By Aran Cheema
Housing is on everyone’s mind these days, specifically the high cost of it in the Metro Vancouver region. Nearly two thirds of residents are homeowners already, but for the 37 per cent who rent,it is extremely frustrating to watch the continuing trend of soaring real estate prices.
It’s also a problem for companies who are struggling to find workers that can afford to live in the region.
As a result, there is a lot of finger pointing going on. Governments at all levels are under pressure to take action to improve the situation.
How should the government intervene in the market to address this issue? Thisis where a seemingly simple problem meets complex reality.
The first step is to define the problem. Housing affordability is about helping non-homeowners become homeowners. Careful intervention in the entry-level housing market, such as by reducing prices at the lower end of the marketwithout affecting the higher end, sounds like an obvious place to start.
In a recent paper, according to demographer David Baxter, reducing home prices by 19 per cent would wipe out $100 billion in home equity held by 660,000 households. These owners are the ones who would bear the burden of a changed tax policy.
A very few number of people would benefit. According to Baxter, only 18,500 renter households would be propelled into home ownership by this intervention. The benefit they enjoy would be worth a total of $3 billion.
What about the other $97 billion? That’s lost wealth, the price tag borne by the majority for the “easy” fix of an affordability tax targeted at a tiny number of people.
Baxter found that price control is an ineffective solution to address housing affordability as it will not increase housing supply, but instead worsen the affordability crisis. Causing people to lose equity in their homes will create widespread hardship with disastrous political consequences.
Decision makers need to be very careful in the choices they make.
One alternative method would be to tax non-Canadians who want to invest in B.C. real estate. Never mind the recent data from the provincial government showing there are not as many foreign buyers as manyBritish Columbians had assumed.
Actions that prevent new dollars from entering the economy will have a cascading effect if they dampen demand for housing.
As homeowner equity deflates, homebuilders and their employees will see a fall-off in demand, translating into less work for carpenters, plumbers and electricians. Sellers of appliances and home furnishings will be hurt, as will professionals in law and real estate.
When the Ontario government implementeda land speculation tax in 1974, the result was an overnight collapse in the property market.
For the governing provincial Conservatives, the 50 per cent tax on profits may have seemed like a simple and straightforward policy to bring in, but it proved to be anything but.
The illusion of control proved devastating for some. “The market literally collapsed overnight,” remembered Bob Aaron, a veteran Toronto real estate lawyer, in a recent interview.
British Columbians have been wary of new taxes, even ones based on good intentions, like the failed attempt to implement a Harmonized Sales Tax.
An “affordability” tax to curb foreign investment is just as likely to come with unintended consequences of its own.
However, there is a positive way forward. All efforts should be focused on entry level housing that will let renters advance into home ownership.
People under the age of 40 need to focus on starting at the lower end of the market. From there they can choose their timing for the next move – just like many of our parents and grandparents did.
If people want to be homeowners in the City of Vancouver, increased housing density is the only possible way to go. At a time when everyone is looking for ways to reduce their environmental footprint, this makes eco-sensetoo. More density around transit hubs will make life easier for everyone.
Another barrier is red tape and municipal levies. With 37 per cent of the cost of a new condo going to taxes, any reductions would go straight toward affordability.
Municipal politicians have control over these issues and they can take action by creating the zoning required.
Taking away the hard-won home equity of the majority to potentially benefit a small number of people does not make any sense. Preserving our prosperous and diverse economy, while ensuring entry-level buyers have fair access, should be the number one housing affordability priority of elected leaders today.
