Housing policy misses the resale-new homes split, says economist

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Vancouver’s housing crisis is exacerbated by federal policies that are creating increased demand for mortgage debt and resale housing, says a senior economist who spent six years at the Bank of Canada and is now vice-president of policy for the Business Council of B.C.

Oxford educated David Williams, who is president of the Association of Professional Economists of B.C., said the current argument that the housing affordability crisis, or the disconnect between household incomes and the price of resale homes, is largely due to a lack of supply is flawed. That’s because it does not distinguish resale home prices from newly built home prices, which are two related but separate markets with different pressures, he says. New home prices reflect construction costs, city taxes, municipal levies and other costs, while abrupt changes in resale prices are principally driven by demand, he says.

And the resale home market is much bigger than the new home market, which is homes built within the last year. ”It’s best to think of resale homes as a vast asset market, with some proportion of it changing hands each year to set the price,” says Mr. Williams.

Mr. Williams created a table that uses census and mortgage credit data and he looks at demand side and supply side indicators for resale home prices versus new home prices.

When adjusted for inflation, resale home prices went up 46 per cent over the five-year stretch between the censuses of 2016 and 2021, while new home prices only went up 8 per cent.

“A lot of economists make this mistake. They blend it all together and we can’t tell which market they are talking about,” he says. “It’s a very big difference.

“When people talk about affordable housing, they are talking about 98 per cent of the housing stock built yesterday. New homes are built this year, that’s a tiny amount of the stock.”

That difference also reveals the impact of foreign capital on Vancouver’s housing market. Mr. Williams has another chart he uses in presentations that shows since 2005 Vancouver detached resale homes have always traded at a premium compared to the national average, at about two or 2.5 times the national price, so it’s always been an attractive market. However, it climbs to three times the national average by 2015. With the introduction of the B.C. foreign buyer tax in 2016, there’s a severe drop in that ratio, and when B.C. introduces new housing policies aimed at curbing foreign capital demand around 2018, the ratio drop continues down to around 2.4 times the national average. Since 2005, resale condo units and townhomes are selling consistently at 1.4 and 1.6 times the national average, respectively. The slowing of Chinese capital into the market would have also played a role. The ratio is now climbing back up again to around 2.5 due to recent federal immigration policies and Vancouver’s role as a gateway city for newcomers.

“It also shows that this is really about demand, and that’s really what drives resale home prices,” says Mr. Williams. “When you are talking about resale home prices, it’s really an asset market, and the supply of those assets at any point in time except in the long run is fixed. So it highlights the role that federal stimulus for demand has played in driving resale home price increases in recent times.”

And that asset class is going up in price for the simple reason that there is a lot of money being thrown at it, which has become staggering.

“What is really remarkable is that in the last three years, Canada added about $450-billion worth of mortgage credit,” he says. “There is more money chasing it, and yet we hear almost nothing from the federal government about that.

“The root of all this is the federal government has been stoking the demand side, and that is what really drives the resale home price, over most periods except the very, very long run – I’m talking decades. Most time periods, it’s the federal government responsible for cranking up demand for credit, chasing that asset class, and chasing demand for homes from newcomers, who may bring additional sources of capital with them, not available to people already here. All of that drives up the price, because you have more money coming in chasing that asset class.”

It’s no coincidence, therefore, that Canada has the highest ratio of resale home prices relative to household incomes.

He also makes the point that as far as supply goes, Canada is faring pretty well. Between 2016 and 2021, there was a 37-per-cent increase in total housing starts. For apartments alone, there was a 63-per-cent increase.

“That’s massive,” he notes.

The problem with blaming the crisis entirely on a supply shortage is that it assumes demand will stay the same, he says.

“If densification alone was the answer to bring down resale home prices, then Hong Kong and New York would be two of the cheapest cities in the world to live, in terms of resale home prices to income.”

Using data supplied by the Canadian Housing Statistics Program, Mr. Williams found that about 10 per cent of B.C.’s housing stock built after 2016 is partially or wholly owned by non-resident homeowners. In Vancouver, it’s around 15 per cent; in Richmond it’s 18 to 20 per cent; Burnaby and Coquitlam, around 13 to 19 per cent.

”This is the central point I want to make,” says Mr. Williams. “It’s about the amount of money that is chasing this asset class of resale homes. That’s probably why we care about non-resident buyers. It’s not the person [buyer] who is of interest here. If the policy goal is to have resale home prices that are more related to local incomes, so then we care about extra money coming into the system – whether that’s coming from loans or whether it is coming from equity being brought from abroad. Either way, it doesn’t reflect Canadians’ earnings.”

Josh Gordon, who is a visiting research fellow in the digital society lab at McMaster University, followed up on Mr. Williams’s analysis in a social media post to highlight the effects of foreign capital on Vancouver’s market. He determined that “foreign capital inflows helped generate a relative overvaluation of around 30 to 40 per cent,” from 2014 to 2018. In his post, he noted that that’s a home value increase that goes far beyond what government and housing pundits had said at the time.

Perhaps a sign of the times, and a reflection of the investor-driven market, is the recent receivership of a major downtown property that had been purchased in 2018. A judge ruled that the owners, who’d proposed a 55-storey condo tower and rental midrise at 1045 Haro St., must now sell the property to pay off a bank loan.

Sales for the 60-storey luxury Passive House Curv tower on Burrard Street are still underway, according to marketer Jacky Chan, who says he sold a couple of units at $4,500 a square foot just this month. But Mr. Chan says they are also looking to a new rush of foreign capital to help buoy sales once the federal government’s two-year foreign buyer ban is lifted this summer.

“We are still plowing through and expect to have another surge of sales around and after Chinese New Year’s and all the way to summer and gearing up for [the] lifting of [the] foreign buyer ban and all the pent-up demand will rush in,” he said in an e-mail.