Saeid Fard is a digital designer and president of Sokanu, a Vancouver-based discovery platform
Almost overnight after the fall of the Soviet Union in 1991, its planned economy was transformed into a market economy. Businesses, factories and property spontaneously fell into the hands of a minority of the population.
This near-instantaneous liberalization, encouraged by Western powers under naive interpretations of how free-market capitalism ought to apply to the new Russian economy, led by some measures to the greatest income inequality in the world, and with it, the resentments and political corruption that massive wealth disparities tend to necessitate.
In modern-day Vancouver, policies at all three levels of government are leading to another great generational wealth transfer – not on Russia’s scale, perhaps, but certainly the largest in the city’s history. Homeowners and developers have become millionaires overnight through no particular skill or agency of their own, at tremendous long-term cost to the community. And like Russia, one pernicious lie has snaked its way into popular discourse: That this is simply free-market capitalism at play.
Housing in Canada has never really been a free market. Municipalities dictate what and where real estate can be built through zoning laws. Provinces regularly step in with social housing programs. And, most interventionist of all, the Bank of Canada chooses interest rates. And as we saw this week, despite the uproar of many, the bank is setting rates artificially low to cheapen the Canadian dollar and encourage exports. This has fanned the flames of real estate by lowering domestic mortgage payments and making Canadian property cheaper in foreign currency terms.
Furthermore, mortgages themselves are insured by the Canadian Mortgage and Housing Corp., a Crown corporation. The CMHC’s mortgage insurance program has made debt available to Canadians who otherwise would not be eligible for mortgages. Ironically, in a bid to make home ownership more accessible, the CMHC has contributed to the country’s affordability problem by adding to demand and pricing out some of the people it was mandated to help.
In foreign capital’s involvement, the application of the term “free market” makes even less sense. Free markets in a global sense simply don’t exist. Countries have different laws, regulations and standards. This is why trade agreements are created – to level the playing field.
Due to government refusal to collect data on foreign ownership, it’s impossible to know how much of our real estate stock is owned by foreigners. The B.C. Real Estate Association, a biased stakeholder by all rights, estimates foreign ownership of housing stock to be at most 5 per cent, thus dismissing the impact of foreign ownership as inconsequential.
Two amateurish flaws with that analysis stand out among others.
First, when assessing the impact of foreign ownership, it is not the share of units that matters, but the share of capital. Foreigners disproportionately buy detached and luxury properties. The price of a detached home is more than four times higher than an apartment, so the share of foreign ownership could be several times higher than the BCREA estimate.
Second, foreign buyers tend to be less price-sensitive, and their subject-free cash offers drive up prices excessively. Put in economic terms, foreign demand is more inelastic than domestic demand and can have a dramatically disproportionate effect on housing prices.
This brings us to the most distortionary government program of all – the immigrant investor program. Through this scheme, 45,000 millionaires migrated to Vancouver between 2005 and 2012 alone. It was thought that investor-class immigrants would create jobs and boost the economy, but the program has been such a massive failure that investor-class immigrants pay less in taxes than refugees. Through a series of loopholes and abject fraud, this class of immigrant continues to funnel untaxed money into Vancouver from abroad.
They come because Canada has some of the loosest property ownership and tax laws in the developed world, and Vancouver is its wild west. The city has among the country’s lowest property taxes, developers hold disproportionate political influence and a league of professionals, such as real estate agents and immigration lawyers, are ready to take their slice of the pie.
The idea that foreigners should have the same rights as nationals to purchase real estate has no economic basis. Global free markets can have terrible externalities when supply is fixed. You can’t produce more land in Vancouver in the way you can produce more iPads or cars. This is why Canadians are restricted from buying property in countries like Switzerland, Iran and China. Those spouting free market arguments have no understanding of its real world constraints and prove the adage that a little understanding of economics is more dangerous than none. The countries with cities in Demographia’s top 10 international housing least affordability list all have regulations to at least measure, and in most cases curtail, foreign ownership, except for Canada.
There was a time when governments cared about the principle of housing affordability – when housing was what you lived in, rather than an investment class. Those times are far gone. B.C. Premier Christy Clark won’t even agree to collect data on foreign ownership. “By moving foreign owners out of the market, housing prices will drop,” she cautioned in May.
You hear government officials literally laugh off ideas of locals living in neighbourhoods like Coal Harbour. That the idea someone who works in Vancouver should be able to live in the city is somehow funny speaks to the perverse acquiescence and cowardice of our leaders.
The aforementioned policies (or lack of policies) have made existing homeowners incredibly wealthy, while most everyone else is permanently priced out of the market. This wealth hasn’t been created – it’s been transferred from the future to the present. Robust wealth is created through business and innovation. As our stagnant job market shows, we are not becoming wealthier – and with leagues of young, educated people leaving the city, it is on a path of decline. We have mortgaged its future, and the future of younger generations, to pad the coffers of today’s property owners.
Vancouver’s housing crisis has been directly caused by government policy, and now that an entire generation has been priced out of the market, we’re being told to deal with it – it’s the free market. That term, “free market,” has become meaningless in the process – invoked when it benefits the wealthy and powerful, and completely circumvented when it doesn’t.Report Typo/Error
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