Vancouver's skyrocketing housing prices are not just a bad news story. Instead, think of them as a good news story – with bad side effects that have for too long been ignored.
Look at it this way: Would you rather have Vancouver's problem of exploding prices – or Detroit's problem of collapsed housing demand? The motor city's population has fallen by 60 per cent since 1950. One of the municipality's biggest jobs is bulldozing abandoned houses, and turning them into vacant lots. Homes in much of the city are ridiculously cheap. It is not a magnet for immigrants or tourists or investors.
Metro Vancouver's housing problem is the exact opposite. The city is beautiful, clean and well-run, and its population has been growing rapidly for decades. And thanks to Canada's democracy and rule of law, Vancouver is an extremely attractive destination for foreign investors looking for somewhere safe to park their money. The challenge for government policy is keeping the good in this good news story, while minimizing the bad.
On balance, the government of British Columbia's decision to impose a 15-per-cent tax on foreign buyers in Metro Vancouver is a sound first step – even though no one can say for sure exactly what impact it will have on prices. The data on foreign home ownership in Canada is fuzzy, and it's also unknown how easy it will be to get around these new rules. It's equally impossible to know whether a tax that turns a $2-million home into a $2.3-million purchase will deter foreign investors, or be nothing more than a speed bump for anyone determined to get money out of places such as China.
That said, the government of B.C. had to start somewhere. It had to try to moderate the market. And a Christy Clark government that until now had shown little interest in doing anything has surprised everyone by doing rather a lot.
Once the tax is in place, the Clark government will have a powerful incentive to get better data on what's happening in the Vancouver market, and who's buying. At the very least, the tax will bring in extra revenue without raising taxes on Canadians; the latest estimates of foreign buying suggest a potential haul of more than $1-billion a year.
Ontario should carefully study what B.C. is doing, while also considering other ideas for moderating foreign demand for housing in the Greater Toronto Area. The data strongly suggests that Toronto is similarly overheated, and that at least some of the heat is coming from offshore money.
When housing prices get out of whack, bad things are likely to happen. The U.S. housing crash of a decade ago, which sparked a financial panic and the Great Recession, shows the pain a bursting real-estate bubble can cause. If a bust is big enough, it ends up infecting the banking system, and the entire economy. That's why the Bank of Canada and various economists have repeatedly raised concerns about prices, in Metro Vancouver and also Greater Toronto, that have long appeared to be rising much faster than underlying economic fundamentals. Bubbles always burst, so the best medicine is prevention.
Bank regulators and the federal government have taken steps over the past few years to tighten lending and mortgage standards, in an attempt to discourage Canadians from speculating on housing. What has been the result? It's hard to say for sure. There's no control group for this experiment, where we can see how Canadian housing prices would have performed if the government had done nothing. But what we know is that, in Toronto and Vancouver, housing prices have continued to shoot up at far above the rate of inflation. And the pace of increases has accelerated over the last year, even as the real economy slowed down.
All of which strongly suggests that today's housing prices are not entirely driven by demand from Canadian home buyers.
Canada should always encourage foreign investment – but in businesses and other productive assets. Buying a home is not the same thing as building a factory or a railroad. Wedged as it is between sea and sky, the amount of land in Vancouver is finite. When an offshore investor buys a house to use it as a safety deposit box, local prices are pushed up, but the positive economic spinoffs are few.
Nobody can say for certain what the new tax on foreign buyers will do, because nobody has good enough data on exactly what's driving the Vancouver market, or who the buyers are. And even with better data, it still will not be possible for government policy to precisely ratchet prices up and down, like turning a tap. There are a lot of variables at work – from interest rates to consumer confidence to the state of the Chinese economy.
It's impossible to micromanage housing prices. But they must be macromanaged – so that the cost of housing broadly mirrors Canada's economy, and the state of Canadians' pocketbooks.