Andrey Pavlov is a professor of finance at the Beedie School of Business, Simon Fraser University. Tsur Somerville is associate professor at the UBC Centre for Urban Economics and Real Estate
On June 29, B.C. Premier Christy Clark announced steps to combat fraudulent and unethical behaviour in the B.C. real estate industry. The proposed policies to strengthen consumer protection and confidence are absolutely the right thing do. Purchasing or selling a home is among the most significant financial decisions we make. It comes with enough risk and stress in the best of circumstances. We should not also have to worry about the integrity of the agents who are supposed to be working in our best interests.
But these measures will not dent Vancouver's housing affordability crisis. It is not unethical behaviour or fraud that makes prices here sky-high. They are astronomical because there is an ultimate buyer willing to pay these prices. To improve affordability, both governments and we, the public, have to make changes that address each of the different contributing factors to current market conditions: foreign capital, local demand, and constraints on supply.
The inflow of foreign capital contributes to rising prices. In recent joint work, we found that neighbourhoods favoured by immigrants with wealth have higher rates of house price appreciation than do other neighbourhoods. But addressing foreign purchasers of local real estate as investment requires different policies than those for immigrant owners who do not declare their worldwide income on Canadian tax returns. And these are different again from those for non-local purchasers who use their Vancouver house for periodic residence. All of these require federal and provincial action. There are also domestic investors who leave units vacant. A vacant unit has the same effect on the housing market whether the owner is local or foreign.
Beyond foreign investment, the federal government has an additional large share of culpability. Rock-bottom Bank of Canada interest rates make it easy for buyers to stretch themselves. The growth in the largely unregulated sub-prime sector adds leverage. Some banks offer loans to non-residents with no need to prove local income. For years federal government policy has ensured that debt for home purchases would be extremely cheap and plentiful in Canada, all of which has fuelled demand.
Local and provincial governments are also responsible. Our completely insufficient transportation infrastructure prevents us from using land as effectively as we could. This precludes us from spreading density more broadly. Add to that protected agricultural land, and we willingly rule out the increase in effective land supply that would normally occur. Cumbersome development guidelines, restrictive zoning, and a slow and often arbitrary rezoning and permitting process, make it difficult and expensive to increase supply in any reasonable period. Fundamentally these policies reflect public opposition to market-driven change.
Finally, there are demographics and parental wealth. Millennials are forming households and entering their home-purchase years, ramping up demand, especially for core urban locations. Despite their incomes, many young families are able to place large down payments to pay prices that seem beyond their means. They can do so because decades of house-price appreciation have left their grandparents and parents flush with home equity, which is often the support for these down payments.
To resolve the Vancouver affordability crisis we need a broad set of policies that deal with all of these factors. Politicians eager to give speeches on affordability should first ensure that they are not contributing to the problem. Residents complaining about affordability should ask which policies that would improve market-wide housing affordability they have opposed in their own neighbourhoods. And we all have to be honest about the costs and benefits of being a more connected global city. Hopefully, we will do this with reason, working towards consensus, each sacrificing something for the communal good. Or, we can wait until something happens to China, or to interest rates, or to the Canadian economy, or to any of the numerous other factors that are propping up this market. This will solve the problem, but we will have no say in the solution.