The Van Mag Q&A: Josh Gordon on intergenerational equity and the real estate market

Why a political science prof waded into the housing debate—and why it has everyone talking

May 10, 2016

By Max Fawcett

“Passionate academic” probably sounds like an oxymoron on par with “postal service” or “military intelligence,” but SFU’s Josh Gordon is doing his best to challenge that stereotype. The assistant professor at the university’s School of Public Policy published a paper last Monday that took direct aim at government inaction on what he describes as this city’s housing crisis, and did so in an unusually blunt—and political—manner.  Last Thursday, I caught up with Gordon to find out more about the paper, its conclusions, and the passion that’s so clearly behind both.

VM: Your paper has an overtly political tone—not partisan, but political—that’s unusual for an academic publication. Why did you decide to be so blunt?

JG: Because I think it’s a pressing issue. It’s something that’s really affecting the city, and if it’s not dealt with soon I think the consequences will be long-lasting and hard to reverse. And I also feel that, to an extent, there’s a last stand that needs to be taken if this city is not to be overrun potentially with a lot of money from outside that would really change the dynamics of the city. Fundamentally, I do think it’s a crisis. Government action is needed, and needed soon. And unfortunately, all we have from both the federal and provincial government is soothing words and not much action.

VM: It seems to me that you’re approaching the subject from a generational perspective. Is that fair?

JG: Well, I’m 33, so I fall into the younger category and perspective, and I think that’s an important part of the dynamic that’s going on. But what’s striking to me when I read through the results of the Angus Reid poll that I cite in the report is that even though, in terms of their own personal situation, people that are older are fairly content or comfortable, they still have a large measure of support—a majority of support—for government action to tackle the crisis. They think that prices are unreasonably high. And even though I think the urgency is not as much there for the older generations, they sympathize with the younger generations. And that’s because that’s their kids. They see the struggles of their kids, and they want their kids to be able to stay in Vancouver, to be able to afford things, and be able to live close to them. They see that it’s out of reach, and they see their kids getting stretched to the limit financially. So they have a lot of sympathy, and a lot of resentment towards the federal and provincial government for not doing something. While the urgency might differ, and sometimes to a lesser extent the degree of strength of support for policy action is different, you do see this concern across the board.

VM: We have politicians who don’t appear to be taking this all that seriously, with a few notable exceptions, and yet we have a public that appears to be overwhelmingly in favour of taking action on housing affordability. Could this become a ballot issue in either 2017 or 2018?



JG: Yes. In both, barring some major collapse in overseas markets that does the work of policy, this will be the issue, I believe. There is no doubt in my mind that this is the central question of B.C. politics, not least because the Vancouver housing situation is now having knock-on effects in Victoria, and it’s spreading out from Vancouver to other parts of BC. I definitely see this as a crucial topic—you simply can’t ignore half of the population and their struggles and issues. So I think it’s going to be at the top of the list.

VM: Is it too late for those politicians to do anything on this file? Even if you knock 50 percent off the value of a home in Kitsilano, it’s still wildly unaffordable based on the median incomes in this city. Have we waited too long to do anything about this, or is there still time to act?

JG: We have waited too long, but there is still time to act. I think a lot of the policy solutions that have been discussed, that is the fundamental weakness—they leave a lot of the effects of foreign capital baked into the cake. There’s no attempt to mitigate the effects of that past investment and the problems it’s created. That’s the beauty of the proposal that my colleague, Rhys Kesselman, has put forward, in terms of a progressive property surtax. It’s an annual tax that’s deductible against income tax paid, and what that means is that it’s targeted at foreign ownership.

But more precisely, even if you bought a house or a condo a while back with money from outside, you won’t have declared sufficient amounts of income or won’t have the kind of career that would allow you to offset that tax. And so, in a way, the policy will help address past flows of capital as well as prospective flows of capital. If you adopted something like that, in combination with other policy measures, you could get a gradual exodus of foreign investment, and that would help to really bring prices down.

VM: Is that kind of tax politically feasible? Our city’s and province’s leaders have spent so long going in the other direction—promoting the Lower Mainland as an attractive and welcoming destination for foreign capital—that it feels like it might be nearly impossible for them to go the other way. And given how much of the economy of B.C. is tied up in the housing market, and how much of this city’s aggregate household wealth is tied up in the same, it seems like political suicide to try and tamper with that.

JG: Absolutely. There’s no doubt that it’s very tricky getting us out of this situation currently, and that’s precisely why, in a way, I’m upset—and why the paper has a fair bit of passion to it. It’s because these governments have put us in this place, where it’s now so hard to deal with it, and where dealing with it will cause major disruption and dislocation and will screw over a bunch of people who have bought recently. They’ve put us between a rock and a hard place, but this crisis is a long time in the making. This has been the policy for a long, long time, and for a while I don’t think it had major negative impacts. But I think those negative impacts began to be felt in the mid-2000s, and so we’ve known about this for years. And yet, there was no attempt to say, ‘Wait a minute—look at what’s happening, look at how affordability is being eroded, look at what this is doing to our local business, look at what this is doing to our communities and address the problem before it got worse.

If we let it continue, then all the problems we have are just going to get worse. You’re going to have more people getting in over their head financially in terms of mortgage debt, and the ultimate crash is going to be even worse. So we don’t have an easy way out of this, but we have to tackle it. Otherwise, we really will get a big crash, and that could put the Canadian financial system at risk.

VM: Is the problem here that the premier really has no incentive to do anything about this until the next election? If she can get past 2017 without things totally falling apart, then it becomes somebody else’s problem, right?

JG: That’s what the last section of the paper is about—some of the politics. The lesson of post-2008 was that housing slumps are not friendly to incumbent governments. If you have a housing slump, that creates a whole lot of downward pressure on your economy, which leads to deep recessions, unemployment, budget deficits, austerity, and so on. As soon as that happens, people vote you out, no matter if you’re left or right or smart or dumb. So governments are very scared about deflating housing bubbles, and that’s why you shouldn’t get them started in the first place. But it does mean that the strategy right now for the BC Liberals is probably about pretending that nothing is going on and ride it out for a year or so until the election—and then potentially do some things after that if they get re-elected.

But we’ll see. I think it’s going to be hard for them to ride it out that long. We’re already seeing the market come down in Hong Kong, and if that starts to unravel—and the Chinese situation starts to unravel in a big way, which is possible—then this thing could get ugly quite fast.

VM: Do the last 12 months at least put the notion that this isn’t being driven by foreign capital to rest?

JG: I think that’s the nail in the coffin for the idea that foreign money is not playing a big role here. You have the people who I call the bubble defenders claiming this and that, which are small things, to try to account for these major price surges, and it’s just not plausible and nobody’s buying it any more. I’ve spoken to a number of people who were previously on the fence on the question, and they no longer are. It’s just so obvious. 

What’s also clear though, I think, is that you have to not only see the transfer of wealth from abroad but you have to understand that we have a decent understanding of where this is coming from. We know that a trillion dollars left China last year, and we know that’s been a major source. The coincidence of that exodus of capital from China with our surging prices—it’s just as clear as you could want. So yes, I do believe it’s put the debate largely to rest.

VM: What’s the one thing you want people who read your paper to walk away thinking?

JG: You have this sense of what’s going on—you probably have your intuitions, and like most Vancouverites you think that foreign money is a major issue. And you are right. Don’t be confused by the people who are trying to mislead you or distract you. You are correct that this is what is in fact going on, and there’s a bunch of good data and good theory that backs up that position. You now have the intellectual ammo all in one place to contest and confront the people who are trying to defend the situation.

VM: What do you say to those who bought in the last five years, and would be most directly and negatively affected by any attempt to seriously address the affordability crisis in Vancouver? Couldn’t introducing policies that encourage price deflation do more harm than good?

JG: If this thing keeps going up then when it comes down it comes down even harder, and it will make the downsides of tackling the problem pale in comparison. That again is the lesson of 2008: if you let these things run on then you get a bunch of over-leveraged people, you get banks that are over-exposed, you have a calamity in the financial sector, and you don’t recover for a decade. You have high unemployment, deep recessions, major budget deficits, financial turmoil, and so on. That’s the bigger worry. And so unfortunately, yes, there is pain either way. But that’s the whole point of not getting into this situation in the first place.

The other issue is that when you talk about tackling it, it’s a question of how dramatically you want to tackle it. If you’re talking a 50 percent price deflation, then of course there’s going to be major impacts. But I don’t think anybody’s advocating that. If you do 20 or 30 percent, then to some extent you’re going back, status quo ante, to the start of 2015. Then the people who are screwed are the ones who bought in the last year, and that’s a more manageable segment. I know I have some friends in that situation too, and they are often living in places that they’re not super keen on, in neighbourhoods that they’re not super keen on, and who would be able to afford in the primer areas had this big run-up not occurred. So they see the advantages of bringing prices down somewhat, because they see that their ability to get into those neighbourhoods that they ultimately want to be in might be increased by tackling the problem.

When you think about the kinds of prices we’re seeing on the west side of Vancouver, and even on the east side, you have to ask yourself: who is possibly buying these houses? I’ve done a calculation, and you’d need a dual income of about $350,000 to $400,000 to afford a $1.9 million house. That puts you firmly into the one percent, and most of the one percent already have their houses. So who is possibly buying all these houses? It just cannot be locals. There’s just no way. And so you have an entire generation that’s being priced out of their own cities. This is happening in the City of Vancouver, but also Richmond, North Vancouver, West Vancouver, and even out to Burnaby and Coquitlam and so on. That’s why there’s so much resentment—people feel like they’re getting kicked out.

VM: And as you point out, even the current homeowners who have done incredibly well on paper because of the increase in home prices can’t easily tap into that wealth.

JG: Home equity gains aren’t like other types of equity gains. It’s kind of useless for somebody who wants to stay in the city. The main way you cash out with home equity gains is you either downsize, and even there that doesn’t help you a ton—and most people don’t want to downsize—or you have to move cities. And most people don’t want to do that because that disrupts their whole social life, and puts them far away from their friends and family and potentially their job. So the idea that we’re all basking in this wealth is a little bit illusory.

VM: At the end of your paper, you say “If it gets widely read, it will undoubtedly invite criticism. There will be an effort to discredit it in a range of ways.” I’m sure you’ve anticipated these ways—what do they look like?

JG: We live in a sound-bite culture where you can assert something and you don’t have to back it up, so I foresee a lot of that happening, where people make arguments by assertion without a lot of careful analysis. That’s going to undermine the case for action, but that’s just inevitable, given our society and how public debate carries on. That’s mostly what I’m referring to. There will be issues with the analysis, probably, in certain places—people will disagree, and that’s fine. But the broad case is what’s important, and I think my broad case is quite compelling. 
The main question to put to anyone who challenges it is: what’s the economic model that can possibly support a 13-1 price-to-income ratio? Show me an economic model, show me an academic paper, that can actually produce that without a massive surge of demand from outside. I haven’t seen it, and I’ve read through the evidence.

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