Editorial: Buy now, pay later
We've been told about the cost of acting to curb rising real estate prices. But what about the cost of not acting?
May 20, 2016
If you didn’t know any better, you might think that the provincial government is powerless to do anything about Greater Vancouver’s increasingly unhinged housing market. Certainly, that’s been the refrain from the front benches of the BC Liberal caucus, which continues to suggest the best way forward is to study information and wait for the appropriate data on foreign capital flows to materialize. But while it’s been clear that it doesn’t want to do anything that would cost current homeowners any of the capital gains that they’ve been gifted, the cost of not doing anything might be even higher in the end.
That’s what Avi Friedman, a professor at McGill’s School of Architecture and affordability advocate, told me recently at the now-annual RED Talks event. Those costs, he said, will only continue to multiply if we allow the current state of affairs to continue—and they’ll be paid by this city’s residents for decades to come. “I believe that if they’re spending more than 30 percent of their income on housing, you’ll have serious, serious problems when they [young homeowners] get older. Those people will probably not save enough for their kids’ education, and for their own retirement fund. And in 20 or 30 years when they’re my age, they’ll recognize that nothing was put aside to deal with these necessities that old-age entails.”
No kidding. As a recent Vancity report revealed, the ownership costs on an average property in Vancouver would put the average millennial couple—remember, couple—into debt by nearly $3,000 each year after covering taxes, healthcare premiums, food, utilities, transportation, and clothing. Never mind travel. Never mind extravagances. And never mind paying off student loans, which almost every millennial still has to do these days. Just the basics alone puts them into the red, which makes any notion of saving for the future that Friedman describes a complete non-starter. The numbers are better when it comes to the average couple purchasing the average town home ($9,549 in surplus annual discretionary income) or condo $(16,422 in surplus annual discretionary income), but add the costs associated with one kid into the mix and both figures dip back down near zero.
That’s why the solution, he says, can’t be more fiddling at the edges. It certainly isn’t a tax on property flipping, which is merely a symptom of the current market’s dysfunction rather than a cause. And it definitely isn’t more filibustering around the quality of the data we have. Instead, it’s drastic—and immediate—action. “We have a runaway train, and we have to stop that runaway train,” Friedman says. “The way you stop it is not by tinkering with the subject but introducing more serious measures.” Friedman thinks Vancouver should look to Singapore, another city whose geography is substantially constrained by water, for an idea of how to more effectively slow that train down. “Ninety percent—nine-zero—of people live in social housing. The government of Singapore realized that since they have, similar to Vancouver, a small amount of land surrounded by water, if they let speculation work nobody would be able to afford a home. And they need these young people.”
What Singapore has done is one option. But in a province where the government appears to be deathly allergic to anything that might be considered as intervention in the market, it’s an exceptionally unlikely one. Mercifully, there’s another option that should be much more palatable to that government: letting the market for housing actually behave like one. According to UBC Sauder School of Business professor Tom Davidoff, that’s something that isn’t happening now. “This is not a free market outcome we’re seeing. Our tax system really skews in favour of people who own property but don’t live and work here. You should have high property taxes in markets where most of the value is in land instead of construction—that’s the efficient thing to do.”
Indeed, he says, we’re doing just about the least efficient thing possible—at least, if our goal is to encourage the development of a diverse local economy rather than one that’s built purely around the transaction of real estate. “We’re one of the most land-heavy markets in the world, because you’re not really allowed to build much and the land is phenomenally valuable, and yet we’ve got, by North American standards, very low property tax rates,” Davidoff says. “By contrast, we have high sales and income taxes.” As a result, activity related to the construction and sale of real estate comprises 18 percent of BC’s GDP—more, as the Huffington Post pointed out last week, than oil and gas contributes to Alberta’s.
But if this seems like an inevitability rather than a deliberate (and perhaps political) choice, Davidoff says that’s simply not the case. “Any taxes are a distortion from the market, but the distortions we’ve chosen to impose pretty much guarantee strong investor demand and difficulty for working people to afford it. We have really high income and sales tax rates, and really low property tax rates. And so, that says it’s hard to live and work here but it’s attractive to invest here. We don’t have to do that. That’s a choice, and it’s a pretty silly choice, in my opinion, if you’re interested in affordability.” He’s not dismissing the fact that the scarcity of land in the Greater Vancouver area is partially responsible for the exorbitant price of a detached home, mind you. But he says that the way we’ve chosen to respond to that supply constraint is clearly shaping how people interact with it. “The market is telling us that land should cost a lot. But that we build luxury housing and invite investment with low property taxes is totally a political choice.” We could make other choices, he says, including a progressive property tax like the one SFU’s Rhys Kesselman has suggested. Another potential option is provincial legislation that would effectively prohibit NIMBYism by mandating that, if land is above a certain threshold value, up-zoning to a reasonable density is automatically approved.
Would such a move be politically toxic? It depends, Davidoff says. “You can’t raise property taxes on everybody. Politically, I understand that. But to ask investors who don’t even provide rental housing to pay higher taxes? I think that’s totally reasonable.” And if it seems hard to act now, it might only get harder going forward. “To the extent we’re going to have very rich people owning a larger and larger share of the real estate, I just don’t believe that you can have a large number of people with millions of dollars who are just going to be ignored politically,” he says. “At minimum, people are going to get addicted to the capital gains.” The only way to prevent that from happening, Friedman says, is if our elected officials begin acting less like politicians and more like leaders. If they don’t, he says, it will come at a significant cost to the city’s future—and its future residents. “Unfortunately, people don’t seem to see the next generation. They fail to see the long-term needs. And then one day you wake up to a situation and say, ‘how did we get here?’”