In real estate limbo, how low can we go?
When will affordability be reached, and who decides on the sweet spot?
PETE MCMARTIN
The Vancouver Sun
A couple of weeks ago, I wrote about the revenue windfall the provincial government was enjoying from the property transfer tax. Revenue from the tax had come in at $2.2 billion, a billion dollars over projections. It had become, I wrote, the government’s largest single generator of revenue, surpassing gambling and resources.
Wrong, said an email from the Ministry of Finance I received the next morning: Revenue from personal and corporate income taxes exceeded property transfer tax revenue.
I stand corrected.
In reply to that email, though, I asked if the government had modelled the effect a 15 per cent tax could have on the housing market. Given that the government had been unwilling to tamper with the housing market until this summer, the tax to me, at least, appeared to have been decided upon at speed and out of political expediency. Had the government picked the 15 per cent figure out of the air without really knowing what effect it could have?
Any information about modelling was privy to cabinet confidentiality, came the ministry’s reply. But included in the email was a study the ministry had done in mid-2015. Its conclusions: If foreign buyers made up five per cent of the market, and if prices fell by 10 per cent due to the tax, roughly “$60 billion in home equity would be lost, averaging about $85,000 per homeowner in the Greater Vancouver area.”
It also cited Singapore’s experience with a 15 per cent tax, which, the ministry admitted in its email, had served “in part” as the government’s model.
“In terms of affordability,” the 2015 study stated, “Singapore is not a success story. Singapore has managed to halt a rapid increase in house prices. However, an individual unable to afford a home in 2009 remains unable to afford a home in 2015. The growth of house prices in Singapore over that period outpaced the growth in incomes.”
That was a year ago. The market changed in that time, and so did the public’s impatience with the government’s unwillingness to act. I asked if there was a more recent projection. In reply, I was sent an updated ministry forecast released in September. Its conclusions:
Property transfer tax revenue will fall $500 million for 2017/18, and another $100 million for 2018/19.
The 15 per cent foreign buyers tax will bring in $255 million for 2017/18, and the same in 2018/19.
“As you can see,” a ministry spokesman wrote, “our forecast is for government revenue from property transfer tax to decline, a return to more typical levels of housing starts, and a total number of unit sales of about 40,000 per year in 2017 and 2018, with a reduced rate of foreign buyers in the market compared to the information we have between June 10 and Aug. 31.”
It’s conjecture, of course. The future in this case is not only uncertain, it is literally, to homeowners who may watch their equity erode, a gamble. Unquestionably, there is overwhelming public support for more affordability, even from homeowners who believe that while a decrease in house prices may not be good for them personally, it must be done for the public good. (And has there ever been a more generous surrender of personal assets toward that public good? A public that railed against a measly transportation tax that would cost them pennies a day have clamoured for a tax with the expressed intention of costing them tens, if not hundreds, of thousands of dollars in their home equity.)
However, that support for the tax is predicated upon finding a sweet spot — one which has yet to be identified — between being too little a decrease, which would do nothing to affect affordability, as Singapore has shown, and too much of a decrease, which would alarm the 70 per cent of households in Metro Vancouver who are homeowners, not renters. How much of a drop in house prices is enough? Ten per cent? Twenty? Thirty? When will affordability be reached, and for whom?
On Thursday, Jock Finlayson, senior economist for the B.C. Business Council, mused on that subject on Shaw TV’s Voice of B.C., hosted by Sun columnist Vaughn Palmer. Finlayson supports the tax and considered the increase in house prices over the last two years “destabilizing.” But he had a caveat.
“A modest adjustment in the market I’m sure will be welcomed by the government. A big drop in prices, however, might be something else. A 20 per cent decline in home prices across Metro Vancouver would reduce the wealth of homeowners in the region by $100 billion.”
Would that reduction be permanent? Maybe not. Helmut Pastrick, senior economist with Credit Union 1, told me he believes that after an initial correction lasting six months to a year, prices will rise back to their original levels. Finlayson thinks prices are likely to move higher in the long-term, too — though he believes those prices would be even higher without the 15 per cent tax in place.
Or as I read it, house prices would no longer be obscenely, stratospherically unaffordable to the average wage earner, just, you know, business-as-usual unaffordable.
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