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B.C. housing crisis cure: more supply and transit, less red tape

Second of two parts So what caused B.C.’s housing crisis and what should the BC NDP government be doing to preserve jobs and make housing more affordable? In 1990, the average mortgage rate was over 12%.

Second of two parts

So what caused B.C.’s housing crisis and what should the BC NDP government be doing to preserve jobs and make housing more affordable?

In 1990, the average mortgage rate was over 12%. A $300,000 mortgage cost about $36,000 a year in interest charges. In 2015, mortgage rates were under 2.5%, meaning that the same $36,000 could support a mortgage of about $1,440,000. If you factor in wage increase over this 25-year period, it would be possible to support a mortgage of more than $2,500,000. 

Interest rates are not controlled by the provincial government. The largest contributor to the current housing crisis is beyond its control.  

Although low interest rates are the most significant factor in high house prices, they do not tell the entire story. The price of any product is decided by a combination of supply and demand. When supply is constrained and demand from migration to the region surges, prices will increase.

The Lower Mainland has a very limited supply of available land due to its location next to the ocean, the mountains and the U.S. border. Most available land is restricted by the Agricultural Land Reserve. Our location on the bird’s-foot delta of the Fraser River exacerbates these issues by creating traffic bottlenecks that make commuting more difficult. 

The lack of available land means housing must come from redevelopment and densification of neighbourhoods. Unfortunately for those seeking more affordable housing, many oppose this process. That includes not only the NIMBY crowd but also most municipal governments that charge gigantic development fees and make the regulatory process so complex and time-consuming that only larger developers can navigate the system.

The lack of new supply combined with the demands of new arrivals (the Lower Mainland population is increasing by more than 30,000 people a year or almost 100 new arrivals per day) translates into increasing prices. Unfortunately, when these market conditions exist, small-time speculators pile in. Doctors, dentists, lawyers and accountants (and, yes, non-residents of Canada) with available cash buy pre-sale units for better returns than by buying guaranteed income certificates that yield under 2% – and where interest income gets taxed at 50%. This sort of speculation is less likely in a properly supplied market where local governments do not restrict construction.

Housing speculation would have been curtailed if the federal government had enforced the Income Tax Act. Many house-flippers have evaded tax by incorrectly asserting these properties as principal residences or reduced their tax in half by not reporting their gains as fully taxable business income. Canada Revenue Agency has been asleep at the wheel and exacerbated speculation. 

New taxes are not required. All that is needed is for the federal government to simply enforce existing laws.

The solution to Greater Vancouver’s housing crisis lies in increasing supply and reducing travel times. 

The provincial government also needs to work with municipalities to encourage housing through faster and less expensive approval processes. 

Recently, the C.D. Howe Institute estimated the regulatory burden now makes up 50% of housing costs in the Vancouver area. Layering the new speculation tax, increased property transfer tax and new school taxes on development land only adds to the cost of delivering new housing.

Every day Manhattan grows from two million to four million people as commuters arrive by rapid transit. There is no reason transit in the Lower Mainland should not be able to transport a worker in Langley to downtown Vancouver in 45 minutes. Investments in transit would go much further to solving the housing crisis than building government housing on the most valuable land in the region.

New taxes are rarely the solution and almost inevitably invoke the law of unintended consequences. It is likely these new taxes will coincide with a housing market that was already in decline due to higher interest rates, the new federal mortgage stress test and a drying up of foreign investment.

BC Green Party Leader Andrew Weaver has suggested following New Zealand and banning all foreign ownership. A more prudent approach would be the Australian model of restricting foreign investment to new housing. This would preserve existing housing stock for Canadians without killing high-paying jobs in the home-building industry, British Columbia’s largest employer. 

Unfortunately, the polarization in politics across the world has manifested itself in the Greater Vancouver housing debate. A wealth tax might appease those with a warped sense of moral rectitude seeking class warfare but it will do nothing to make housing more affordable. Just as things are playing out in the socialist paradise of Venezuela, it will disproportionately damage the poor. •

Hugh Woolley, CPA,CA, TEP, is a Vancouver income tax consultant, author and lecturer at Lewis & Co. Chartered Accountants.