Slumping Metro Vancouver home sales have prompted speculation about what government could or should do in the event of a major price correction.
Potential initiatives include:
•the provincial government implementing a temporary moratorium on foreclosures;
•the provincial government establishing a fund that would provide interest-free loans to unemployed applicants who can no longer pay their mortgages; and
•the federal government changing regulations to make mortgage interest tax deductable and, instead, taxing capital gains on all homes.
On October 2, the Greater Vancouver Real Estate Board pegged the benchmark price for Metro Vancouver residential properties at $606,100 – a 2.3% drop in the past three months and a 0.8% decline from a year ago.
Geoff Castle, president of Merlin Pacific Capital, believes government would have a role to play in mitigating the effects of any significant real estate price correction.
"If we are heading toward a major housing correction then we have to look at the number of foreclosures that took place in the U.S. and the displacement that resulted and ask ourselves whether there is a better way to handle a meltdown," he said.
Castle pointed out that banks need a court order to foreclose, so one lever available to the provincial government would be to legislate a foreclosure moratorium.
He added that the federal government could also adopt the American system of making mortgage interest tax deductable. A capital gains tax could instead be applied to capital gains on homes.
"Nobody would care if the capital gain was taxable because a lot of them would be looking at capital losses," Castle said. "Propping up a market and having mortgage interest be tax deductable would make everyone's mortgage interest payment easier to bear."
But Turner Tomenson Wealth Management financial adviser Garth Turner believes that governments will do nothing to buffer the blow if and when any decline in house prices gains momentum, which would increase unemployment among renovators, mortgage lenders and others whose livelihood depends on a strong housing sector. Turner said governments couldn't afford the billions that would be required to keep Vancouver mortgages current.
Turner is convinced that the latest figures are just the start of a correction of up to 40% in the Vancouver housing market over the next five years.
"The best thing for people to do is sell and pay down debt," he told Business in Vancouver. "They have the opportunity now. The market still has some spunk to it, and there are buyers around."
Central Credit Union 1 chief economist Helmut Pastrick expects a "mild correction" that won't require government action. "It would have to be dire circumstances for the government to act – something comparable to what we saw in the U.S."
Were that to happen, Pastrick said governments have other tools in their arsenal than the ones Castle outlined. He pointed out that making mortgage interest payments tax deductable would be a delayed solution because its impact would be in the following tax year. Pastrick said a more immediate solution would be for the provincial government to have a fund that provided either grants or subsidies to successful applicants who can't afford to pay their mortgages. •
Vancouver home prices increasingly unaffordable
Speculation that Vancouver's housing market is set for a correction stems from data showing home prices at historic highs compared with gross domestic product and average salary.
An M Hanson Advisors study released last October noted that average Vancouver house prices cost 26 times the average Vancouverite's personal disposable income. That compares with 13 in 2001 and eight in 1987.
Stories abound that wealthy offshore investors have been scooping up properties without regard to price. The study, however, shows a huge jump in the percentage of B.C. households that have mortgages, which illustrates that most properties are owned by B.C. residents who are not wealthy.
The study started with a standard 100 ranking in 1990 for both the B.C. population and the number of B.C. households with mortgages. By early 2011, the ranking had risen to 145 for the B.C. population and to more than 300 for the number of households that have mortgages. Perhaps the most compelling argument that home prices are overvalued is that they're out of whack with rents.
A similar M Hanson Advisors study also started with a 100 ranking in 1992 for B.C. house prices and the average B.C. rent. By the end of 2010, rents had risen to 125 and house prices topped 300.
