As part of the announcement and discussions around the 2019 BC Budget, the NDP’s housing-related measures over the past year have been hailed as successful. We’re told prices are down, properties for sale are numerous, and affordability has improved.
Except nobody is buying.
January housing transaction volume is down 40% year over year for the whole market, 44% down for apartments, and a shocking 50% down for apartments in the more affordable areas of the region.
If “things are getting better,” as the taxpayer-funded government ad about the Speculation and Vacancy Tax claims, why aren’t more families finding housing? And the government isn’t expecting this to change anytime soon – just look at their Property Transfer Tax revenue projection. You guessed it: same dollar amount over the next three years, far lower than before.
It all gets even more puzzling when you consider the government’s projection of nearly 30% drop in housing starts over the next couple of years.
Part of the justification for restricting real estate demand is that when land prices decline, developers could build more multifamily units at more affordable prices. So why are we not seeing a construction boom that presumably favorable conditions should generate?
Two narratives are often offered as an explanation.
First, it’s the stricter mortgage underwriting standards introduced at the federal level, especially the stress test, that are preventing people from buying even at the current lower prices.
Second, the market troubles we are experiencing are due to the economic slow-down and stricter capital controls in China.
While both are significant, neither can explain the facts on the ground.
First, the tighter underwriting standards were announced over 2017, with the stress test for all buyers taking effect on January 1, 2018. Therefore, January 2018 sales were already affected by the stress test implementation.
Importantly, the same stress test was applied to borrowers in Toronto, and elsewhere in Canada. Yet the transaction volume in Toronto was flat over the past year, and actually enjoyed a 6.9% increase in the apartment sector in the region’s more affordable areas.
The second potential explanation, of slowdown abroad, is more plausible. Yet it doesn’t square with the fact that transaction volume is down in all markets, including apartments in the most affordable areas in the Lower Mainland – a market segment that hardly attracts any foreign buyers to begin with.
So what could explain the unwillingness or the inability of local families to buy a home despite the declining prices?
We can speculate about the possibilities – maybe the perception the market has become too risky, maybe uncertainty about the economic future of our province, or maybe lenders trying to scale back exposure to a declining market. Possibly it’s a bit of all.
Whatever the cause, the fact that a lot fewer people are willing or able to buy a home, even in the most affordable market segments, is a testament that our current housing-related policies have failed – and should be reversed.
Andrey Pavlov is a professor of finance at Simon Fraser University’s Beedie School of Business