The most expensive housing market should now think of a path to structural recovery.
The trend in the housing sector is speculated to threaten Canada’s fastest-growing regional economy. The housing affordability crisis is evident especially, in Vancouver’s empty multimillion-dollar houses. The homes are rapidly getting out of reach for Vancouverites. Temporarily occupied or vacant homesteads have doubled to 66,719 between 2001 and 2016. Scrutiny has been directed at foreign landlords who invest huge sums of cash in properties. Based on this realization, Vancouver imposed new tax on homes in January 2017 as a strategy to boost rental supply in a near-zero vacancy rate city. Additionally, a 15% tax was imposed on foreign buyers following their enormous investment in local properties over a five-week timespan.
Canada, in general, and Vancouver, in particular, has seen heavy real estate activity. New home constructions surged in early 2016 to a record level. Since then, home prices have been escalating at a hot pace. The average resale price inches up a still-hot 17% y/y in July, 2016, almost two-thirds more than Toronto.
There are several suggested factors responsible for the skyrocketing housing prices in Vancouver. Rising population, extended low interest rate periods, and external capital flows are just some of them. The problems in real estate in Vancouver seem to be very similar to those in emerging economies – money laundering, fraud and tax evasion; re-emergence of shadow flipping, and ineffective regulation for surging housing prices. more importantly, there have been no laudable initiatives in promoting or executing affordable housing reaching the crest of political force, inspite of the “feeding” effect of the financial crisis.
The world’s super rich are channelling their wealth in real estate investment in gateway cities like Hong Kong, London, and now Vancouver. This, for good reasons, has a negative implication of treating housing as an investment rather than a place of residence. The surging prices have broadened the rift between the rich and the poor. For instance, the housing wealth is not distributed evenly, with the top 20% households owning 68% of the principal residence net worth.
The rental market on the other hand, has been experiencing lower vacancy rents by keeping tenants longer in rental housing; and, along with having a knock-on effect by the housing dynamics, it is also affected other factors that coincide with affordable housing initiatives. Major federal and provincial initiatives to build new co-op or social housing ended in 1993 and 2002 respectively. In 1970s and early 1980s, the federal tax incentives for construction of purpose-built private rentals were eliminated. Lastly, the AirBNB and associated services are currently diverting a portion of longer-term rental stock during this tight rental market situation – worsening affordability challenge. Real estate experts and policymakers are advocating for more housing supply and higher density near the CBD to temper prices and boost productivity, while the opposite is really happening.
Abounding recommendations have come through, that may help alleviate the housing crisis in Vancouver. First, building new affordable rental stock (co-op & social housing) through construction programs under provincial and federal funding. Second, maintaining and re-investing in existing affordable housing through federal support, since they are threatened by expiration of operating agreements. Also, essential are upgrades for the purpose-built rental housing, since older stock has poor energy performance and higher carbon emissions. Third, creating inclusive housing in “complete communities” – low-carbon neighbourhood with closer proximity to public services. Fourth, arresting speculative investment and absentee ownership. Most of the local real estate should be restricted to people living and working in the city for most part of the year. Alternatively, imposing differential tax rates on non-BC rental buyers/purchases of non-principal rental stock would help. Lastly, making property taxes fair by: reducing wealth inequality and improving tax system’s overall equity; accumulating revenue to finance housing proposals; curbing external and speculative investment that escalates housing prices; and making property tax fair to renters.