New Taxes Digging Metro Deeper Into Housing Affordability Crisis

There is an old Yiddish curse that warns that you better be careful what you wish for as you might just get it!

Many believe that the series of new taxes recently announced by the British Columbia's NOP government are designed to make housing more affordable in Greater Vancouver; however, it is much more likely that these measures will only kill jobs, further hollow-out the middle class to the point where only the very rich can afford to stay in their homes and sour homebuilders on risking their money to construct the many new homes that our region desperately requires.

Are these new taxes simply a method of increasing general government revenues at the cost of the largest creator of high paying jobs in the province? Will these new taxes do more harm than good to those that these policies were intended to benefit?

It is an irrefutable fact that there is a housing crisis in the lower mainland. Unfortunately, the cause of this crisis is not as clear-cut. It is most likely that the crisis was caused by a perfect storm of ultra-low interests rates, significant migration to the region, lack of supply, high regulatory costs and the emergence of Vancouver as an international city.

Many felt that the previous Liberal government was ignoring the issue and that doing anything is better than the status quo.  Just be careful  what you wish   for.

It is difficult to comprehend that the implementation of massive additional property taxes on houses valued at over $3 million will do anything other than decrease the price of high-end houses that will never be affordable to those seeking to enter the housing market. It will simply force the elderly university professor (who may well have voted for David Eby) to sell their home on the U.B.C. endowment lands where they have lived for the last 30 years. Some will take glee in punishing someone fortunate enough to benefit from owning their own home but forcing the elderly to relocate from neighborhoods where their doctors are located, where they shop and where they feel comfortable is unjust punishment. And guess who will be there to scoop up this bargain property? Most certainly, it will not be someone who is currently renting and, more than likely it will not be a young professional who also would be unable to afford the new property tax regime.

It is hard to see how new taxes will solve the afford-ability crisis and it is much more likely to make the situation worse by decreasing supply. The government does not have sufficient resources to build housing for anyone other than the most vulnerable members of our society. Those hoping that this new tax revenue will be used to construct new affordable housing for anyone other than the homeless will be left sorely disappointed.

The remainder of new housing must be built by non-government builders. Those willing to risk their money to purchase land and borrow money to construct homes with the hope that they can sell this new housing at a profit.

If these home-builders believe that government policies are designed to decrease house prices and make homebuilding uneconomic they will simply stop building. Once this occurs the fall­ out will be twofold.

First, jobs will disappear. Well paid tradespeople will see their incomes decrease and they will stop spending money on new trucks and in restaurants. And it will not just be the construction trades that will be hurt. New housing means building materials are required and that provides jobs in lumber yards and cement plants. New furniture and new appliances are required and these all must be delivered by truck drivers. Credit unions finance the new homes and notaries get paid for filing the paperwork at the land titles' office.

Secondly, the supply of new housing will dry-up. This decrease in the number of new apartments, townhouses and other forms of housing will cause the market to stagnate. On the one-hand government taxes will put a damper on prices while, on the other hand, the lack of supply will mean that house prices will not fall to the point where they are affordable. As in­ migration continues and new housing is not built, the market will become more crowded and the very people that these NDP polices were intended to help will be hurt the most.

So what caused this housing crisis and what should the NDP government be doing if they want to. preserve jobs and make housing more affordable?

In 1990 the average rate for a mortgage was over 12%. That means that a $300,000 mortgage cost about $36,000 a year in interest charges. Twenty-five years later, in 2015, mortgage rates were under 2.5% meaning that the same $36,000 of interest payments could support a mortgage of about $1,440,000. If you factor-in the increase in wages over this 25 year period , it would be possible to support a mortgage of over $2,500,000. Interest rates are not controlled by the provincial government and, thus, the largest contributor to the current housing crisis is beyond the control of the province.

Very clearly, the massive decrease in mortgage rates (especially after the 2008 financial crisis) has been a major contributing factor to the increase in value of a variety of assets including all forms of real estate. Although the price of real estate has increased across Canada, it has clearly been more pronounced in the lower mainland. Thus, although low interest rates are the most significant factor in high house prices, they do not tell the entire story.

It is a well established law in economics that 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 of the available land in the region is restricted by the agricultural land reserve.  Further, being located on the bird's-foot delta of the Fraser River exacerbates these issues by creating traffic bottle­ necks that make it much more difficult to commute within the region. The lack of available new land means that additional housing must come from the redevelopment and densification of existing neighborhoods.  Unfortunately for those seeking more affordable housing, there are many who oppose this process. This includes not only the NIMBY crowd but also most
 
municipal governments that not only charge gigantic development fees but make the regulatory process so complex and time consuming that only the largest of developers have the ability to navigate the system. The lack of new supply combined with the demands of new arrivals (currently, the population of the lower mainland is increasing by over 30,000 people a year or almost 100 new arrivals per day) translates into increasing pricing. Unfortunately, whenever these sorts of market conditions exist, small-time speculators will pile-in. Doctors, dentists, lawyers and accountants (and, yes, non-residents of Canada) with available cash will buy pre-sale units as they hope for better returns than they can achieve by purchasing GICs that yield under 2% return where the interest income gets taxed at 50%. This sort of speculation is less likely to occur in a properly supplied market where local governments do not restrict the construction of new housing.

Also, housing speculation would have been curtailed if the federal government had enforced the existing rules in the Income Tax Act. Many house flippers have completely evaded tax by incorrectly asserting that these properties were their principal residences or reduced their tax in half by not reporting their gains as fully taxable business income. Revenue Canada has clearly been asleep at the wheel and has exacerbated the amount of speculation. New taxes are not required, all that is needed is for the federal government to simply enforce their existing laws.

The solution to Greater Vancouver's housing crisis lies in increasing supply and reducing travel times. The provincial government needs to figure out how it can work with municipalities to encourage new housing through a significantly faster and less expensive approval process.• Recently, the CD Howe Institute estimated that the regulatory burden now makes up 50% of the cost of housing in the Vancouver area. Vancouver's cost of housing restrictions are by far the greatest in Canada resulting in a 50% extra cost of $640,000 for the average new house and are amongst the largest internationally as a share of market costs. Layering of the new speculation tax, the increased property transfer tax and the new school taxes on development land will only add to the cost of delivering new housing

Every day Manhattan grows from 2 million people to 4 million people as these extra 2 million commuters arrive in the borough by rapid transit. There is no reason that transit in the lower mainland can't transport a worker living in Langley to downtown Vancouver in 45 minutes.
Investments in transit would go much further to solving the housing crisis that building government housing on the most valuable land in the region.

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

The Green Party leader, Andrew Weaver, has suggested following the New Zealand model and banning all foreign ownership. A much more prudent approach would be to consider the Australian model of restricting foreign investment to new housing. This would preserve the existing housing stock for Canadian citizens without killing high paying jobs in the home building industry which is British Columbia's largest employer.
 
Unfortunately, the polarization that is being witnesses in politics across the world has manifested itself in the Greater Vancouver housing debate. A wealth tax may appease those with a warped sense of moral rectitude seeking class warfare but it will do nothing to make housing more affordable and, just as things are playing out in the socialist paradise of Venezuela, will ultimately disproportionately damage the poor.

By Hugh Woolley who is a Vancouver based income tax consultant, author and lecturer.
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