B.C.’s interest-free loans could hurt new homebuyers more than it helps

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Appeared in the Vancouver Sun, December 30, 2016

Due to Vancouver’s sky-high housing prices, many residents worry they might never be able to climb the property ladder. Indeed, a recent survey found that housing issues ranked as British Columbians’ greatest concern heading into next year’s election. So it should come as no surprise that the Clark government has taken action to allay those concerns. Unfortunately, it chose the wrong approach.

The latest provincial intervention in the housing market—interest-free loans to first-time homebuyers—aims to help new buyers with their down payments, ostensibly making B.C.’s red-hot housing market more affordable. However, stoking demand for housing without a significant increase in housing stock will likely do more harm than good, rendering Vancouver housing even less affordable.

Why? The answer can be found in a first-year economics textbook.

Boosting demand for a good without also boosting its supply puts upward pressure on prices. In the case of housing in Metro Vancouver, encouraging first-time buyers means that more (and higher) bids will be placed on listed homes. If the number of listed homes does not increase in response to this new demand, the growing pool of buyers will push prices up.

So why not build more homes?

In short, red tape at city hall is holding up tens of thousands of new units from entering the market. Fraser Institute research measured the effect of local regulations on homebuilding, including how long it takes developers to acquire building permits, how much it costs to comply with regulation, how often rezoning is required, uncertainty, and the opposition homebuilders face from local council and community groups.

It takes more than 15 months to gain approval on typical projects in Vancouver, five months longer than in Burnaby. This is exacerbated by the uncertainty of these timelines, which presents a stronger deterrent to developers in Vancouver than in most of its suburbs. It also costs more than twice as much to comply with regulatory requirements in Vancouver than in Abbotsford. These costs include building permit application fees, legal expenses, and other costs associated with compliance.

Cranes may dot the Downtown Vancouver skyline, and new towers may be springing up near SkyTrain stations, but what matters for affordability is the rate at which new housing enters the market. Further research suggests that, were Vancouver’s regulations on new homebuilding in line with more housing-friendly cities in the metro area, many more units would have already been built in its most desirable and accessible neighbourhoods in recent years, taking pressure off the city’s razor-thin vacancy rates.

Housing markets are complex, reflecting many factors on both the demand and supply sides of the equation. The Lower Mainland is one of Canada’s most attractive urban regions, drawing workers, retirees, vacationers and investors from across the country and around the world. It’s also short on space, being hedged by mountains, ocean, and the border with the United States. As such, efforts to improve housing affordability seem appropriate. However, boosting first-time buyer demand without addressing Metro Vancouver’s underlying housing supply issues will likely have the opposite effect on affordability.

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