The start of a new school year and the influx of hundreds of students to my first-year economics class means I am on the lookout for useful examples of economics in action. Thanks to the government of British Columbia, I have received a great example of how governments deal with policy issues and their myopic understanding of markets and how they work.

In July, the B.C. government announced a new 15 per cent tax on foreign buyers in the Vancouver area in an effort to address the issue that foreign speculators were driving up the price of housing and making housing unaffordable. The B.C. government’s expectation appears to have been that by taxing foreign buyers, this would reduce demand bringing down prices thereby making housing in Vancouver more affordable.  

This was an entirely demand-side perspective and lost in the analysis was the fact that both demand and supply determine price in a market and both sides are characterized by multiple determinants. First, demand for housing in Vancouver was not just a function of foreign buyers but also preferences (Vancouver is a beautiful place to live), income, population growth and interest rates—which are at historic lows. These demand-side forces are still at play regardless of the new tax on foreign buyers.

Second, along with rising demand, there is the issue of the supply side of the housing market. Housing supply in Vancouver has not been keeping pace with demand. All other things given, rising house prices should send a signal that there’s money to be made in the housing market and spark new home and condo construction.

However, the supply response has not been sufficient. The natural geographic constraints of Vancouver being hemmed in by the mountains have been made worse by regulatory barriers to housing supply growth such as municipal land use regulations and long approval times for building permits, as a recent Fraser Institute study shows.

What is the result to date of the new tax designed to make housing more affordable?

Well, sales appear to be down in the wake of the introduction of the new tax—a year-over-year drop of 26 per cent. As a rule of thumb, if you ever want less of something, tax it. Yet prices appear to have hit new highs with little downward movement, which means housing in Vancouver is not becoming more affordable for locals. It would appear that other forces are still at play when it comes to housing prices in Vancouver. Prices are not about to come down in Vancouver, at least not as a result of the foreign buyer tax.

The best way to make housing more affordable in Vancouver is not reducing sales of existing housing stock but improvements on the supply side that boost new housing construction.