The efforts of various governments to control the rise in housing prices by reducing demand through tax policy has been of little avail.
In his report on Metro Vancouver housing titled Growing Pains, James Tansey, executive director, Centre for Social Innovation and Impact Investing, suggests that the best way for municipal and provincial governments to have the biggest impact on housing affordability is to reduce the time and cost of gaining regulatory approval.
Tansey points to rising property tax revenues as evidence that provincial and municipal tax policies are not working to reduce demand.
“If the goal of these polices was to cap or reduce housing prices, the most recent budget forecasts would show declining revenues over time,” said Tansey in his report. “All the taxes [related to housing] are projected to increase government tax revenue in the coming years.”
For example, the transfer tax levy, which was increased with the aim of reducing foreign ownership, is projected to generate 21% more in government revenue by 2021. If the transfer tax was reducing housing demand, you would expect this tax revenue to decline with it.
Since taxes have not worked to reduce demand, Tansey asks what is the downside of significantly improving supply conditions?
“I think some of it is driven by governance and some of it is fear at a municipal level, there will be pushback against density outside of the corridors,” said Tansey, on Business in Vancouver’s podcast BIV Today. “I think that’s because a lot of people misunderstand what density means. I think they see it as being high-rises and small condos when there are lots of examples across the region of in character density.”
In character density refers to additional housing that matches the character of the neighbourhood.
Density, however, is much lower for Vancouver’s surrounding area than it is for the city’s downtown core or even Vancouver proper. When excluding areas like Surrey and Burnaby, where population density is only a fraction of the City of Vancouver’s population density, 1/4 and 1/2 respectively, density increased from 490/km2 to 5491 persons/km2. The City of Vancouver has greater density than Tokyo, London and New York, but drops to 29% of the population density of New York when all of Metro Vancouver is considered.
Even within the city, density falls very quickly once one moves from the downtown core to the West Side or to most areas south of Broadway.
So what’s causing rising housing prices? According to information gathered in the report, the rise is housing prices is largely the result of B.C.’s strong economy. Income, interest rates and rising population explain two thirds of the rise in housing prices.
Vancouver housing prices rose 48% from 2010 to 2016, 16% was the result of rising disposable income, 11% was the result of an increase in young adults and 9% of the increase was due to lower interest rates. The remaining 12% is from unobserved factors, which includes cost of regulation, speculation and geographical constraints.
Regulation accounts for six times more than speculation as the cause for rising home prices. Regulation accounts for 3.6% of the housing price increases compared to 0.6% attributed to speculation.
Along with physical constraints imposed by the mountains, the boarder and the Pacific Ocean, regulation has the largest impact on prices after taking into account market fundamentals like interest rates and population growth.
One of the core arguments in Tansey’s report is that in the median term all levels of government need to move past taxation and address barriers to increasing supply. One of those barriers is the region’s unique system of governance. Other major metropolitan areas like Greater Toronto and Greater London have a single mayor and single council. This is fundamentally different in Metro Vancouver where a regional district manages and provides shared services leaving decisions for housing developments to the individual municipalities. The Ontario government has a great deal of power over municipalities. The same is true for the most part in British Columbia, with the exception of the City of Vancouver, which is governed under the Vancouver Charter. Extra jurisdictional powers and multiple governments within a region can add to both the cost and time of regulatory approval.
The report also found that Vancouver is the third least affordable city behind Hong Kong and Shanghai based on a variety of metrics. Both cities however, have comparable density to the City of Vancouver but have a significantly lower risk of experiencing a bubble. According to UBS Bank’s bubble risk score, Vancouver has the fourth highest risk, behind Toronto Stockholm and Munich.