A roadmap for bringing sanity back to housing markets

Where once the housing market was limited by the ability of the local labour market to pay, it is now a globalized commodity. Here’s how to address that.


 

Last week in a post titled “B.C. Boomers have lost their moral authority to judge Millennials,” I argued that the popular characterization of Millennials as entitled is unfair, especially in the face of policy decisions that mostly benefit senior generations. But there is more in common between the generations than there is to divide them, and it’s worth exploring how Millennials and Boomers alike can understand the present crisis in housing affordability and its root causes. That’s because each generation can do its part to regain a sustainable footing not only in housing affordability but also in how we ensure our social contract remains stable in the face of globalization.

One of the common responses to the first article was that “Boomers worked hard to get where they are.  Millennials should too.” At the outset of their careers, Boomers had a big, challenging mountain to climb, something akin to B.C.’s Mount Garibaldi. They faced obstacles and setbacks along the way and they needed hard work to succeed. It was and remains an achievement to reach the top of that mountain. But if Boomers climbed Mount Garibaldi, Millennials are at the base of Mount Everest. The combined challenges of increased automation, globalization, climate change, increased higher education costs, paying for the health care needs of the Boomer generation, and the challenging housing markets in cities across the country mean that we are required to be smarter, more nimble and more focused than our parents were.

Groups like Generation Squeeze seek to bring solid analysis to counter the notion that the upcoming generation is somehow exceptional for its sense of entitlement. Millennials are said to be entitled for wanting what was once considered a Canadian dream worth fighting for: a decent job, adequate housing and a prosperous family. Given Canada’s home ownership rate of 75 per cent for more senior generations, this can easily be considered the norm of recent history. There have been countless articles trying to understand and prescribe solutions to the housing problem faced by young people in Canada’s major cities—the places where most good jobs are located. Those articles tend to focus on increasing the supply of housing either through increased density or increased support for social housing. They also raise questions about the sources of demand, particularly foreign ownership. To respond, the B.C. government announced a 15 per cent foreign buyers tax, $575 million for the construction or renovation of 4,900 social housing units, and a program to give down payment loans to first-time homebuyers. In Vancouver, an empty-homes tax hopes to bring under-used houses back into the rental market.

But do these policies address the right questions or are they simply working at the margins? The fact is that they are still skewed to benefit those who have experienced a massive run-up in their home equity at the expense of those who will come up behind them.

As the apocryphal Einstein quote goes, “If I had only one hour to save the world, I would spend 55 minutes defining the problem, and only five minutes finding the solution.” We all need to spend the time to understand and define the problem. It turns out that if you care about housing affordability, you also need to care about how the global economy works and what that means for our 20th-century tax system.

Here’s why:

The photo paired with my first article featured a protester loudly proclaiming “build social housing now!” Can this solve the problem?  Currently, under five per cent of Canadians live in subsidized housing. While increasing this percentage is a worthy debate to have, it’s important to acknowledge how expensive social housing is. To build or renovate 4,900 units in B.C. this year, the province will spend $554 million. This was announced as the “largest ever” investment in public housing in the history of B.C. But when you compare this to the number of households in B.C., this policy represents a 0.28 per cent increase in the proportion of households living in subsidized housing. This suggests that to move from housing five per cent to 10 per cent of the population, $10 billion in social housing would be required in B.C. alone. That shift would leave the other 90 per cent of the population holding the bill while still facing high housing costs. While important for Canada’s poorest citizens, increased social housing won’t solve the housing affordability crisis for the average Millennial.

Absent a revolution in our economic structure, we need to make market-housing affordable once more. Simon Fraser University’s Josh Gordon wrote the most accessible work on the issue of housing in Vancouver. It suggests that lack of supply, zoning issues or even scarce land is not the main problem in urban centres like Vancouver. Gordon shows that Canada’s Millennials are not only competing against their fellow Canadians for housing, they are also competing against a tide of global capital coming into Canada’s housing markets. Where once the housing market was limited by the ability of the local labour market to pay, it is now a globalized commodity.

A scenic view at twilight of Sunset Beach on the West End's waterfront, English Bay, Vancouver, B.C. (Bayne Stanley/CP)

A scenic view at twilight of Sunset Beach on the West End’s waterfront, English Bay, Vancouver, B.C. (Bayne Stanley/CP)

The problem with this particular influx is not just that it makes housing expensive. It breaks the Canadian social contract. At the core of this contract is an understanding that Canada is a society of relatively high taxes and relatively high services. Globalization makes it much easier for significant proportions of the population to collect their social services in Canada and declare their income elsewhere. One example is the Immigrant Investor program, where those wishing to immigrate would make an interest-free loan to government of $400,000 in exchange for landed immigrant status. UBC geographer David Ley has shown that investor immigrants in the Vancouver region represent nearly 10 per cent of the Vancouver region’s population.  That population paid, on average, $1,400 in income tax 10 years after immigrating. This is less than refugees. This immigration policy failure is a perfectly logical choice from the perspective of the immigrant—it’s rational to want Canada’s good schools and social services for your family. It is hard to move a successful business from abroad to Canada, and you’d pay more taxes anyways, so why would you?

But a focus solely on investor immigrants leads us down the wrong path. It’s not the immigrant side of the equation we need to pay attention to. It’s the investor side. Those with significant wealth—even longtime Canadians—are too often moving money around the world to avoid taxes.

The number of wealthy tax avoiders of all types has reached critical mass. High-end neighbourhoods are no longer populated with taxpayers who help pay for the services of low-income Canadians, but rather are populated with Canadians who are a net drain on the system. This breeds the kind of resentment that Donald Trump rode to power. Policies around foreign ownership aren’t effective in solving the problem—the buyers are Canadians.

So how can we solve this problem without reshaping the entire global economy?

Economists at UBC and SFU have recommended different proposals for an efficient way of making Canada’s housing less desirable to those who simply want a place to park their wealth. A property surtax is an elegant and legally safer way to reduce foreign capital flows into Canada’s cities than the new foreign buyer’s tax. A one per cent surtax would work like this: if you own a $1 million house, you will receive a surtax bill for $10,000. If you have already paid equivalent income tax, are on a disability pension, or if you are a retiree on CPP, the tax is a full deduction—you’ve already paid, thanks.

The above proposals focus on slowing housing investment. They answer the question: How do we solve the housing crisis? But the housing crisis is a by-product of free-flowing global capital. The policy question that addresses this more fundamental issue of concern to all generations is: How do we ensure that Canada evolves its tax system to be fair in an era of free-moving global capital?

For the many property-rich homemakers, students, or tax avoiders, a more ambitious, national version of the tax could provide a minimum threshold of taxation that makes it much harder to collect services and avoid taxes. In this version of the tax, the property-value threshold would be lower—perhaps $400,000—and the specific rate would be designed to ensure that homeowners in the wealthiest areas once again become net contributors to society.

Fixing the tax fairness issue in this way makes it hard for people to avoid their contributions to the social good and helps bring down housing prices—a win-win for the rest of us. Over time, the policy would pull property values closer in line with incomes and restore the meritocracy we once had as middle-income Canadians pursued their dreams. Because such a tax is much easier to enforce than the empty homes tax or even the foreign investor tax, the cost of collecting each dollar is lower and the money can go to whatever policy people want. This is where we can find the resources to build needed social housing for Canada’s poorest, or reduce student loan interest.

In all this, what can Boomers do to regain the moral high ground they have lost? What can Millennials do to put the lie to the myth of their entitlement?

On a personal level, Boomers need to realize that in all likelihood a Millennial isn’t angling for that promotion after six months because they are special flowers. It’s because they have been told they need to do exceptionally well in their careers to make it up their mountain. They are angling for that promotion because to have what was once an average lifestyle means they need to make a VP salary by the time they are 30. Acknowledge this in your own thinking and your discussion with other Boomers.

On the policy level, while the above tax proposal is a win-win, there are also losers in the equation. Any time someone suggests that housing prices come back in line with incomes, they are suggesting one of two things: high income inflation, and thus high overall inflation, or deflating the housing market. To date, politicians have been walking a fine line. No one wants to be seen to pop a bubble. Prices in Vancouver are coming down somewhat already. Boomers are also recognizing that a city needs age diversity and occupied houses to thrive. They realize their retirements will be rather lonely and services hard to come by if things continue on the present path. But the desire to retain age diversity can’t simply be lip service. Boomers have to be willing to voice their support as voters for policies that make the housing market local once more and support measures to bring back tax fairness. This means losing net worth as housing values come back into the realm of normalcy.

But it isn’t just Boomers who lose in this reset. As younger people enter a stratospheric property market, they take a huge risk. For every senior that has recently sold their home to a young family, we have created a young family with a huge mortgage. That mortgage will not go away if property values fall, pushing those who bought at the peak underwater. It is a risk that any buyer should acknowledge, but many people bought in Vancouver on the popular myth that housing only ever goes up. High loan-to-income ratios on mortgages are increasingly common. A housing reset would, ironically, place the greatest burden on the youngest, most recently minted homeowners.

The alternative is no better.  As the largest segment of Millennials is now reaching home-buying age, the problem only gets worse as we convert paper gains to real debt with each housing transaction. These new buyers leverage themselves dangerously, and are only encouraged in this risky investment decision by the new dow-payment loan program. If the status quo continues, we simply have a slow-motion train wreck where our economic output moves to servicing debt. In the immediate term, the economy looks great. In the medium term, when it comes time to pay down the debt, this is a disaster, especially if wage inflation remains stagnant. It is better to rip of the Band-Aid than let the wound fester.

Millennials need to up their game, too. They do not vote at the same rate as Boomers did in their youth. As Donald Trump’s election reminds us, we can’t simply content ourselves to share articles (like this one) in our social media bubbles. We must act. To focus these actions, we can join organizations like Generation Squeeze, which has set out to build a powerful voice in the world of politics for Canadians in their twenties, thirties and forties.

We must engage in political discussion at the municipal level, where the main message given to councillors and mayors seems to be “don’t change my neighbourhood” and we must vote for councillors who support intelligent growth. City elections can swing on a few hundred votes. We have the power to bring out those votes.

We must give provincial and federal politicians of all parties the confidence that they will not lose votes if they show leadership on this file. There are dozens of politicians watching Twitter. Reach out to them. Volunteer some time to advocate either with a political party or with an advocacy group. Knock doors with politicians and take them for coffee afterwards. Attend town halls. Make appointments with politicians at all levels. Bring friends. Make it fun. Physical presence counts.

Millennials need to be a voting block more fearsome than the Boomers and we need to be sufficiently informed and sufficiently engaged to convince other generations to see that voting in our interests is also a vote for their own interests. Millennials need to be clear that this is not about demanding to buy a house on a barista’s salary—it is about clearly demanding policies that will return us to the meritocracy that Boomers enjoyed.

In doing this, we can gain support by acknowledging the challenges that Boomers overcame: high interest rates, poor job markets, and more. But point out that those same high interest rates need to be adjusted for inflation to make a fair comparison. Point out that while they absolutely worked for what they have, we will quantifiably need to work harder. Demonstrate that we are not entitled but rather ready for the challenge. Again: They are atop Mount Garibaldi; we are standing at the base of Everest.

If the conversation happens enough times and seeps into the imagination of our political leaders as both a good policy but also a popular one, we can bridge the generational divide.  Change is possible.

Who’s up for a hike?

Stephen Price is an educator, borderline Millennial and renter who lives in Vancouver. Follow him on Twitter here: @YVR_P.


 

A roadmap for bringing sanity back to housing markets

  1. The relevance to the ongoing drone of the “crisis in. the housing market” is yet one more example the north-south divide in Canada. If one looks north to resource-based communities where unemployment is in. the double digits, property values are plummeting, and vacancy rates often exceed 30%, the picture in “the housing market” looks very different. The arrogant south-centric myopia that the focus and tone of the commentary betrays is shameful. On behalf of those of us living in the part of the country which is exploited when resources are in demand I would quote from Dr Seuss in Horton Hears a Who…”We are here, we are here, we are here.”

    • It’s fair to point out that the housing issue isn’t consistent across Canada. Though I would also point out that 2/3 of Canadians live in urban centres. Didn’t address it above, but that’s partly why the focus is on tax fairness rather than just housing affordability. With a $400,000 minimum before the policy kicks in, most people in rural/northern Canada will not be affected by a solution aimed at solving urban Canada’s problems. Avoiding impacts on areas where the problem didn’t exist was an important consideration in the proposal.

  2. There are precious few jobs in most large cities that will ever pay well enough to afford a nice single family house on a nice lot inside it’s core. This is true no matter ones age. Young workers have to move where the good paying jobs are and work their way into the cities they want to live in just like the boomers they decry did over the years. To sit there and demand that everyone else pay more so they can possibly get cheaper secondary education plus live how and where they want to with the lifestyle most dream of is being delusional.

  3. I bought a house in Cookstown, On, because Toronto was too expensive even 38 yrs ago. I bought the house for $132,000 and had more than 25% down payment, the interest rates then were 11 1/4% we paid the house off in 8 years and bought a condo in Toronto for $134,000. My condo is now worth around $355,000 for a 3 bedroom two bathroom place. Everyone has choices, those were our choices, jobs are in major cities so people are trying to live near them. What we Canadians need are jobs that pay, full time and with benefits. We do not need greedy people flipping property or getting rich on the backs of others. Canada is a semi socialist country but people have to pay for their fair share of taxes in order to receive these benefits. Too many people do not pay their fair share of taxes, I should know, I used to work for CRA!!

  4. House prices continue to rise yet the media isn’t talking about the exploitative sales tactic that is helping escalate home prices: “The No 2nd Chances Blind Guessing Game”.

    In most instances in hot real estate markets like Victoria, BC, when you are involved in a multiple offer situation, you must remember that there are no 2nd chances. You must put your best offer forward as it will be compared with the other offers at the same time.
    This is not a bidding war in the sense most people think the house buying process works.

    As one Victoria realtor eloquently put it:
    “my clients offered on an expensive property $50,000 below asking. There was a competing offer (only one competing offer) and that party offered well over $100,000 above asking. If it wasn’t for my clients below ask offer the other party could have bought the house for asking price; however, they incorrectly assumed my clients offer was above asking.” This tactic is leading to desperation among homebuyers.

    More transparency around multiple bids is required.

    The Government needs to prohibit the practice of blind offers in which interested home buyers are required to submit their best and final offer upfront without ever knowing the price, conditions, or existence of any other bids. The process is nothing more than a blind guessing game which unnecessarily drives up prices.

    Bids are kept secret in Canada and no would-be buyer knows what the others have offered.

    CBC Marketplace recently offered a solution:
    In Australia, the process is transparent. Over about a four-week period leading up to the auction, interested house-hunters can schedule visits and inspections on the home in order to prepare their bids. Then on bidding day, interested buyers gather on the sidewalk outside the home and place their bids out in the open, in an auction led by the seller’s agent. Buyers can see exactly what the competitors are doing, and they can decide whether they want to keep going or not. Since all bids are public, no one bidder has an advantage. Canada should do the same.

    The government will not act on this lack of transparency in the home buying process until this serious issue receives greater attention in the media. Hopefully, media outlets like Macleans can help educate Canadians on this important issue.

  5. What’s missing from this discussion is the impact of government policy on housing: the so-called housing crisis is most rampant in cities that have intensification as a central theme in planning with severity in proportion to how long such policies have been in place. The Vancouver house I once lived in is now the only modest single family home in the entire neighborhood that has not been knocked down and supersized. The general corollary of intensification is that construction at every stage of the process is protracted and the value of replacement construction is up market from what it replaced; this congests supply while raising the average cost (not price) of additions while depleting the supply of lower cost units by knocking them down. Politicians are happy with this as it benefits their primary friends, large scale developers, and increases revenues through development fees and increased assessment. One way to drive down average market prices is simply to not issue permits for luxury housing (since the tenor of the article is to beat up on the rich) and/or make the city less hospitable (possibly cut police and fire budgets? :).
    “making Canada’s housing less desirable to those who simply want a place to park their wealth” – say what? Most Canadians when considering the buy versus rent question, see ownership as a means of preserving wealth and as an investment; since taxation is proportional to value, all real estate investments are already taxed – a surtax on high-priced real estate will be marginally beneficial and will at best cause a dearth of properties close to the cut-off limit (such measures rarely have any impact on average price, only the distribution of prices).