Prof says taxes miss the mark

Andrey Pavlov believes that adding supply is the only long-term solution

Even though Metro Vancouver’s housing market has slowed dramatically over the past year, an SFU professor of finance says that doesn’t necessarily mean that homes are becoming more affordable.

“If incomes are going down, who cares if prices are lower?” Andrey Pavlov of the Beedie School of Business told the Straight by phone. “You still can’t afford to get into the market.”

It’s why he’s skeptical about the approach of the City of Vancouver and the B.C. government. According to him, they’ve “done everything in their power to suppress demand”.

In the case of the city, it’s through measures like the empty-homes tax and zoning restrictions that drive up prices. To cite an example, he pointed to the massive number of low-rise warehouses in the area around Terminal Avenue and Main Street, as well as in other areas of Vancouver.

“That, in my view, is a very inefficient use of space,” Pavlov said. “If you need the warehouses, you put them underground. Or you build on top of it—more residential or office. People do that all the time. It’s not rocket science.”

Because this land is being set aside exclusively for industrial purposes, it leaves fewer sites for housing. And more housing, in his view, could lead to lower prices.

He also accused the province of suppressing demand with a range of new real-estate taxes. They include a surtax on expensive properties (called a school tax), a vacancy tax (also known as a speculation tax), and an increase in the property-transfer tax.

“Sure, they may reduce prices,” Pavlov acknowledged. “But you have a higher tax bill. So your monthly payment doesn’t change all that much. And even if it does, that’s a terrible way to provide affordability, and it will not work because you’re slowing down the economy.”

So what’s Pavlov’s prescription? Over the long term, he argues that adding housing supply is really the only solution. That’s because adding supply doesn’t making housing more unaffordable because that’s

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tied to the price-to-income ratio.

“You need a situation where incomes are rising and prices are stable,” he said. “That’s going to help people get into the market.”

He contrasted that with “taxing everyone to death”. Furthermore, he said that over the long term, curbing the housing supply reduces population growth.

“How many more people are we going to squeeze into the existing square footage?” he asked.

Pavlov thinks it was necessary for Canada Mortgage and Housing Corporation to subject mortgage borrowers to new stress-testing rules in late 2017. But he’s concerned about the timing because this came after a big run-up in housing prices.

“This is the worst time to introduce restrictions on how much people can borrow,” Pavlov said. “Mortgage lending should be tightened when realestate markets are rising, not when they’re flat or falling.”

He worries about the effects of all of these policies on the domestic economy, particularly if there’s a slowdown internationally.

“All these measures take a year or two to take effect,” he stated. “You raise this tax, you raise that tax, and people aren’t going to stop what they’re doing on the same day. But they’re sure going to scale back their investments going forward. It takes a year for those things to take effect.

“Unless we reverse course right now,” Pavlov added, “I do predict we’re going to have a substantial economic slowdown relative to the rest of the world because of those tax policies and the resulting slowdown in the real-estate market.” g