The goal is a drop in housing prices
New taxes on speculators, foreign buyers and homes valued at more than $3 million
VICTORIA — Finance Minister Carole James says the goal of her budget’s new housing taxes is a downturn in the market and a drop in home prices, potentially making the market more affordable but also potentially putting some existing homeowners under water on their mortgages.
James said Wednesday that her new taxes on speculators, foreign buyers and homes valued at more than $3 million will, she hopes, lead to a correction in a housing market that has experienced steep price increases for several years.
“We need to see a moderation,” she said.
“My hope is by addressing both supply and demand, you will see more supply in the market and that will ease some of the cost pressures and you’ll see a moderation.”
James was asked specifically if the goal was a decline in home prices. “Yes,” she said. “I hope we don’t see the kind of escalation you are seeing now in the market.”
A decline in house prices will undoubtedly be welcome by those who are priced out of the market. But it could also cause some recent buyers to suddenly see the value of their home drop below the price of the original mortgage they took out to purchase the property.
When asked about such a scenario, James said she thinks people will understand it’s necessary so that people can afford to live in the communities in which they work. She admitted her finance ministry has not done any modelling on how much the market could adjust because of her measures.
“There are firsts here and we’re going to track it carefully.”
Her declaration sparked concern in the real estate and housing sectors.
“I can’t imagine a government telling homebuyers who bought a home in the last year that we are purposefully trying to put you under water,” said Cameron Muir, chief economist of the B.C. Real Estate Association.
“I’m fully in favour of having prices grow at a much lower rate. Ideally you’d want home prices to grow at our near the price of inflation and perhaps a little bit less so incomes can catch up over time. If home prices were arbitrarily driven downward by government policy there are large consequences to that in the marketplace, including builders pulling back on production so you’ll end up in another supply crunch down the road as well as you’d impact the overall economy.”
The Bank of Canada calculated in 2016 that a 15 per cent drop in housing prices would put one in eight mortgages in Greater Vancouver under water, with a 25 per cent drop meaning one in four mortgages would sink into negative territory.
Anne McMullin, president and CEO of the Urban Development Institute, said she’s not sure James means what she says, because a housing price drop could trigger a recession. It’s a politically popular line, said McMullin, even if the reality is complicated because the same homeowners who want to see cheaper prices so their kids can buy a home also want their houses to retain their higher values so they can pass on their equity or use it for retirement.
“Probably what she’s saying is we don’t want prices to keep going up, that’s fair,” said McMullin. “But she was struggling with a political statement she thinks the public wants to hear. ”
Josh Gordon, a Simon Fraser University assistant professor in the school of public policy, said he thinks James is making the right move by trying to trigger a market drop.
“Prices do have to come down a decent amount if we’re going to get back to affordability and that will mean some of the people who bought in recent years will be underwater on their mortgages,” he said.
“It can create some economic problems which is part of the reason why you should not allow a housing situation to get to this place in the first place, which is the fault of the B.C. Liberals, not the NDP,” added Gordon.
Muir said a smaller correction could be brought onto the housing market without causing too much pain.