House price inflation and what to do about it

I have a new report out today on affordable housing in Metro Vancouver. While it’s mostly of regional interest, I think the analysis and framework for housing solutions could have a much wider audience. The report looks at what’s driving the spectacular rise in housing prices in Vancouver, summarizing what we know from a wide range of sources. It looks at the how rising prices have widened the growing gap between rich and poor. And it outlines five themes for a solutions agenda.

Here’s the oped length summary of key measures, including restricting absentee ownership, major new public investments in affordable housing stock, and a more progressive property tax system.

A Solutions Agenda for Vancouver’s Housing Market

Marc Lee

Metro Vancouver’s housing market is broken. While most of the attention has been on the soaring price of housing, there is also a crisis in the rental market, and the complete absence of any secure housing for the most needy. Together, these factors have fuelled a widening gap between rich and poor.

To address this crisis we must stop treating housing primarily as an investment rather than a place to live. Vancouver’s housing should be owned by the people of Vancouver, not absentee owners or corporations.

First, we need to take external capital out of the game. The ability of outside wealth whether Chinese, Russian, American or Albertan to come into the housing market is largely unquestioned. But when Vancouverites have to compete for housing with the world’s super-rich, locals cannot win.

In London’s even crazier real estate market, the UK government has acted to curb foreign money inflows by making its property transfer tax steeply progressive (topping out at 12% above $3 million), and adding a 3% transfer tax on purchases of second homes and rental properties.

BC’s property transfer tax could easily be amended along these lines to keep outside money at bay, and to address other ills of the real estate market like speculation. Over the longer term, though, we need to have a conversation about outright restrictions on absentee ownership.

In addition to cooling demand, we need to build public housing supply, lots of it. The development industry maximizes its profits when it can sell exclusive, luxury units to the top bidder. We need to revive the role of public enterprises to build the housing that local people need, not what investors want.

The tools for such public investment are already in place, from CMHC to BC Housing to regional/municipal housing agencies, not to mention potential partnerships with a wide array of non-profit housing providers.

We can start with an ambitious expansion of the rental housing stock, ideally with cooperative and social housing models. We need about 5,000 new units per year just to keep pace with demand. And more if want to address the housing backlog, from thousands of homeless people up to the estimated 145,000 households considered in “core housing need” (meaning they spend more than 30% of their gross income on housing).

In addition to rental, a building program should also explore innovative affordable ownership models, like community land trusts, where constraints on resale price serve to lock in affordability over the long term. Whistler also provides an excellent BC example of developing affordable ownership for local workers.

The challenge is how to fund the upfront costs of building new housing, typically about $250,000 per unit (800 square feet, mid-rise apartment). That means an annual investment of between $1.25 and $2.5 billion per year to build 5,000 to 10,000 units per year, less where land is contributed or development charges waived. That said, most of that upfront cost would get repaid over the lifetime of the building through rent.

To finance such as build out, and to make the tax system more fair, we should reform how we tax property. For example, a progressive property surtax kicking in at $1 million of assessed value would only affect the top one-third of homeowners, but would raise $1-2 billion per year.

Similarly, the windfall capital gains from housing price escalation should be subject to tax, just like income from working is or (to a lesser extent) income from selling stocks. A lifetime capital gains exemption of $500,000 could be included, with only gains above this amount taxed.

The surge in real estate prices has further increased the gap between rich and poor, with homeowners essentially winning the lottery. A portion of those winnings should be taxed to build the affordable housing we need.

It’s clear that we need a more rational management of housing in the interests of the people who live and work in the city. We have plenty of examples of success from our own history to actions taken in other jurisdictions. The real challenge is political will, and overcoming the powerful collection of vested interests in the housing market.