Painful Truth: Perverse incentives drive housing

Who is responsible for the housing bubble in Metro Vancouver?

Everyone. No one.

Who is responsible? Foreign buyers looking to park cash in a sure thing. Predatory realtors driving up prices to line their pockets. A building industry that smells money. Homeowners eager to scoop up windfall profits as they retire and sell up.

All of those groups are responsible, in some degree, to our insane housing price increases. But as far as I can tell, none of them started it. They’re just driving it ever upward, creating a self-reinforcing cycle. Higher prices attract the speculators, who drive prices up even more. Higher prices convince baby boomers to ask for more when they sell. Higher prices attract crooks to the real estate game, crowding out honest realtors.

We have, in the Lower Mainland, a series of perverse incentives that will continue making things worse until either the rules of the game radically change, or it collapses entirely, a bubble bursting catastrophically.

It may already be too late for anything but the latter solution.

First, the current mad increases (price of a Langley home up 35.3 per cent in a year!) tend to overshadow the fact that this has been going on for more than a decade.

The price runup started around 2002. Back then, you could get a single family home in the Fraser Valley for less around $250,000. Prices had been largely flat for a decade.

Then the fun began. Graphs from the Fraser Valley Real Estate Board show a steady upward slope, with a brief dip for the 2008 recession.

Remember around 2006-08? There were bidding wars for new homes and fears of a condo bubble then, too.

After the recession, growth was more measured, until the sudden, shocking surge that brought the average residential detached price to more than $950,000.

And that’s in the Fraser Valley, including Surrey, Langley, and Abbotsford. Vancouver is even worse off.

Prices have gone up almost fourfold over 14 years. The increases have been steadier and more reliable than the stock market.

Why?

In no particular order, here are some of the reasons thrown around for our current predicament:

• Lack of land. Some blame the ALR, some the regional geography. While land may be a little scarcer in Metro Vancouver than, say, suburban Calgary, there are still vast swathes of land that are ready for development or redevelopment, especially in the suburbs. But the perception of limited land is definitely a factor.

• Foreign money. An accusation that is both true and painful to make (since it tends to draw racists like flies). But the fabled foreign investor only began turning up in recent years. Remember, we’ve been busily running up prices on our own for more than a decade now. They came because prices were already increasing at an unsustainable rate. They are part of the cause now, but not the original cause by a long shot.

• NIMBYism. Plenty of people don’t want their neighbourhood to change. At all. No towers, is the cry in Vancouver. In Langley, not another Willoughby, shout people who haven’t noticed that Willoughby has three times as many people as their neighbourhood and more happily moving in every day, thanks very much. The situation is complicated by angry residents who don’t care about whether anyone else can afford a house – they’ve got theirs.

It doesn’t hurt that keeping land expensive also means that for the aging, Baby Boomer and older residents who make up most of the NIMBY groups, their own homes keep rising in value. Right up until they sell up to foreign investors and buy retirement homes in Kelowna or on Vancouver Island.

• Local speculators. Before the foreign investor became everyone’s favourite punching bag, it was the more generic “speculators.” Flippers. Folks who bought a house and turned it around for a quick buck. It’s hard to gauge how many there are, but I’d be shocked if there weren’t any, given the almost certain profits to be found. You can throw “crooked realtors” into this category too. Like all speculators, most of them are recent arrivals to the profession. The Globe and Mail has done some excellent reporting recently on a few firms that exist almost solely to make profits from shadow flipping, running both ends of a housing transaction, and other shady practices.

What can we do? We have to flip the incentives. Right now, all the incentives point one way – towards ever increasing prices. If we want to slam on the brakes, we need better incentives in the other direction.

We can tackle them in order.

• Lack of land can only be tackled with (holds breath) density. We can’t make more land. We can’t level the mountains. And if we try to carve up the ALR into suburbs, that’ll get us a few more years, but at the cost of our ability to feed ourselves in the future.

We need to build up. And it needs to happen everywhere, to spread out the impacts.

Langley is already building a lot of new condos and acres of townhouses, densities that would have been unthinkable just 20 years ago.

But Vancouver still has whole neighbourhoods with densities that are no higher than parts of Brookswood. They need to do their part as much as we in the valley do.

• Tackling foreign money (or local flippers and speculators) can be done by increasing fees and property taxes on vacant properties, or by increasing penalties for each sale of a property within a given time frame. In other words, if a property is sold six times in a year, jack up the fees on each sale by 10 per cent.

The same goes for vacant houses in rural areas awaiting development. Some lots are built up quickly. Others sit for years, being traded back and forth between development groups. Start jacking up the land taxes for vacant homes.

• Tackling NIMBYism is almost impossible. I’ve seen people scream and shout and even cry over development, in a way I’ve not seen over any issues other than abortion, guns, and hockey playoffs. I wish I knew how to fix this one. I don’t think there is a solution.

About all we can do is hold the province to account for all the real issues that rapid development does bring. We need to pump money into building schools and roads, parks and transit much faster. Because when we do densify, when we do generate more housing fast, we also get no support from Victoria. They want to fix the housing crisis? Make it easier to live in the new neighbourhoods.

• As far as local speculators, it’s about the only area in which the government is actually making headway. They may need to do more, but it’s honestly the easiest of the bunch to tackle.

 

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