Home Price Economics & BC’s Interest Free Loans

On December 15, 2016, the Government of British Columbia announced the BC Home Owner and Equity Partnership (BC HOME Partnership) to help first time home buyers with their mortgages.   The plan is to provide interest free loans that can be put toward down payments.

The Province’s goal is to provide repayable downpayment assistance loans to first time home buyers. This is supposed to increase affordability.

In a previous lengthy blog article, I wrote about the program’s finer details. Below is a summary of my main points:

  1. The program will have almost no impact on home buyers’ affordability.
  2. Home prices will not be pushed up!
  3. There was no consultation. Even today, more than two weeks after the announcement, not one lender has verified they will allow this program.
  4. In order to increase affordability, the city, and not the provincial or federal governments, needs to increase supply. This can be done with rezoning.

I applaud the BC government for trying. However, I think that they misjudged and came up with an inappropriate solution to a very complex program.

Demand Side Economics

Affordability for first time home buyers (and second time home buyers, for that matter) is a big issue. Affordability can be broken down into two camps: supply and demand.

Housing Prices with Demand and Supply
I love economics!! Give me a call if you want a crash course 🙂

The image to the left shows what happens when there is an increase in demand based on a certain supply – the prices increase.

In 2015 and 2016, Vancouver real estate saw record demand and housing speculation ran rampant. The “crazy” demand increased property prices to unprecedented levels.  In response, both provincial and federal governments instituted demand-side regulations to curb property appreciation (some of these measures addressed the belief that offshore buyers played a big role in the burgeoning housing prices).

If the demand had actually been curbed, D1 would have returned to D, but that didn’t happen; prices have stayed high.  This happened because demand side changes decrease affordability for most and hurt the average consumer the hardest; in other words, many affluent buyers were/are still able to purchase!

In 2016 alone, the demand-side measures have been:

  1. Stress Test and Decreased Affordability
  2. Bulk Insurance Changes: Complexification of Mortgage Rates
  3. Increased Property Transfer Tax for Foreigners
  4. Vancouver Empty Homes Tax
  5. Capital Gains Exemption Loophole Closed

The demand-side measures above have been successful in decreasing the number of sales but not average prices. Yes, prices have decreased slightly on the very high end ($2+ million) but they have not moved at lower prices. A recent article from the Real Estate Board of Greater Vancouver states that new listings are now inline with the region’s 10-year average. However, in the same article, we have sales-to-active listings at around 26%. “…downward pressure on home prices can occur when the ratio dips below 12% for a sustained period of time, while prices experience upward pressure over 20%.”

Supply Side Economics

On the supply side, however, we have had some, but very limited success (as compared to size of the problem):

Much more needs to be done in order to increase supply of housing! From what I’ve read, UBC Professors Tom Davidoff and Tsur Somerville have excellent views.

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