Friday, November 18, 2011

Elections and the Unspoken Fear

I have been following local Vancouver City election campaigning of late. I have been particularly interested in looking at the various platforms aimed at combating housing "affordability" and "speculation" in Vancouver. Various parties and candidates offer potential solutions to solving "affordability" and "speculation", ranging from "cutting red tape", adding low-to-medium-income rental housing, changing the housing mix, embedding neighbourhoods in the planning process, to outright curbs on foreign ownership.

I think, though, there is a lack of debate surrounding high prices in general. Most candidates seem to understand that prices are high but few seem convinced, at least publicly, that prices are destined to drop. All debate seems to surround the possibility that high prices are here to stay as Vancouver "graduates" into the ranks of a world city with commensurate high prices. This may simply be that telling homeowners prices -- and their homeowner equity -- are destined to fall is unpopular it wouldn't garner popular support, but after listening to the candidates speak, Tweet, and comment, I come away with the impression that crashing prices experienced by our urban Cascadian neighbours to the south are almost entirely foreign.

Nonetheless the assumption of high prices leaves me feeling raw, first that prices are obviously in a speculative bubble as measured by price-income and price-rent ratios. The evidence supporting prices remaining high is suspect, it relies on a continuous flow of foreign capital and continuously low interest rates. Most purchases of property in the Greater Vancouver area (though perhaps not certain sub-areas) are by locals with locally-derived incomes. By that measure it's a relatively simple exercise to calculate how much foreign investment would be required to keep prices from dropping, and it amounts to something approaching British Columbia's annual GDP.

Given that house prices are on an earnings basis a poor return on investment, we should be asking first whether these poor earnings are in the long-term best interests of Vancouver's economic growth. Second, if we determine that expensive house (actually, land) prices are a net harm to economic output, we should be asking a big question: is it possible and desirable to suppress land prices to enable more stable and diverse economic growth?

Keeping land prices low is not an unheard of concept. Through various schemes surrounding limiting leverage, land use plans, landlord and tenant protection legislation, and taxation various jurisdictions have been more (though arguably not wholly) successful at reducing land speculation. Parts of Texas and Germany have done this.

No easy answers -- and no doubt simplistic suggestions the blogosphere seems to be prone to peddling are riddled with flaws -- nonetheless I dismiss chronic boom-bust cycles that have plagued Vancouver are not controllable using thoughtful and long-term feedback mechanisms.

5 comments:

Whisperer said...

I think the salient question is, "what do you plan to do when the collapse comes and the civic budget is decimated by the dramatic drop in property taxes?"

patriotz said...

Property taxes don't fall when property values fall, because the taxes are determined first and then the rate. Ask anyone who's been around for the previous two price declines (early 80's, late 90's).

The city would see a decrease in developer fees, which I think are pretty small in comparison to property taxes.

me said...

http://vancouver.ca/fs/budgetServices/pdf/10AnnualReport.pdf

Property taxes were 44% of revenue for 2010. I'm going to guess that "Other fees, rates and cost recoveries" are mostly developer fees. At 35% it is smaller, but significant.

jesse said...

me, it's long been my position that the City of Vancouver is dependent upon development-focused revenue to balance their budget. There were significant cuts to department budgets in 2009 when permits were in the pooper.

Now there has been a resurgence of permit applications -- not pre-GFC highs but still reasonable. If Vancouver has a leg down in prices at any point, it could devastate the City's operating budget. That means significant pressure to raise taxes (long overdue in my view), cut services/salaries, and bend over backwards to woo developers to build again (not good for long-term planing in my view).

On balance, I expect the austerity bell to toll for the City before the end of the decade and it won't be pretty. At this point we should be preparing to take our medicine and institute policies that ensure boom-bust cycles are reduced in the future: revenue volatility makes budget planning for a slow-moving entity like a municipality more difficult.

comment said...

Whenever there is an entity that claims to "solve the issues you have with X", X becomes unaffordable for good 70% if not 99%. Read "Life of Tiberius Gracchus" for the idea of how Management (any Management) get corrupt. Any management. Inevitably.