BC Housing markets

With the liberal government recently announcing (well almost a month ago now) that they would help first time home buyers with their down payment through an interest-free loan program (for first five years - more info can be found here) this got me thinking,

As many have commented, on the spectrum of purely political policy to good economic policy, this falls pretty close to the political extreme. Rob Gillezau has an excellent piece in Macleans titled "BCs new subsidy for homebuyers is pure politics and bad policy", where he discusses this further.

I don't overly want to discuss the actual policy being implemented here, but rather the idea of the housing market. I often hear from students and others that the price of housing is too high, that it should be much lower.

My response to this is usually along the lines of "what determines the price of a good?" - in this sense, where the sellers' minimum willingness to accept meets the purchasers' maximum willingness to pay, or put another way, when supply equals demand. Thus the price for housing from a natural perspective is neither too high or too low, but rather where it should be as determined by market forces.

This does not mean that the price of housing is right from a social perspective, so we begin to try to determine what is a "fair" price - the problem is, what is a "fair" price, and "fair" for who? As soon as we begin to try to pin a "fair" price onto a market, we are constructing an artificial price, and distorting the market (No comment as to whether this distortion would be good or bad! simply that it is a distortion).

So, back to the market price, where we are currently at. Gillezau in the above-mentioned piece, as well as many others (myself included), have contributed the rapidly rising house prices in BC to be due to a supply shortage. That is demand is rapidly increasing (shifting right) due to increasing population, low interest rates, etc. While supply is not able to keep pace, the result being a series of price increases due to excess demand.

At least that is the story which seems to make the most sense looking at the current situation. The question is what is actually happening? Is the demand for housing outpacing the ability to supply new units?

to take a look at this I pulled the following data sets:

• BC annual population estimates.
• BC residential housing starts, all unit types.

to keep consistency between the two data sets, I only focus on the common years from 1999 to 2016.

Comparing the annual estimated increase to BC's population with residential starts we see the following:

here we see what we would expect, given the price situation, the population has outpaced new housing starts for almost the entire 17 years under evaluation.

But this is where we need to be careful, not everyone needs a house! most people tend to live with a few others all at the same residence. According to the latest census, the Canadian and BC average household size is 2.5 people, so if we take this into account we have a very different story.

Now we see almost the opposite case. With the exception of 2009, every year residential housing starts outpaced household formation. This is saying that supply has outpaced demand!

If this is the case we have excess supply and we should have been seeing house prices dropping across BC for the last 17 years, not increasing! This does not seem right, let's go back to what we know, in order to figure out what is happening.

1. Prices have been drastically increasing across BC for the last 17 years.
2. Housing starts have outpaced household formation.

For prices to be increasing, we must have either (a) demand growing faster than supply, or (b) supply shrinking. Clearly, supply has not been shrinking so something must have been missed in the demand. 

Arguably the excess demand is coming from the use of real estate as an investment over shelter (probably not a shocker to most!). that is if these properties are being purchased with the hope to "flip" them once they have appreciated enough in value, then we have our missing demand. 

While this may make sense ... the number here seems extraordinary! take a look at the proportion of housing starts to household formation:

On average (gray line) there have been 1.8 units built for every household formed. If these excess starts over household formations were captured by investors purchasing units, then price should have remained stable (growth of demand roughly equal to the growth of supply). What we have seen instead is skyrocketing prices, implying that there has been greater demand for residential units than have been supplied over these 17 years.

So where on average, 1.8 units have been built for every household formed (almost 2 units per household!) investment demand for units must have been even greater, perhaps in the realm that for every unit purchased due to a household being formed, another 1 to 1.5 was purchased for investment, not for shelter. 

I would love to see some data on vacant houses ... as 60 to 65% of BC lives between the CRD, Vancouver or Lower Mainland, I am a bit skeptical that there would be almost a vacant investment unit for every unit occupied! but maybe I am not looking.

If this is the case, then vacant investment properties are the cause for skyrocketing house prices, why isn't more done to restrict this? 

1. Anyone who owned a house is more than happy to see their equity skyrocket and would be furious to see it collapse now.
2. Anyone who has recently bought a house at this high price would be devastated if their house price collapsed.
3. The FIRE (Finance, Insurance, Real Estate) industry is the driver of the BC economy. See here among other sources.

With all this in mind - Yes the new downpayment policy will further spur demand, creating an even greater upward pressure on prices. From the liberals' view, this will give the economy a little short-run kick, fueling the FIRE industry, and hopefully making everything look rosy so that we are all happy for election time.

What are your thoughts? good policy? just politics? anyone planning to take advantage of the loan?  anyone have any insight into investment purchases, I would love to see some data from that side to compare.