How to Mess with British Columbia Millennials

Recently, the Provincial Liberal government announced that it will offer to first-time home buyers 5-year interest-free loans matching their down-payment of up to 5% of the house price or $37,500. After five years, the borrower has to pay back the second mortgage at prime plus 0.5 percent. The government claims the program is designed to make it easier for first-time buyers to purchase their home.

The problem

The main problem is that most BC homes are already grossly overvalued. Typically, houses are considered fairly valued at about three times income, or grossly overvalued at five times income. In Greater Vancouver, houses are somewhere above the ten times range, approaching 15 times, and, whenever a list comes out about the most overvalued houses in the world, Vancouver is typically #1 or #2.

What does this mean in more comprehensible terms? The median household income in Vancouver is about $71,000. The 2200 square foot house in the picture above is listed for $4.9 million.

So essentially, purchasing housing is extremely unaffordable to most people. One of the main causes of this situation is that the government, through CMHC, is taking the risk of borrowers defaulting away from the banks through mortgage insurance. It doesn’t matter to the bank whether buyers can actually afford the homes they’re buying, because the bank won’t lose the money if the buyer defaults.  Thus, we have moral hazard that leads to people buying homes they can’t actually afford.

Eliminating constraints

One of the few constraints on this orgy of house buying is the down-payment. The federal government has been cracking down on 0% down-payments, so people actually have to have the discipline to save up some money before they purchase these grossly overvalued houses. (Appalling, I know. Why should anyone need money to buy houses worth half a million dollars?)

This loan program takes care of that. Now people need far less money to actually buy these houses, ensuring that the housing bubble can grow even more. Millennials are already taking on debt levels that they can’t afford to buy real estate, so this just allows them to pile on even more debt. Essentially, the government is encouraging housing prices to increase even further, continuing to turn its citizens into debt slaves.

Why would they do this?

I believe the Liberals are doing this because for two reasons. First, an election is coming, and polls show that housing is the biggest concern people have, even more than jobs. Thus, the government wants to pretend that they’re addressing the housing problem. They’re actually exacerbating it, by increasing people’s debt and enabling them to further push up housing prices. But they’re hoping that the electorate will be stupid enough to think that this is actually an attempt to address the housing crisis, and they’re probably right.

Second, the first attempt of the Liberals to address the housing problem was to blame it all on the Chinese, introducing a tax on all foreign buyers of real estate. Unfortunately, when introducing this tax, they didn’t give advance notice to BC real estate developers. Normally, this wouldn’t be a problem—there’s no reason why developers need advance notice.

But in BC, the Premier has a salary that’s subsidized by fundraisers, and the biggest contributors at these fundraisers is the developers. They’ve given the Premier money, so of course they expect preferential treatment. Thus, these interest-free loans are Christy Clark’s way of apologizing to her benefactors by giving them an indirect handout. I don’t think it’s a coincidence that these loans only apply to houses less than $750,000—in the Lower Mainland, that means it’s only applicable to condos and townhouses, the product that the people who pay Christy Clark’s salary are pushing.

The bottom line

Pretty well everyone in the development industry seems to love this idea, and pretty well every economist seems to hate it. They all realized that the likely result isn’t making housing more affordable, but rather pushing up prices and increasing homebuyer debt. But, for over a decade, the Liberal government has been happy with the housing bubble, so it isn’t really surprising that they’re doing their best to perpetuate it.