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B.C.’s help for first-time home buyers is a trap

Andrey Pavlov is a professor of finance, Beedie School of Business, Simon Fraser University

The B.C. government announced Thursday their new program designed to help address the housing affordability crisis that has spread across many parts of our province.

Starting next month, the provincial government will extend a subsidized loan to first-time home buyers to match their down payment for a principal residence. While this attempt to help B.C. residents with their housing situation is well-intentioned, it will not work.

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Read more: B.C. to offer loans to first-time buyers as Bank of Canada issues debt warning

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Greater Vancouver is a highly constrained market. Some of this is due to our geography, but most of it is because of the choices our municipal governments are making. Our transportation infrastructure is among the most inadequate in North America, our development approval process borders absurdity, and we have chosen to make large areas of land unavailable for development. All these factors eliminate any possibility for a meaningful supply increase that would normally occur given our housing needs.

So what does this have to do with the new loan program? Everything. In a market with highly constrained new supply, any financial subsidy for buyers would get reflected in higher sale prices. Therefore, the benefits of the new program will flow to current owners and developers, not to the buyers.

The negative side effects of the new program, on the other hand, stay with the buyers. It will push people to stretch themselves even further financially and to take on even more debt. This comes at the worst possible time, just when interest rates are clearly on the increase and many real estate markets in B.C., especially in the Lower Mainland, appear to be just past their peak and forecasted to decline from here.

It gets worse. The new loans will be registered as second mortgages. This means they will experience losses first in case a borrower defaults. This creates a taxpayer liability that has the potential to come back and haunt us. The loan exposure de facto invests all B.C. taxpayers into the real estate market, whether they like it or not.

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If we are serious about helping home buyers, we should take steps to allow a vast increase in housing supply in the Lower Mainland.

First, we should greatly simplify and speed up the development approval process. Regrettably, this falls mostly within the mandate of the municipal governments, who have shown no interest in doing so. Still, the province can easily pass legislation that imposes tight limits on development approval timelines and outlaws unreasonable and arbitrary requirements and restrictions.

Take the current de-facto moratorium on redeveloping most rental properties in Vancouver as an example. We all suffer the consequences of sky-high real estate prices and rents, but city hall arbitrarily forces us to keep hundreds of crumbling and wasteful buildings in place.

Beyond increasing the supply through higher-density redevelopment, we need transportation infrastructure that puts outlying areas within reasonable commuting time. A 30-minute commute in large cities in North America gets you 20 kilometres, often more. Unless your commute is confined to a single direct SkyTrain line, you can't even get half of that in 30 minutes in Vancouver, regardless of how you travel. Not only we are not investing enough, we spend the money we do have to dismantle or close whatever little infrastructure we have left.

We do have available land that we choose not to develop. Vast Agricultural Land Reserve areas just south of Vancouver are within 15 to 20 kilometres from the downtown core. This gives us tasty (although overpriced) strawberries in August, but it also packs B.C. families into inadequate housing or, worse, sends them away to cities with more sensible policies.

The desire to help B.C. residents with their housing is admirable. But instead of handing out subsidies that do more harm than good even for the recipients, and certainly for the taxpayers, we should allow the housing supply increases that would normally have occurred by now. This should be done both through higher density and through accessing more land.

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