Last week, as part of their election platform, the BC NDP announced a new scheme to help first-time buyers get into the market. Government would offer a low-interest rate loan on 40 per cent of the purchase price. The loan would come due either when the property is sold or after 25 years.
The loan would be open to homebuyers with an annual median household income of up to $191,910. When the homeowner sells, they repay the loan plus 40 per cent of any lift in value. Premier David Eby said it the program would help about 25,000 people get into the market.
Funding for the scheme was pegged at $6.45-billion over five years, and would require partnerships with non-profits, First Nations, local governments and private developers.
The plan is one of a series of housing schemes recently proposed aimed at creating affordable housing for local incomes, but whether it’s the most efficient use of taxpayer money is a matter of debate.
The province has also set up the Rental Protection Fund, with an initial $500-million investment, to purchase apartment buildings for below-market housing. The crown corporation BC Housing has purchased buildings around the province, including older hotels.
But some critics have said such government acquisitions are typically inefficient because they overpay. BC Housing purchased the North Star Inn hotel in Prince George for $10.535-million last year, from owners who’d paid $3.25-million just five years prior. The same owners sold the province the Lotus Hotel in Prince George for $2-million, after paying $700,000 two years prior. Housing Minister Ravi Kahlon said the prices were based on independent BC Housing appraisals, and the North Star sale included furniture. He also said assessed values don’t necessarily reflect market value.
Last year, the crown corporation purchased an old 42-unit apartment building on Cherry Avenue in Kamloops for $12.8-million that had been assessed at $4.2-million.
“If you’re going to buy a house, the appraised value is not the same as the assessed value. If that was the case, we wouldn’t need the appraisals at all,” said Mr. Kahlon. He underscored the urgent need for housing a segment of the population quickly.
He said BC Housing has had to walk away from purchases that they deemed too expensive.
“We’ve also had many cases where we’ve leased hotels and the price that they wanted has been too high. And we’ve just said, ‘Thank you very much, but we have to go on.’ And that’s a difficult decision always to make when you’ve got people needing housing.”
Long-time realtor Lorne Goldman said values can vary broadly between appraisers, and any other buyer would have based the valuations on revenues they could generate from the property. Instead of purchasing buildings, or incentivizing development, he says taxpayer money would be better spent if given directly to people who need it, instead of being given to landowners and developers.
“Government can’t build housing efficiently and cost effectively, and then you give money to the private sector to build the housing. Who benefits from that? The private developers. My thought is, what would happen in the event you just let private developers build it without any free money from the government? And give grants to the tenants or the potential buyers based on their income tax returns, as a baseline for credibility, to obtain the free grant,” Mr. Goldman says.
“You are giving away the Canadian population’s taxes. You are giving away the tax money, so you want to give it out as efficiently as possible. Why not just skip the middleman and give directly to the buyers or tenants in the form of grants, and let the government stay out of business, which, I think it’s been proven, they are not particularly good at.”
UBC economics professor Tom Davidoff says that the high cost of land, construction and everything else makes it extremely difficult for government to efficiently deliver nonmarket housing. Government policy by its very nature requires overpaying, he says.
“They’re overpaying, but the whole point is to overpay. They pay market prices, and you get discounted [rents] so low-income people can afford it. And that’s a lot of housing policy. We call it the second welfare theorem in economics, like you should not take a fancy $1 million apartment and give it to a household that is only willing or able to pay $250,000, because that’s a $750,000 gap. And that low-income household would clearly be better off with a $750,000 cash gift than a subsidy.”
When it comes to the 40 per cent low-interest rate loans for middle-class buyers, he’s got mixed feelings, he says. He believes it would prove popular with a lot of buyers, and developers will like it because it increases the available pool of buyers. But with an ultralow interest rate of 1.5 per cent, it involves a subsidy for a restricted number of people. You could argue that money could be better spent on lower income people than those whose household income is $100,000 to $200,000, he says.
“[Government] expectation is they’ll break even given their cost of borrowing. But of course, they might do better or worse. … My guess is something like 10 to 15 per cent of this should be thought of as a subsidy to the buyer.”
A possible outcome, and a reason why the private sector doesn’t offer these sorts of loans, is that buyers might strategically sell when prices fall, to get out from under the debt, he says.
“That’s a caution that makes you think, ‘hmm, maybe this will cost the province money because the private sector doesn’t want to do it.’”
Andy Yan, director of Simon Fraser University’s City Program cautions that these programs require enforcement if they are to work. He cited the case earlier this year of the Victoria-based government program meant for middle-income home buyers that was abused when it was discovered that 13 of the purchasers never lived in the units. The government had given a $53-million loan to a developer to build below-market units at the Vivid condo project for qualifying buyers.
“While made with the best of intentions, affordable homeownership programs require stringent oversight and transparency,” said Prof. Yan. “Those that applied for the program were not necessarily those who need it the most.”
University of B.C. law professor and director of UBC’s Housing Research Collaborative, Alexandra Flynn, says that government operates on a timeline to make quick purchases, which is an issue. But the higher premiums paid by government on hotel purchases, for example, are offset by the good that comes from housing people quickly. But she has concerns about the suitability of hotel housing.
“I think it’s ultimately more cost efficient in the long term because of other, related social costs that go along with not having adequate housing,” she says. “What I’m concerned about with the hotels is the long-term suitability of those particular spaces for the people that they’re being purchased for.
“Are they in areas where people are going to be able to access the services that they need as well? How much is it going to cost not just to purchase the building, but to modify them to be usable for the folks that need them?”
