PAVLOV: Eby offering interest-free second mortgages... What are they smoking in BC?

Dr. Andrey Pavlov is Professor of Real Estate Finance, Beedie School of Business, Simon Fraser University"Twenty-six hundred new homes to be sold at 60% market value in Vancouver," read a September 19 CBC headline. This quickly expanded to 25,000 homes across British Columbia. Have the countless promises, policies, and plans finally worked? Have we built enough housing that 25,000 units are available, at a discount? Might there be a chance that my kids can stay in British Columbia?But headlines are meant to be catchy, not accurate. A closer look at the BC NDP’s "Attainable Housing Initiative", released on the eve of a provincial election, quickly reveals a far grimmer reality. For starters, there is no discount at all on the homes. Instead, the province gives you a loan for 40% of the purchase price, meaning a second mortgage, but you're still paying full market price. Second mortgages were among the main causes of the 2008 great financial crisis and mortgage defaults in the U.S.To be fair, the taxpayer-funded 40% mortgage is not quite like any loan a bank would give you. First, there is no downpayment required on the 40% portion. Buyers only need to cover the required minimum on the remaining 60%. A million-dollar home would require a $20,000 lower downpayment and no payments on the government loan for 25 years.I will let you decide if the $400,000 taxpayers would be putting up to provide the above benefit is justified, especially when BC is basically broke. My main concern is that the benefit itself is just on paper. The program allows eligible home buyers to take on even more debt and buy a more expensive home than they otherwise could. Many would do so, especially in areas where the typical home costs 10 times or more the typical income. But when supply is limited, allowing buyers to borrow more only increases prices.This is particularly painful if the home is on leased land, as is the case with the first project under this program. In the government's own assessment, "the relative value of the lease tends to decline as the lease term approaches its termination date...” Homebuyers would face not only elevated initial pricing but also declining value over time.Whether you choose a lease or a freehold purchase, ultimately, our key housing issue is still low supply. The stark reality is that we're building less and less. The figure below shows Vancouver Metro completions since 2003. We built fewer units in 2023 than we did in 2017. Shocking, I know, especially following NDP's 30-point plan of 2018 that was supposed to solve it all. Meanwhile, the population (demand) has grown to 5.6 million from 4.8 million in 2017. .Instead, it’s time to reverse course and eliminate all the growing taxes, fees and restrictive red tape choking housing supply. It will take time to remedy the chronic housing shortage accumulated over many years, but it's a start. Or, we can try another 30-point plan.Dr. Andrey Pavlov is Professor of Real Estate Finance, Beedie School of Business, Simon Fraser University.

PAVLOV: Eby offering interest-free second mortgages... What are they smoking in BC?

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