How two UBC Sauder profs are trying to fix B.C.'s housing market
In Vancouver, not a day goes by without a story about real estate making the news. And chances are Associate Professor Tom Davidoff from UBC Sauder's Strategy and Business Economics division is the one deciphering the complex market for the general public.
"Vancouverites are passionate about real estate because having a place to call home is as primitive as it gets," explains Davidoff. "Mountains to the north and an ocean to the west not only make Vancouver a very desirable place to live, but at the same time, that geography severely limits housing supply."
This white-hot demand - coupled with low property taxes, rock-bottom mortgage rates and a relatively strong local economy - has led to astronomical increases in home prices, so much so that the median income of Vancouverites is nowhere near what's needed to afford a home in the region. For example, it took five years (March 2010 - March 2015) for detached home prices to rise $400,000 to $1.4 million, yet prices rose $300,000 between September and December 2015 alone. According to Statistics Canada, that same year the median family income in Vancouver was only $79,930. Davidoff's own research has found that over the past two years, rents for online listings have been rising much faster than inflation.
A solution from UBC Sauder real estate economists
Early on, Davidoff and his colleague, Associate Professor Tsur Somerville, recognized Vancouver's affordability problem and discussed ways to increase supply and reduce demand by investors, whose home purchases were negatively affecting local residents. Two key issues that the pair grappled with was low property tax rates coupled with limited supply; in a paper Davidoff wrote with his MIT classmate Saku Aura, he demonstrated that markets like Vancouver - where it's hard to build - actually need higher property taxes and lower income and sales taxes. This acts to reduce investment demand and improve the situation for renters, thereby making the economy operate more smoothly.
Then news started circulating in The Globe and Mail about properties being used to park extreme wealth by overseas owners, transforming dozens of Vancouver neighbourhoods into ghostly streets full of empty homes.
Davidoff started working with Somerville to draft a position paper for the government; Joshua Gottlieb from UBC's Vancouver School of Economics soon joined the group and together they proposed the B.C. Housing Affordability Fund. The plan involves taxing owners of vacant properties and those who don't pay Canadian taxes, and then returning the 1.5 per cent surcharge to local residents.
While the plan gained traction with the city's leading economists - 47 to be exact - as well as the public and media when it was proposed in January 2016, it didn't formally become public policy until the NDP announced a new speculation tax on February 20. Beginning in fall 2018, the province will tax foreign and domestic speculators who own residential property in B.C. but don't pay taxes in the region, including those who leave their units vacant.
"We know markets respond to taxes, so much like the B.C. Housing Affordability Fund, the speculation tax will benefit locals in one of two ways: units will either be sold or rented out, thereby creating more supply for locals, or owners can pay the tax, which will add to provincial coffers and benefit taxpayers," explains Davidoff.
A lifelong passion for cities and public policy
For Davidoff, the ability to positively influence public policy and improve the lives of residents is one of the reasons he pursued a career in academia - not to mention he grew up immersed in the world of real estate. "My parents were urban planners in New York who sued suburbs that zoned areas to keep out the poor, so when it came to city planning, doing the right thing was like a religion in my family."
That exposure to cities, housing and public policy led Davidoff to work in real estate development after graduating from university back home in Brooklyn. He then pursued a Master in Public Affairs/Urban and Regional Planning at Princeton University and a Ph.D. in Economics and Urban Studies and Planning from MIT.
Davidoff says his passion for housing and public policy stems from the fact that it's "…a nice intellectual puzzle, and it matters in our lives. It's a fascinating area to research, and I think it's amazing to be in a city where people care about research and public policy so much."
Now that the B.C. Housing Affordability Fund has become law, Davidoff is turning his attention to a new frontier: supply. "Municipalities have hundreds of billions of dollars of zoning they can release to the market, but a lot of communities don't want tall skyscrapers in their backyard. So how can we tap into that immense property value and create more affordable housing that doesn't compromise the beauty of existing neighbourhoods?" Davidoff says. "Auctions are surely the best approach."