When's the last time a government actively tried to reduce its constituents' wealth?
In February 2018, BC’s Finance Minister Carole James announced that it was the stated policy of her government to force down home prices. Together with a suite of initiatives announced at that time, she made it clear that the policy of her government was not just to moderate home price increases, but to enact whatever policy initiatives were necessary to bring them down.
With this announcement, BC entered unchartered territory. For the first time in history, a government in Canada announced that its policy was to reduce the wealth of its constituents. Approximately 68% of British Columbians own their own homes and for the vast majority it is the primary repository of their wealth and savings.
Every homeowner assumes considerable personal financial risk in purchasing their home, and most worked diligently to slowly pay down large mortgages. These purchasers knew marketplace corrections were part of the risk they assumed. Few expected that their government would willfully set out to destroy what they had worked to accumulate.
There were of course reasons for the NDP’s policy. Home prices had risen rapidly creating often insurmountable barriers to ownership for new buyers. British Columbians were angry and blaming foreigners and their foreign money. Something had to be done.
But almost a year and half later, it is worth assessing our government’s policy to see how it is doing so far.
First, it cannot be denied that it has been wildly successful. Never in history has BC lost so much wealth so quickly. Recent reports are that $90 billion has been lost in home value, just in Metro Vancouver just over the past year. This figure is roughly 65% of the entire annual economic output of the region (GDP $137 billion). It represents approximately $40,000 for every resident of Metro Vancouver in the year, almost matching average annual salaries.
What is the key to this success? It is that no rational person would make an investment into an asset where it is the stated policy of the government to make that asset worth less. Some observers point to other drivers of BC’s housing correction, especially federal government tightening of mortgage lending rules. However, the Greater Toronto Area (GTA) has absorbed the federal changes and the market there remains healthy. The key ingredient in BC is that there is no reason to believe the market will recover so long as it is the policy of the government to ensure that it does not.
Second, the real estate development and construction industries, over 20% of BC’s economy, are facing a significant downturn. MLA Advisory’s April 2019 Pre-Sale Real Estate Insights stated that approximately 5,000 concrete units within 17 development projects have been postponed. Housing starts are down by at least 20%. Further project cancellations are announced weekly. Billions in investment has already been lost, with job losses and associated decline in economic activity to follow.
Third, one is hard pressed to find the winners of this policy. Despite the massive wealth destruction and economic damage, few Millennials are now celebrating that they can finally afford a home. Nor would it make sense for any of them to buy a home, so long as it is the stated policy of their government to destroy the savings they invest.
For the believers in the policy, the argument is that the benefits of the policy have not been realized yet because it has not gone far enough. Surely, they believe, we can eventually wealth-destroy our way out of this problem.
Norm Streu is the President and Chief Operating Officer of LMS Reinforcing Steel Group, a top company in the reinforcing steel industry with extensive operations throughout Western Canada and the US. Norm has served as Chair of the Board of the Vancouver Regional Construction Association and director of the British Columbia Construction Association.