Prices Crises: Cost and Benefits of Reducing Housing Prices, April 2016
There has been a growing chorus of cries for governments to “do something to bring down housing prices to help with housing affordability” in metropolitan Vancouver. I find the calls for such significant intervention worrisome, as no one has yet said how much which prices will be brought down, or who will bear the burden and who will get the benefit that would result from this intervention. Without such a social and economic cost benefit analysis, intelligent and effective policy cannot be discussed, selected and implemented.
As a starting point to the discussion, this report provides a set of empirical estimates of the major parameters of the costs and benefits of an arbitrary reduction in home prices in this region. If governments pushed prices down from the 2015 metropolitan real estate boards’ average of $779,577 (reflective of current assessed values) to the 2012 average of $646,415, the impact of this 19 percent reduction would be an average loss of $153,000 per home owner. Currently there are an estimated 656,966 homeowners in the region, 64 percent of the total households; the total cost to these owners from such a price reduction would be $100 billion.
There are an estimated 18,531 households in the region who would be homeowners if the highest historical levels of age specific ownership prevailed: if each of them could benefit by being able to purchase a home that was, on average, $153,000 lower than its current value, the benefit would be only $3 billion. The burden of the intervention would be 33 times greater than its benefit.
These values are what the math of price controls show in theory. In reality, they would not be effective, and would actually worsen the affordability problem. Price controls would not increase the supply of dwellings, they would not reduce the number of people competing for home ownership, and they would not change the relative purchasing power of those who would be owners if maximum age specific ownership rates prevailed. Shadow markets would develop that would bridge the distance between controlled prices and actual values, negating the price reductions in the property market by shifting the value difference to furnishings or art works. This would make markets less transparent and less accessible to those who did not have the financial resources to deal with the high levels of cash such markets involve.
To read the full report, click here