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Yes.  Somebody should do something about high house prices.  You are somebody.  And whatever you do would count as “something”.  So do it!

Based on recent reports, I worry that this is the thinking style of the new federal government.  The Finance Minister has talked about doing a “deep dive” into the data.  They must be feeling a lot of pressure from people in Toronto and Vancouver to do something about high prices but media headlines often overlook the real problems.

A bit of perspective would help.  The last Prime Minister had an M.A. in Economics and, still, his policies such as “boutique tax credits” ignored most of the simple advice given in Econ 101.  Econ 101 tells us that prices are never a problem.  (To be very clear: prices being “high” is not the definition of a “price bubble”!)  In a market context, they are always a symptom of something else (i.e. matching the demand curve to the supply curve).

This statement may be obvious once you see that any attempt to alter prices directly would have side effects that are also worth worrying about.  For example, the broad effects of lower interest rates need to be contained by special policies aimed at mortgages.  Builders are taking advantage of their good market conditions but are constrained by high land prices and policies which limit land supply.  (Ontario’s Greenbelt policy is being re-considered, and that consideration may or may not acknowledge its contribution to prices.)

A good decision maximizes the difference between Value and Cost, but it can get complicated.  Early in Econ 101, people learn about the difference between financial cost and Opportunity Cost: in every decision and regardless of the action chosen, there is an action which was not chosen.  Later, they learn about the difference between private value (including profit) and social value.  For example, owning property may be profitable financially but if it is not used or lived in then, from a social perspective, it is a wasted resource.

What could $100m accomplish if it were “thrown” at the problem.  As an order of magnitude, that number seems about equal to what the government spends on aboriginal housing and infrastructure [1] [2] [3].  According to headlines, that money would buy homes for about 50 families in Vancouver.  The money could help more people if they were given a partial subsidy and  even more could be helped if the money were not spent on some of the most expensive homes in Canada.  Being outbid on a $2m home does not reveal an “affordability problem”.

Spending $100m on rental housing, for example, would help far more people.  Vacancy rates in Toronto and Vancouver are about one percent (I was always taught that about 3 percent was “balanced”).  For some segments of the population, the social benefits of having a place to call home could be far greater but would generate fewer headlines because of how they create a virtuous circle.  A problem is that political credit would be diffuse.

Beyond this static value calculation, the government worries about the effects of contagion due to a hiccup in housing market.  That puzzle is more complex, both conceptually and in terms of government policy.

Not everybody wants to or should own their own home with a white picket fence and so on.  I understand the pressures on politicians but one should make ownership an obsession.  That was the banana peel that led to the slippery slope that had politicians in the US inflating its price bubble.

So, I agree.  Somebody should do something wise.

PA

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