The Case Against a Government Condo Bailout in BC
Recently, Prime Minister Carney discussed using government funds to purchase unsold condos in Vancouver from developers. The government plans to convert these into affordable housing units, to alleviate high housing costs. This would involve using a mix of Federal and Provincial funds. Between 2,000 and 4,000 condos are sitting unsold in Vancouver, due to a dip in the price of condos.
However, such a plan will not assist average, working people: it effectively amounts to a taxpayer-funded bail-out for developers who would otherwise lose millions due to their own poor business judgement. Average people would be better off if developers absorbed such losses because this would allow condo prices to decrease naturally.
The government purchasing condos from developers is poor policy because it interferes with the housing market’s natural tendency towards equilibrium. In the Vancouver condo situation, the market is shifting downwards on its own. If the government continues to do nothing, condo prices will naturally fall – and by extension the overall housing market will cool off too. This is evident by the fact that thousands of condos are sitting unsold, implying they are currently overpriced. Normally, in a situation of excess inventory, sellers respond by reducing prices until buyers are willing to buy: the price at which buyers eventually purchase is the true market price (or value).
However, if the government intervenes by implementing an affordable housing scheme, it would very likely pay a price higher than what private buyers would have paid – otherwise, why bother implementing the scheme at all? Unfortunately, such intervention would artificially inflate the price of condos.
Furthermore, governments are ill-equipped to intervene, in part, because of the economic (and psychological) reality that bureaucrats are unable to determine the value of goods as well as consumers on the ground can. A bureaucrat does not understand the budgetary constraints and conditions of an average person. Therefore, they would pick a condo price somewhere between the currently inflated prices and the price that a consumer would be willing to pay. The taxpayer will cover the difference between the price actually paid by the government and the real value of the asset.
Such use of taxpayer funds is unprincipled, as it assists condo developers at the cost of society overall. A bailout effectively socializes business losses at the expense of the taxpayer while allowing private enterprise to retain any potential profits: it is a win-win for business. Using taxpayer funds in this way to help private companies also creates a concerning precedent: the government will be expected in future to help minimize the downside of future risky investments.
Covering business losses by using the money of average, working people is patently unfair and unprincipled. Such assistance rarely goes both ways: when average people make an investment – for example by purchasing shares in the stock market – they expect to personally experience any gains or losses. Individuals cannot expect the government to provide hand-outs to cover bitcoin losses. The unfairness is further evident in the condo context: when the real estate market is doing well, average people pay higher prices to own condos, resulting in more profits for developers. But when the real estate market is not doing well, should the same taxpayers be expected to cover the developer’s losses? That doesn’t seem fair.
This situation is similar to the 2008 financial crisis bailouts: critics noted that the banks which profited off of underwriting bad loans were later bailed out when the house of cards inevitably came crashing down. The taxpayer footed the bill in the end, but did not enjoy any of the profits the banks generated leading up to the collapse.
Let the developers hold the bag and handle their own losses. This sends a message to the real estate sector that it is overvalued, leading to a cooldown. This will help average people to afford housing.