Why Premier Christy Clark's interest-free housing loans could keep the NDP in opposition for four more years

    1 of 2 2 of 2

      Premier Christy Clark has submarined her opponents and confounded housing experts with another major intervention into the real-estate market.

      But will it pay off big-time in the next B.C. election, scheduled for May 9, 2017?

      Yesterday, the premier announced that buyers can borrow up to $37,500 interest-free for five years for a down payment on their first home. After that point, the homeowner will have to start paying interest.

      The program is only eligible to Canadian citizens and permanent residents who've lived in the country for five years.

      The entire loan cannot exceed five percent of the purchase price and will have to be paid off within 25 years.

      It came four months after Clark introduced a 15-percent tax on foreign buyers of residential real estate in the Lower Mainland.

      The B.C. NDP immediately condemned the latest announcement, accusing her of doing nothing while prices shot up over the past two years.

      "Now, instead of taking action to fix the problem by increasing the supply of affordable housing, Christy Clark thinks that first time homebuyers should get two mortgages instead of one,” NDP housing critic David Eby said in a party news release. "Christy Clark’s plan for first-time home buyers doesn't do anything to help affordability. Instead, it puts young people who are already facing record levels of debt further into debt, while rewarding developers and speculators, many of whom are big donors to the B.C. Liberal party."

      The premier's move was also slammed by Tom Davidoff, a real-estate expert at UBC's Sauder School of Business, and two other economists who spoke to Global BC.

      Davidoff maintained that it will lead to higher housing prices because it will increase demand in a supply-constrained market. As a result, the interest-free loans will fatten the bottom lines of developers.

      In the past, similar criticisms have been levelled against the B.C. government's rent-supplement program. One housing activist, Jean Swanson, has claimed that landlords are the major beneficiaries in a supply-constrained market.

      The Urban Development Institute, which is an association of developers, applauded the premier's announcement of interest-free loans. According to the UDI, this could provide financing to about 42,000 B.C. residents.

      “This down-payment support from the provincial government is a great start,” UDI president and CEO Anne McMullin said in a news release. "With applications for the program starting in January, what a way to ring in 2017 for first-time homebuyers." 

      The B.C. Real Estate Association also cheered the government's decision to grant interest-free loans for down payments. The BCREA cited a 2015 study by Altus Group Economic Consulting, which determined that, on average, a Multiple Listing Service transaction results in nearly $63,000 in additional expenditures in B.C.

      And there's where some of the political benefit lies for the premier.

      Not only will she appear to be helping first-time homebuyers, she's also given a shot in the arm to mortgage brokers, notaries public, real-estate lawyers, real-estate agents, and all the others who benefit from a brisk housing market.

      However, it remains to be seen how much impact this will have in light of new federal rules around mortgages.

      All homebuyers, regardless of down payment, must face a "mortgage stress test". And no more than 39 percent of household income can go toward gross debt servicing (mortgage payments, heat, and taxes). The total debt-service ratio (carrying costs and other debt payments) must not exceed 44 percent of household income.

      NDP housing critic David Eby accused the premier of forcing first-time buyers to take on two mortgages to buy a home.

      Report showed impact of resales on economy

      The Altus Group report covered the years from 2012 to 2014, when the B.C. housing market was heating up in a low-interest rate environment.

      The analysis concluded that new owners of Canadian resale homes spend about $9,500 per year on renovations in the three years following their purchase.

      "In addition, there are also significant expenditures for furniture and appliances and general household purchases such as bedding, towels, lighting fixtures, tools, blinds, etc.," the report noted.

      Then there are the moving costs, as well as insurance.

      "B.C. experiences the highest relative job impact of any province," the Altus Group declared. "MLS home sales and purchases in B.C. generate 32,960 direct and indirect jobs—nearly 1 in 70 jobs across the entire B.C. economy, much higher than the national average of 1 in 104 jobs."

      This study reflected how important housing sales are to the B.C. economy, which is often not mentioned in media reports about this industry.

      Clark knows that if interest-free loans keep the real-estate market afloat until after the May 9 provincial election, she will be in a better position to remain premier for another four years.

      And she's not going to lose any sleep if a few economists pooh-pooh the idea in the media.

      A key aspect is the five-year term for interest-free loans.

      This means that first-time buyers who jump into the market will still be avoiding paying interest on these loans come the provincial election in May 2021.

      So you can consider this a two-election-cycle policy pronouncement.

      Policy will help B.C. Liberals in key constituencies

      B.C. elections are won or lost in the outer suburbs of Vancouver, such as Coquitlam, Maple Ridge, and Surrey, where there's an abundance of first-time buyers.

      They're also won and lost in places like Prince George, Kamloops, Quesnel, and Williams Lake, where many home-owning voters worry about their children ever being able to afford to buy. In many cases, the parents will be let off the hook from having to lend money to their kids to purchase a home.

      If Clark's B.C. Liberals retain power with a narrow victory next May, it may well have happened because of yesterday's announcement.

      Clark's move is reminiscent of a former NDP premier, Glen Clark, giving voters a cheque from ICBC shortly before the 1996 election.

      At the time, the populist NDP premier came under criticism from experts and the opposition for trying to buy votes.

      But Glen Clark didn't care. He was really interested in scooping up so-called "low-information voters" who don't pay attention to the issues.

      Similarly, Christy Clark's announcement also appeals to low-information voters, who are sometimes so busy raising kids that they tune out provincial politics until shortly before going to the polls.

      No politician ever wants to admit publicly that he or she is giving away public money to woo low-information voters.

      But these policies can prove to be very potent tools on Election Day, particularly for populist politicians who never underestimate the gullibility of the public.