A couple months back, Ontario Premier Doug Ford got himself into trouble for purchasing a private jet with government money.
The move was rightly seen as off brand for a premier who has cultivated an image as an everyman politician who would stop the “gravy train.”
The backlash was severe. Within a week, the government had reversed course, selling the so-called “gravy plane” back to its seller for the same price for which it had bought it.
Even so, the damage was done. Ford’s current approval rating is at a dismal 21 per cent — down 10 points from March.
Prime Minister Mark Carney now finds himself in a similar mess of his own making.
In mid-June, Carney announced that Ottawa and B.C. would purchase more than 2,200 vacant condos from Vancouver property developers to convert them into affordable homes.
“With higher interest rates and weaker investment demand, developers are stuck. They don’t want to sell at a loss. They can’t afford to hold those empty units indefinitely,” Carney said at a press conference.
This pledge has left many people scratching their heads. Carney’s brand is that of a sophisticated technocrat — someone with the education, experience and wisdom to take the hard decisions needed to put Canada on better footing.
Against that backdrop, this move is confounding.
Affordable housing is of course a laudable goal. But bailing out property developers is antithetical to it.
Home prices are a function of supply and demand. The only ways governments can help make homes more affordable is by increasing supply, cooling demand or both.
By stepping in to buy vacant condos, the government is bidding up demand, which has the opposite effect of what the government is trying to do: it drives home prices up.
As an economist, Carney would understand this. That is part of what makes this pledge so off brand.
Second, the move protects property developers when doing so is entirely unwarranted.
While details of the bailout are not expected until the fall, the June announcement strongly suggests the government plans to pay developers above-market rates for their vacant units.
Sometimes there can be a case for policymakers to intervene in markets, such as when there is a risk of a contagion effect or disruption to essential services. But that is not the case here. This is a perfectly functional market; it just needs time to clear.
If the government didn’t intervene, developers would simply be forced to lower their prices. Yes, this might mean selling at a loss. But this would be a win for homebuyers — the very group the Carney government ostensibly wants to help.
By protecting the developers from losses, the government is sending investors a message that it will help cushion their bad investments — with taxpayer dollars.
Third, the move is problematic because it raises questions about process, or a lack thereof.
What process did Ottawa follow when choosing to intervene in this particular market? Why is it choosing to help these particular developers now? Vancouver is not the only market in Canada where developers are sitting on unsold inventory.
Even industry groups are saying they did not ask for this.
“No one in the development or allied sectors advocated for [the developer bailout],” Michael Drummond, CEO of the non-profit Urban Development Institute, wrote in a LinkedIn post.
Finally, the developer bailout is puzzling because it works at cross-purposes with some of the government’s other pledges.
In its announcement, the federal and B.C. governments committed to spend up to $3.2 billion to lower development charges for multi-unit housing by up to 50 per cent in “priority communities.”
As we have written before, development charges are a key reason new homes have become so costly in recent decades. Bringing these charges down would boost new housing supply, and bring costs down for everyone.
The development charge announcement is therefore largely good policy. But the government is undercutting the effectiveness of its measure, boosting housing supply with one hand, while boosting demand with the other.
Carney would be smart to follow in Ford’s shoes. He should immediately apologize and reverse this “gravy pledge.”
Carney of all people should know this is a time to let the market function.
