Homeownership and Post-Secondary Education Subsidies

The Liberals and the NDP are playing their usual electoral politics of promising handouts and freebies in exchange for votes.  This simplistic shell game is quite transparently bribery, but we’re so used to it now that few bother to question it and instead just pick the side that promises more to their particular group.
It’s easy to see why they do this: British Columbians (specifically in the Lower Mainland, Vancouver Island and the Okanagan) have endured skyrocketing costs of living for the past 15 years while wages have remained more or less stagnant.  The clamouring for help in being able to afford raising a family has reached a fever pitch, and affordability of housing, education and life’s other necessities consistently rank amongst the biggest issues on voters’ minds when asked.
So it is only natural that the incumbent party and official opposition jockey for position in offering voters the most help come election season.  However, these handouts themselves contribute to this rising cost of living.
It does not take a degree in economics to understand that if you increase demand for goods or services without increasing supply, the price of those goods and services will rise.  No matter how altruistic the intent is in satisfying demand for homeownership, post-secondary education or anything else, it cannot be ignored that there are side-effects to doing so.
Looking at homeownership, a majority of (although not all of) people would prefer to own the property they live in rather than renting.  It is also well known among economists that the primary driver of economic growth is household formation (two or more people moving in together and the associated purchases of goods/services relating to it).  Knowing this, the BC Liberals and federal Conservatives/Liberals have combined to incentivize homeownership with a combination of tax credits, grants, interest free loans and other subsidies.  The combined effect of these cannot be understated.
When a prospective home buyer approaches a mortgage broker or their bank to be pre-approved for a mortgage, the amount they qualify for is determined not only by their level of income, but also by the amount they have as a down payment.  Most of the subsidies provided allow home buyers to add directly to the amount of their down payment.  Below is a simplistic example.

(Assumptions: lender will lend up to 80% of the purchase price and up to 4x household income.  Numbers not exact.  For illustrative purposes only.)
From the perspective of government economists, this is a good thing.  Those who were priced out of the market completely at 300k can now afford an entry level condo.  Poof, affordability crisis fixed!
Not so fast.
The mortgage applicant in the above example is not alone.  There are many prospective first-time homebuyers with similar incomes and savings that are also now able to be pre-qualified for up to $425k.  They will now be competing with each other to purchase their entry level condo.  A property used to have a market price of just over 300k will be adjusted to just over 425k.  This adjustment will occur almost immediately, as savvy realtors will advise their clients to raise asking prices to reflect the new capacity of first time homebuyers.  Savvy speculators will often anticipate these subsidies and buy up properties in advance, only to flip them later for a profit.  All these prospective homebuyers are left with is an extra 90k in mortgage debt.  The resulting increase in their monthly payments mean they have less disposable income for spending on other things, or for saving.
Questions that should therefore be asked include:
  • How many businesses would have been created if the disposable incomes of these people were not artificially decreased?
  • How many jobs would those businesses have created?
  • How long must people delay marriage and having children due to financial constraints?
  • What is the effect on the birthrate as a result?
  • These subsidies have a cost to taxpayers.Were they allowed to keep those tax dollars, how would that also affect the 4 factors above?
The knock-on effects of such policies are obvious when you take a step back and look at unseen consequences, something modern economists are reluctant to do because “what would have happened otherwise” is not quantifiable.  There is no telling how much damage this does to the broader economy.  But that damage is done is undeniable.
Is it any wonder that real estate developers who can now fetch an extra 40% on their new builds, and banks and credit unions that can now collect extra interest and for longer periods, are staunch proponents of such subsidies?  Is it surprising that they lobby government for these policies?
The only legitimate defense for these policies is that by driving prices up, market signals are given to increase supply for developments that would have previously been unprofitable.  Yet land use restrictions and municipal permitting require years for new inventory to hit the market.  Not nearly in time to balance supply with demand.  It could also be argued that a wealth-effect for existing property owners can benefit the economy, yet this can only occur through increased indebtedness (home equity lines of credit), or by selling and leaving the area entirely.  The first-time homebuyers again lose out, while only the politically well-connected and speculators benefit.

A similar argument can be made for subsidies that encourage participation in post-secondary education.  It is appealing, at first glance, to think that educating our youth more cannot be a bad thing.  Statistics often show that people with university or college degrees experience larger wage gains than those who do not, and commensurate improvements in their standards of living.  Yet, once again, this focuses exclusively on what is easily seen and ignores the unseen, or unintended consequences.
Spaces in universities and trade schools are limited.  Spaces in classes with exceptional professors or instructors are even more limited.
By artificially increasing the numbers of students seeking spaces in these institutions, we need to again ask some unasked questions:
  • Is it not inevitable that some of the most appropriate students for certain schools and classes cannot access them due to overcrowding?
  • How many students are forced into programs that do not suit their needs simply based on lack of availability?
  • How many students end up taking their spots who are not appropriate, and either do not care enough or will never use the skills learned?
  • Would some number of these students not be better served by gaining work experience?
  • What would the tax dollars used to fund these subsidies be used on otherwise?
  • How does delaying entry into the workforce for some of these students affect the above questions on homeownership?
Once again, because the answers to these questions cannot be quantified, it is assumed in proposing the subsidies that they are not relevant or do not exist at all.
Our economy is being damaged by the very interventions intended to improve it.  Politically motivated handouts and freebies do come at a cost, and it is time that these costs be recognized.  In doing so, it should become plainly obvious that they are doing more harm than good, which is only logical considering their true motivation is not actually improving the standard of living for British Columbians, but rather obtaining or perpetuating political power.
British Columbians would be well-served to reject these handouts for the cynical vote buying that they are.  The only way to do that in this coming election is to vote for the Libertarian candidate in your riding.
Matt Stiles
BC Libertarian Party member