The following comments are from Cameron Muir an Economist here in British Columbia.
The desire of some well-meaning British Columbians for government to
drive down the price of homes through demand-side policy may sound
practical at first blush. However, when you consider the broad and deep
economic toll that a negative shock to home prices would exact on both
homeowners and renters, it quickly becomes apparent that such an
approach is at best, a mug’s game. BCREA Economics analysis* shows that
even a relatively modest negative price shock will produce significant
consequences to the BC economy.
Nearly 70 per cent of British Columbian households own their home. A
relatively minor 10 per cent negative shock to home prices would
extinguish $90 billion of their wealth, or $70,000 of the average home
owner’s equity. While some may see this as a paper loss, it will have a
significant impact on the economy, as declining household wealth reins in
consumer spending. Retail sales would suffer, with an estimated $1.8
billion in forgone revenue in the first year after the shock.
Home construction activity would fall dramatically. Home builders would
cut back production 25 per cent; that’s 10,000 fewer housing starts in the
first year alone. A negative price shock would markedly slow the expansion
of the housing stock, creating even more critical housing supply problems
down the road.
Across the economy, a negative home price shock will slow growth. Tens of
thousands of jobs will be forfeited. The unemployment rate will shoot up. A
10 per cent negative price shock will slow real GDP growth to 1.5 per cent
from a baseline of 2.7 per cent. That’s $3 billion in lost activity. If home
prices fell 35 per cent, a level some activists are championing, the BC
economy would collapse into recession. The average home owner would
have lost $245,000 in equity, housing starts would fall by half, 64,000 jobs
would be forfeited – sending the unemployment rate to 7.5 per cent with
$4.4 billion in forgone retail sales and a colossal $8 billion loss to GDP in the
This analysis does not account for the negative impact on provincial tax
revenues, expanding deficits, ballooning debt and credit downgrade risks.