The Great Bailout Nobody Can Define
British Columbians are outraged about a program that is so far little more than a headline
Goodman Report
The pitchforks are out in British Columbia over an attention-grabbing announcement that seems to have caught everyone by surprise. Taking a break from watching the World Cup, Prime Minister Mark Carney and Premier David Eby took to the podium to announce they are teaming up to convert 2,200 newly built but unsold condo units into affordable housing.
The program, quickly branded as a bailout, has done the impossible task of uniting the left and the right in this increasingly divided province. It also managed to overshadow significant moves many have been calling for – namely a 50% reduction in DCCs, along with new funding for transit and hospitals.
Even worse: when it was announced, no one in government seemed to know what this bold intervention might actually be. Rather, our leaders led with a headline-grabbing promise, apparently without defining the program first.
The bailout that (maybe) wasn’t
Despite the definitive headlines and widespread condemnation from social media pundits, the official announcement only committed to leveraging “innovative financing tools to convert more than 2,200 vacant condo units in priority growth areas into affordable homes.”
Carney spoke of using “the right financing mechanisms” to make the homes more affordable, while simultaneously taking a large block of unsold inventory off the market. “It is a way to clear off on the books this overhang.”
Postmedia quoted a BC Housing Ministry spokesperson saying “discussions are underway between the province, the federal government, and stakeholders on how we can best leverage innovative funding mechanisms to create a pathway to home ownership for people facing barriers today.”
Financing. Funding. Pathway to home ownership. When it comes to the condos actually changing hands, no one knows who will be buying, where, at what price, or the timeline involved. The talk of a bailout was premature; even now, whether the program will be implemented in a way that moves any inventory at all remains unclear.
Some clarity (sort of)
A full week later, Carney and Eby finally stepped in to clarify: this will be a rent-to-own scheme, with the government of BC (with minor funding from Canada) acquiring distressed condos and getting them into the hands of buyers who don’t have the savings for a down payment and would otherwise be shut out of the market. Both went to great lengths to distance the program from the bailout label, suggesting that by buying at scale they will be able to secure units below replacement cost.
On that point, they may not be wrong. Major investors have already identified the same opportunity and have been scouting for blocks of unsold units. At today’s pricing, with discounts for buying in bulk, it would cost the government more to build these units than acquire them from a developer eager to move on and put their capital to work elsewhere. Curiously though, the developers – the supposed sellers of these condo units – say they were not consulted about the program, and some have gone on the record to say this is not help they asked for or wanted. They would have preferred more effective solutions to clear the housing logjam – such as expanded GST relief for new home buyers.
That offer was apparently on the table from the feds, who wanted to give BC the same deal Ontario got months earlier. Eby declined: BC already exempts first-time buyers from GST. In his mind, a young family moving up the property ladder as needs change is buying “a second home” – language typically referring to vacation homes – and is not deserving of GST relief. Par for the course from a premier who has never let policy get in the way of ideology.
Here’s the deeper issue: a government acquisition program lives or dies on its terms. If executed well, it might successfully move inventory, house people, and clear an overhang that is creating havoc not just for developers and their lenders who are on the hook for unsold units, but also for anyone who owns a condo. If the intervenor bungles – buying at the wrong price, moving too slowly, or launching a program too poorly designed to deliver – they don’t just fail to solve the problem, they make it worse. Developers who might otherwise have cut prices and sold low instead sit on their inventory waiting for the government offer.
We’ve seen this movie before in BC
We saw just such a failed intervention a few years ago with the BC Rental Protection Fund. The Fund was designed to give non-profits capital to purchase existing apartment buildings and to operate them as below-market housing. During its peak, when funding was available and splashy announcements were being made, we heard from countless sellers who wanted to sell their building to these cashed-up non-profit buyers. A cursory analysis of some of the transactions shows why. During a falling market, the government-backed buyers were paying top dollar – or more – for dated buildings with low rents that investors in a normal market would discount, not overpay for.
But not all buildings fit their criteria, and many of the non-profit buyers moved extremely slowly or offered terms that made no business sense. And soon enough, as with any government program of this type, the cash ran out. Many apartment owners who passed up good offers from the private market while attempting to catch this wave of funding were left on the sidelines, watching as the value of their building plunged.
Similarly, now, the mere suggestion of government parachuting in to buy up units is bound to give some developers sitting on unsold inventory the temptation to hold prices, to wait for better terms, to avoid the market reckoning that would otherwise clear inventory.
Markets clear, one way or another. The question for any developer holding unsold inventory today is a simple one: how long are you willing to wait to find out if Ottawa and Victoria have designed something worth holding out for?
To some, “innovative financing” may sound better than another price cut. It may also turn out to be another innovative way to generate headlines for a program that delivers far less than advertised.
The bailout may be coming. But it hasn’t arrived yet, and the terms, when they do, may surprise everyone who spent the last week arguing about how generous they were.