Brian White

Careful What You Wish For

The Economic Fallout of Housing Price Stocks

The desire of some well-meaning British Columbians for government to drive down the price of homes through demand-side policies may sound practical at first. However, when you consider the broad and deep economic toll that a downward shock to home prices would exact on both homeowners and renters, it quickly becomes apparent that such an approach is at best, a shell 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 Columbians 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 suffer, with an estimated $1.8 billion in forgone revenue in the first year after the decline.  

Home construction activity would fall dramatically. Home builders would cut back production 25 per cent; thats, 10,000 fewer housing starts in the first year alone. A negative price adjustment would markedly slow the expansion of the housing stock, creating even more critical housing supply problems in our market that already sees demand out strippiing market supply.

Across the economy, a negative housing 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 first year.  

This analysis does not account for the negative impact on provincial tax revenues, expanding deficits, ballooning debt and credit downgrade risks.  

*Based on simulations using BCREA’s econometric model of the BC economy augmented by a housing Vector Autoregression model.