Banks and other mortgage lenders are key players in the high price of Metro Vancouver and B.C. real estate, according to a study by the B.C. Government and Service Employees’ Union (BCGEU).
In its report Building an Affordable BC, the union identifies a series of contributing factors to the housing crisis, including the seldom-addressed issue of whether financial institutions actively encourage high-priced mortgages so that they receive higher interest repayments, and therefore cause prices continue to spiral further upwards.
The report said, “In the case of residential real estate, [financial institutions] are mainly indifferent to the productive value of housing as a place to live, so long as they can secure a profitable cash flow from it. Rather, itis the perceived market value of the home as a financial asset that concerns lenders—and, most importantly, the interest that is earned on the loan. For financial institutions, the higher the mortgage loan, the higher the rate of compound interest that can be collected over time.”
The report adds that the interest paid to financial institutions on ever-increasing mortgage loans is like a hidden and unregulated “tax” that is collected by the banks.
“As loans become larger with rising real estate speculation, the productive value of real estate is subsumed in the payment of compound interest. In this way, private financial institutions effectively ‘tax’ the productive value of property for their profit, meanwhile, it is left untaxed and unregulated publicly by government.”
The study identifies a cycle of increasing home prices and rising loans. “Homebuyers are caught in a difficult place. On the one hand, they genuinely need the financial backing of a lender to make their investment, and they are willing to go into significant debt to do so. But as the loans get bigger (to match ever-increasing prices), so do the interest payments to banks, which can then be recycled into new and even bigger loans—to (again) match ever-increasing prices.”
It added that in the case of real estate investors renting their homes to locals, this increased payment is passed directly to tenants through higher rents.
The BCGEU also identifies other factors contributing to the region’s lack of housing affordability, including:
• the desirability of B.C. and Metro Vancouver as locations;
• population growth;
• increased speculation;
• sustained low interest rates;
• outdated zoning and land-use policies; and
• foreign investment.