National Post (Latest Edition)
The road to housing affordability is paved with more construction.
Construction hasn’t met the demand
Canadians and real estate experts agree that housing has become increasingly expensive over the years, but what causes prices or rents to rise and how to address shelter cost inflation lacks consensus.
Two poles of divergent views have emerged. One side believes housing demand is being fuelled by low interest rates, foreign home ownership, money laundering and speculation. The other side argues the increased pressure on housing prices is because there isn’t enough of the right type of construction to shelter the growing population.
Since there’s no agreement about what ails housing markets, there’s also no agreement about what measures are needed to fix them. Those who blame unsatiated demand want stricter measures on credit supply and higher transfer taxes. Others advocate regulatory reforms to facilitate more housing construction.
Supply skepticism can be addressed by highlighting research from the Housing Policy Debate journal that reviewed 100 studies to conclude that an increase in housing construction moderates housing price increases and improves affordability.
Two leading urban economists, Edward Glaeser at Harvard University and Joseph Gyourko at the Wharton School, have also repeatedly addressed the economic implications of housing supply.
They, along with Raven Saks, in a paper for the Journal of Economic Geography found that “differences in the nature of house supply across space are not only responsible for higher housing prices, but also affect how cities respond to increases in productivity.”
Similarly, Arthur Grimes and Andrew Aitken, of the University of Waikato in New Zealand and the University of London, respectively, wrote in Real Estate Economics that “higher housing supply elasticities help contain short-run price spikes following demand shocks.”
Other research shows that an increase in the supply of new homes moderates housing prices more so than an increase in listings of existing homes.
In short, research in the leading economics journals has repeatedly shown that housing prices rise faster in cities where supply does not readily respond to an increase in demand.
Still, there are those who suggest that Canada has been building enough housing and the intense demand is the problem. A quick look at the data suggests otherwise. Total housing completions (newly completed dwellings) have declined since 2006. Even more relevant is the decline in single- detached units that started earlier. By comparison, apartment ( essentially condominiums) completions have continued to grow since the early 2000s.
Housing completions data clearly show Canada has not been constructing enough low- rise housing. As the demand for such housing increased in populous cities, a less than adequate response by home builders contributed to the increase in prices.
Even more evidence in support of the supply argument comes from the rental market. Recent data for Toronto and Vancouver, Canada’s most expensive rental housing markets, showed that rents have fallen while the supply of rental units has increased.
The decline in rents is partly due to the drop in demand as immigration flows to Canada have dropped because of COVID-19. However, the supply-side dynamics are more influential, such that second-quarter condo rental listings in Toronto jumped by 45 per cent year over year.
So why hasn’t housing construction kept pace with demand? Why have rising prices not encouraged builders and developers to ramp up supply?
Research from the United States reveals that stringent regulations, delays in development approval and resistance to development by residents contribute to a slowdown in new housing supply.
A recent industry report also identifies planning delays as well as rising development charges and planning fees as deterrents to new construction in Canada. The report indicates that average government charge for lowand highrise development is $ 93,700 and $ 57,800 per unit, respectively.
Ignoring the critical role of supply in addressing housing affordability would not be wise. Whereas demand- side measures, such as a foreign homebuyer tax, are essential interventions to address excessive demand, the real solution lies on the supply side of the equation.
The real solution lies on the supply side.
Financial Post Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www. hmbulletin. com.