National Post (National Edition)
Policy restrictions have caused the housing crisis
For 18 years, I have been monitoring international housing affordability, as author or co-author of the Demographia Housing Affordability series. The latest edition rates 92 major markets in eight nations using the “median multiple”: the median house price in a place divided by the median pre-tax household income. In the early 1990s, median multiples in Canada, Australia, Ireland, New Zealand and the United States were 3.0 or lower. The median house cost no more than three times the median income.
Even in the mid-2000s, housing affordability in Canada's largest “census metropolitan areas” (or CMAs) was still as good as in 1971. Toronto's median multiple was actually 0.4 percentage points lower than in 1971, at 3.9, while Montreal, Ottawa-Gatineau, Calgary and Edmonton were all between 2.7 and 3.1. The exception was Vancouver, which deteriorated from 3.9 in 1971 to a very unaffordable 5.3 in 2004.
How things have changed! Toronto and Edmonton provide the starkest contrast. In 2004, the average price of a single, detached house in the Edmonton market was about $200,000, while in Toronto it was $320,000. March 2021 real estate reports indicate that the average Edmonton price is now a bit over $500,000, while in Toronto it has risen to nearly $1.7 million. In other words, prices are up about 150 per cent in Edmonton but nearly three times that (430 per cent) in Toronto. In the mid2000s, Edmonton's median multiple was 2.8 and Toronto's was 3.9. By 2021, Edmonton's median multiple had risen to 3.6, while Toronto's was a staggering 10.5. The difference between the two cities rose from 1.1 in the mid-2000s to 6.9 in 2021. That's a massive increase, equal to nearly seven years' worth of household income.
How did this happen? The cause was not underlying demand. Between 2004 and 2021 the Edmonton CMA experienced much stronger population growth, 46 per cent, compared to Toronto's 27 per cent, according to Statistics Canada. Nor do differences in construction costs explain the gap. Data in the Altus Canadian Cost Guide do indicate that house construction costs are in fact higher in Toronto — but only about 30 per cent higher, a far cry from Toronto's 240 per cent higher house prices.
The real difference between the two CMAs is in land values and regulation.
The one big change in the two cities' environments has been Toronto's “Places to Grow” policy, introduced in 2006, which imposed a greenbelt. Like an urban growth boundary, greenbelts generally ban new housing on the urban periphery, where land costs are most affordable. Economic research has associated these urban containment strategies with huge increases in land values — generally from 10 to 20 times — where development is still permitted, that is. And that's before subsequent price escalation, when normal demand growth outstrips the newly rationed land supply.
Toronto is not alone in imposing such obstacles to affordable growth. Around the world, many metropolitan areas have adopted urban containment, usually to stop urban expansion (for which the ideological termof-art is “urban sprawl”). Households have paid a heavy price, as housing costs have skyrocketed relative to household incomes wherever there is a strong urban containment policy. From London to San Francisco, Los Angeles, Auckland, Sydney, Melbourne and elsewhere, the result has been the same. Vancouver, which adopted urban containment much earlier than Toronto has even more unaffordable housing. Its median multiple is now 13.3. Only Hong Kong and Sydney had more unaffordable housing in the latest Demographia report. Skyrocketing returns may attract international investors to markets such as these but they make life unaffordable for normal people.
In each of these urban areas, the median multiple was around 3.0 before urban containment. After it, house prices have doubled, tripled or risen even more relative to incomes. Lower middle-income households have been forced to seek subsidized housing, for which there is insufficient political support to supply in adequate volume. Other middle-income and even upper middle-income households can no longer afford the middle-income houses that until recently were typical of life in Canada. Meanwhile, the housing affordability crisis has morphed into a standard of living crisis. In the United States, the higher costs of living in the most expensive metropolitan areas are at least 80 per cent explained by their higher housing costs.
In this environment, younger generations — Millennials, Generation Z and those who follow them — face unprecedented challenges in acquiring the same housing that was affordable to their parents and grandparents. At the same time, however, places like Edmonton and many other smaller population centres across the country are still within reasonable reach and may well remain affordable — so long as they do not opt for urban containment, in which case their median multiples would begin to track Vancouver's and Toronto's.
The crisis is spreading, however, as households leave the Toronto and Vancouver CMAs to acquire the housing they desire. This intensified demand, along with similar provincial and local restrictions, has led to rapidly rising house prices in places like Kitchener-Waterloo, Guelph, Brantford and London near the Greater Toronto Area, and Abbotsford, Chilliwack, Nanaimo and Kelowna near Vancouver.
The prospects for material improvement are dim in urban containment markets unless regulations on the urban fringe, even if beyond the greenbelt, are relaxed. Greenbelts poll well and are liked by many, especially those already owning houses next to them. But if middle-income housing is to be within reach of younger generations, affordable land needs to be made available. The choice we face is clear: a modest expansion of greenfield development or greater housing poverty.