With housing prices at an all-time high in Vancouver, there was a lot of buzz about the interim report of the Mayor’s Task Force on Housing Affordability. While the Task Force acknowledged the need to streamline and create more certainty and clarity in the regulatory process, the City of Vancouver will need to significantly reduce land-use restrictions and the regulatory burden on developers to truly help make housing more affordable.

Currently the average home price, including apartments and townhomes, in Greater Vancouver is $625,100. Home prices increased 59 per cent between May2005 and May 2011 while consumer prices increased by only 13 per cent over the same period. Furthermore, Vancouver home prices are significantly higher than in other major Canadian cities. For perspective, average home prices in Greater Toronto and Greater Montreal are $460,900 and $290,800 respectively.

Much of the increase in house prices is likely due to demand-side factors, such as low-interest rates and population growth. However, supply restrictions almost certainly play a role.

The City of Vancouver employs various rules and regulations to attempt to control how the city develops. For example, zoning regulations specify which areas of Vancouver can be used for industrial, commercial and residential developments, and how dense these developments can be. Vancouver also imposes a requirement for public hearings where residents or businesses in a neighborhood can voice their displeasure with proposed developments. Furthermore, some new developments are required to provide space for public services such as daycare or social housing. The city also imposes expensive energy efficiency requirements on new buildings.

The downside of these rules and regulations is that they restrict the ability of property developers to respond to market signals such as rising house prices. With increased demand and relatively unresponsive supply, there is pressure for prices to go up. The city’s rules and regulations can also impose monetary costs on developers that are partially passed onto home buyers via higher sale prices on new homes. Simply put, the rules and regulations restrict the supply of housing.

Over the past 10 years, Harvard professor and renowned urban economist Ed Glaeser, along with various coauthors, uncovered a wealth of evidence suggesting that restrictive land use regulations increase the price of housing. Notably, in a study published in 2008 looking at the 45 largest U.S. metropolitan areas, Glaeser and his coauthors found a positive relationship between the stringency of land regulation and housing prices. Jurisdictions with stricter land-use regulations have more expensive housing.

Given Vancouver’s regulatory stringency, the city and its residents would benefit from more flexible regulations on housing development.

While there is some debate about whether Vancouver’s housing market is in a bubble, reducing residential land use regulations would mitigate the effects if the city is in fact experiencing one.

Research by economists Haifang Huang and Yao Tang found that U.S. cities with looser residential land use regulations experienced less of a housing price boom leading up to the recent financial crisis, and experienced less of a price crash after the financial crisis. In contrast, cities with stricter regulations experienced a larger boom and a larger bust. In other words, the stringency of residential land use regulations is correlated with the severity of housing bubbles.

Thankfully, the Mayor’s Task Force on Housing Affordability has recognized the importance of loosening regulations on Vancouver’s housing stock. In fact, some of the recommendations contained in their interim report called for reducing the regulatory burden to increase the supply of housing.

The first recommendation is to increase the supply of affordable housing through zoning and other regulatory changes. For example, many residential neighborhoods in Vancouver have prohibitions on multi-unit buildings beyond duplexes. By removing these prohibitions, residents could convert existing houses into multi-unit buildings. Developers could also purchase multiple lots and build medium density housing, such as townhouses, row houses, and stacked townhomes. If these types of supply increases can occur on a large scale, there will likely be an effect on house prices.

The other important recommendation in the report is to make the regulatory process surrounding property development more efficient. Developers should respond to a streamlined and more certain regulatory approval process favorably and build more housing. The Glaeser’s research suggests that having a less restrictive regulatory approval system is imperative for making a city more affordable to live in.

It is unclear if the reforms suggested by the task force will be sufficient to significantly increase the supply of housing, or whether these reforms will even be implemented. However, if the goal is housing affordability, the City of Vancouver would be wise to significantly reduce land-use restrictions and the regulatory burden on developers.