Canada's real housing problem is impeded supply, not high demand

Prime Minister Justin Trudeau has acknowledged a "very significant" housing crisis in some of Canada's urban centres. The good news is that he and more public officials realize higher home prices are not to be celebrated. The bad news is that there was no mention of the prime cause: the litany of barriers and costs that prevent property developers from getting on with the job.

In an interview at the Canadian Conservative Party Convention in May, business mogul Kevin O'Leary advocated for the continuous rise of home prices, as investment vehicles. Albeit commonplace, such a confused wish flies in the face of a basic human need. Just as we should not celebrate rising costs of food, or energy, nor should we celebrate risings costs of housing.

Further, policies that restrict credit access and housing construction—for the sake of market speculation—come at the expense of some of Canada’s most vulnerable people. Canada's lack of housing affordability leaves the working poor struggling to put roofs over their heads, and it coincides with more young people opting to live with their parents.

There’s certainly a housing crisis, at least in Vancouver and Toronto. The latest Demographia International Housing Affordability Survey, published by a U.S.-based research firm, finds both cities to be "severely unaffordable." Even the better options of Ottawa and Edmonton are still "moderately unaffordable," and in Ontario alone there are 171,360 households on the waiting list for government-assisted housing.

Vancouver, in fact, is the third worst of 87 cities in the English-speaking world, behind only Hong Kong and Sydney, with the median home price at $1.03 million and 10.8 times the median household income. Toronto is at 6.6 times, but is far from the recommended price-to-income ratio of 3 or below, as can be found in more than a dozen major urban centres across the United States—including Cleveland, Indianapolis, and Kansas City.

Aside from blaming foreign buyers, Trudeau has given no details on what the federal government might do to help Vancouver and Toronto. That may be because, as reported by Reuters, federal officials have already tightened mortgage regulations five times since 2008. These policies have tried and failed to curtail demand, including higher down-payment requirements for buyers, as went into effect earlier this year.

Unaffordable housing is not unique to Canada, but it does vary widely between cities and countries. With more and more data coming to the fore, it is no secret that higher home prices are strongly associated with more restrictive land-use regulations such as land rationing or "urban containment," as affirmed by Demographia (PDF, p.13). In the case of Toronto developers, they have struggled under a tripling of provincial land-use regulations (PDF, p.57). A Fraser Institute report, published in January, further notes that the "derived externality" of the city's greenbelt is "higher housing prices" and an uncompensated loss of value for property owners within the protected zone (p.32).

The New Zealand Initiative policy institute clarifies that successful housing supply stems from "predictable consents and planning processes, and an assumed right to build"—in contrast to Vancouver, where approvals are restricted, lengthy and costly. They further highlight the successful example of Texas, with "no zoning outside cities" and a user-pays approach to new and extended infrastructure.

The Liberal Party government may think it’s out of options for lessening the interference in supply. Land-use regulations tend to be a matter of local jurisdiction, and the feds can of course call on local governments to cut red tape and fast-track approvals, which would be the ideal approach. Beyond that, though, Ottawa could look at ways to make localities benefit directly from more real estate, particularly from local tax collection.

In this case, the New Zealand Initiative recommends an incentive called "housing encouragement grants." In essence, these grants are rebates of taxes associated with construction that would otherwise go to the federal government. Akin to the Texas approach of shifting the cost of new infrastructure away from local government, this too would reverse the perception of new housing as a burden and "foster a pro-development attitude" at the local level.