Think local when addressing housing affordability across Canada

Housing markets in Canada’s largest cities are once again the subject of national news, this time because of an increase of the minimum down payments for government-backed mortgages on homes over $500,000.

Although the policy applies across Canada, its focus on expensive mortgages with low down payments seems primarily motivated by dramatic housing price increases in several large Canadian cities.

Regardless of the merits of this decision, legislators should worry about the underlying causes of dramatic (and localized) housing market appreciations in cities such as Vancouver and Toronto that can lead homebuyers to over-leverage themselves to pay for housing. To improve affordability in the long-term, policies should target the availability of homes in the desirable urban centres that have become so expensive.

Recent work in the United States highlights the role of local land constraints in determining the trajectories of house prices in many cities. In addition to geographical barriers like coastlines and mountains, municipal land-use policies like zoning can increase development costs and ultimately impede homebuilders’ ability to respond to increasing demand for new housing. Lengthy building approval timelines, high compliance costs, and uncertainty over project approval can deter or delay the provision of new homes. When the housing supply is rigid and demand is growing, economic intuition suggests that home prices will rise.

Municipalities with particularly costly permitting processes can look to neighbours to improve their practices, and ultimately improve the allocation of new homes. For example, it takes almost five months more for housing developers to receive building permits in Vancouver than in neighbouring Burnaby.

Similarly, compliance costs and fees for the development of a typical home in Vaughan, Ontario add up to over $10,000 more than in nearby Markham. Any efforts to reduce the costs associated with providing new homes can ultimately lower the amount of debt families must incur to become homeowners.

Adjustments affecting housing demand enacted at the national level may achieve some transfer of risk away from taxpayers. However, if the goal of policymakers is to stem the rising costs of housing, they cannot ignore local barriers to the housing supply.