Housing affordability requires attention to both supply and demand | RENX

GUEST SUBMISSIONS: Housing price increases in recent years have severely eroded housing affordability and galvanized national attention. Pundits and politicians have unveiled a wide range of remedial proposals, some of which are becoming policies.

It is essential to remember that, in any market, prices are determined by both supply and demand. This means that while Canada certainly needs more homes, attention needs to be paid to demand-side issues, such as who is buying them, how buyers are paying for them, and what buyers are doing with them.

Canada clearly needs high and continuous residential construction.

The Conference Board of Canada estimates that in the 10 years ending in 2021, about 120,000 more households have been formed than homes have been started.

Ambitious annual federal immigration targets of over 400,000 put further pressure on the backlog.

Still, insufficient supply may be overestimated and is being resolved. Backlogs fell in 2020 and 2021 as housing starts outpaced household formation.

And, while the federal budget cited OECD data showing that Canada has 35 fewer housing units per thousand people than the OECD average (less than an 8% gap), many countries, including the United States, Australia and New Zealand, had relatively less housing than Canada. .

Government measures to boost housing supply

Yet recent federal and Ontario budgets have included measures to stimulate supply.

Ottawa hopes to deliver 100,000 net new housing units over the next five years through its Housing Acceleration Fund, an additional 10,000 units with smaller plans like the Rapid Housing Initiative and the National Co-Investment Fund for housing and 6,000 “co-op” units through a new co-op housing development program.

Queen’s Park, meanwhile, is aiming for 1.5 million housing starts over the next decade, aided by increasing housing density, accelerating the development process and shrinking cities’ ability to thwart the proposals of the promoters.

While proposals to address affordability by boosting housing supply are laudable, they face challenges. Statistics Canada’s recent finding that multi-property owners owned almost a third of all Canadian residential properties in 2020 has experts electrified.

This suggests that a good portion of any increase in supply could be captured by investors rather than new buyers.

Other hurdles include the risk that homebuilders may not be able to ramp up housing deliveries, which could thwart Ontario’s hoped for 150,000 annual housing starts.

The province’s homebuilders already have a near-record volume of units under construction and are facing labor and material shortages and a wave of retirements.

Density, supply and accessibility

Density increase proposals are politically heavy and can raise intergenerational conflicts.

While higher density and more housing could benefit younger people entering the market, the negative fallout from excessive density increases could reduce nearby house prices – expropriating wealth from (often older) homeowners. .

Another problem with using increases in supply to increase affordability is simply that homes take time to build, so new builds won’t immediately help affordability.

Given that sales of existing homes are roughly double housing starts in any given year, limiting resale demand could do more to boost affordability than the rise in new construction.

Both the federal and Ontario budgets contained demand reduction measures.

Ontario has extended and increased its tax on foreign buyers. This should cool prices based on the experience in BC and the initial levy put in place in Ontario.

Many ideas, but no magic formula

The federal proposal to ban blind auctions on resale homes has been met with lukewarm reception from many provincial premiers whose cooperation may be needed to implement it. Indeed, Ontario is considering making avoidance of blind auctions a door-to-door seller’s choice.

While secret auctions, by definition, hide their impact on raising prices, there is no doubt that potential bidders would benefit from knowing about competing bids.

Various restrictions on investor activity may well be coming, at least at the federal level.

Potential measures include a proposed two-year ban on foreign purchases of non-recreational residential property in Canada (although an exemption for “students” appears to be an oversight) and the taxation of capital gains on property held for less than 12 months (with certain allowances).

The extent of money laundering’s effect on rising house prices is unclear nationally, but the media regularly reports examples of such activity and a 2018 panel in British Columbia said the $800 million to $5.3 billion laundered in the real estate market that year pushed home prices up about five percent.

Therefore, a federal budget promise to investigate this issue seems timely, though it still leaves lawyers’ trust accounts unexamined, another potential blind spot.

All in all, Canada still has a lot of work to do to improve housing affordability. Given the potential limitations of supply-side measures, demand-side policies are likely to provide more short-term relief from high house prices.

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