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Can more housing supply resolve the affordability crisis in Vancouver?

Thomas Davidoff and Tsur Somerville are associate professors in the University of British Columbia's Sauder School of Business. Joshua D. Gottlieb is an associate professor in the University of British Columbia's Vancouver School of Economics

The end of 2017 was a busy time for policy efforts to address the housing-affordability crisis in Canada's most expensive region.

In November, the City of Vancouver announced a new housing-affordability strategy. But in December, it rejected a much-needed effort to rezone some of the most valuable land in North America for more flexible housing options.

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Meanwhile, Statistics Canada released new data showing non-residents own 5 per cent of residential property in Metro Vancouver, and nearly 12 per cent of condominium units in the City of Vancouver.

These new developments revive a key question for Canadian housing policy: Does building more homes improve affordability?

The key element of Vancouver's new strategy – and likely the most controversial – is to "transform low-density neighbourhoods across the city by increasing the supply, affordability, and variety of housing options." To evaluate whether this will work, we have to ask: Do stratospheric prices come from high demand or low supply – or both?

A prominent view attributes high prices exclusively to outside investors. This view holds that we cannot have a supply problem because housing starts are at a record high. Housing starts are indeed high relative to historical levels and prices have continued to rise. But that only tells us that demand growth exceeds new supply. The right question is what the price level would be without this new supply. And the right question for policy makers is: How would prices change if housing supply were to expand?

The opposite view is that supply restrictions are the only problem: If government just got out of the way, we would not have an affordability crisis. The solution, then, is just to build.

But there are real constraints on new construction in the short term, such as the limited number of construction workers and firms available. Furthermore, if an investor outbids local residents for a home, but then does not use this home to house someone who lives and works in the community, this new construction would not reduce housing costs.

More than two centuries of economic science shows that supply and demand factors are both crucial for determining prices.

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From avocados to apartments, markets must use prices to allocate scarce goods to the consumers who want to buy them. If demand for coffee increases, firms both expand coffee production and raise prices to avoid shortages. How much more coffee gets sold and how much prices rise depends on production costs, regulations, the extent of market competition, and consumers' sensitivity to price changes.

Increases in demand for housing come from many sources. These include rising incomes, cheaper and easier mortgages, a city becoming a more attractive place to live, new household formation and inflows of investor capital.

But for any increase in demand, the supply response determines how this demand affects prices. When supply can rise quickly, increasing demand leads to more output. This dampens price growth. But if supply cannot increase sufficiently in the face of rapid demand growth, price increases can be astronomical – as Vancouver and Toronto have recently shown.

Housing affordability in Vancouver suffers from both demand and supply-side pressures. Demand growth is high while both geography and regulation restrict housing supply. Of what land developers could use, zoning limits where and how. A long and arduous permitting process slows the supply response to increases in demand.

With Vancouver's limited land base, increasing density in single-family areas is the right first step. But the impact will depend on whether the new strategy relaxes regulations in a meaningful way. Regulations must allow builders to capitalize quickly on development opportunities. Development fees help ensure new units contribute to community infrastructure. But the rules must be transparent and predictable so everyone knows what it takes to build.

The city's recent pledges in this direction are a very welcome step. But its refusal to rezone a mere 150 acres in Northwest Point Grey for higher-density housing options raises questions about whether this strategy will lead to meaningful and prompt changes. If not, affordability won't improve.

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At the same time, broader demand-side efforts can help ensure local residents benefit from increased supply. To this end, we urge the B.C. government to fulfill its campaign promise to implement the B.C. Housing Affordability Fund. This would tax properties that are not used to house residents who work and pay taxes locally. More generally, shifting the provincial tax base from income to real estate would lead to a more livable region and a more stable and sustainable economy.

Vancouver is taking important steps toward a more flexible housing market. But these changes are only a start. The city's planned increase of 72,000 units over 10 years would add less than 1 per cent a year to the Lower Mainland's housing stock. More is needed, and both demand and supply must play key roles.

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