New census data released last week has shone a brighter light on the question of whether the high price of housing is simply the result of a lack of housing supply.
Many industry experts and policy advisers have long argued that supply is not keeping up with demand, hence skyrocketing house prices.
But the new census data – released every five years – show that from 2016 to 2021, supply of new housing in Vancouver more than kept pace with the population growth. The city’s population grew by 4.6 per cent, whereas the number of dwelling units in the city grew by 5.8 per cent. That’s a net population gain of 30,762 and net increase in dwellings of 18,929, according to analysis by Andy Yan, director of Simon Fraser University’s city program.
Meanwhile, it was a record year for real estate. The benchmark price for all residential properties was up across the region by 17.3 per cent over the year before, according to the Real Estate Board of Greater Vancouver.
The information is broad strokes, and only the first batch of census data to be released this year. But experts say it shows that it’s necessary to focus on more than the flat-out construction of market rate housing. A balance needs to be struck.
Otherwise, we could exacerbate the housing affordability crisis, says Steve Pomeroy of Focus Consulting. Mr. Pomeroy is an urban planner who has 38 years of housing research behind him, including his work at Canada Mortgage and Housing Corporation. He has advised governments and national associations on housing analysis, and he is a fellow at the School of Public Policy & Administration at Carleton University.
“If you don’t diagnose the problem correctly, you end up with the wrong solution. The census data provide concrete evidence that the insufficient supply argument is incorrect, and has been overhyped, including this week with the release of the report from the Ontario Housing Affordability Task Force,” Mr. Pomeroy says.
“I believe that demand factors are the larger culprit – the combination of strong income growth and very low interest rates substantially improve borrowing capacity and are augmented by accumulated equity in current homes. And three-quarters of buyers are existing owners,” he adds.
Mr. Pomeroy said the census also showed that around 8 per cent of Canadian homes, or 1.3 million, are not being used full-time by “usual residents,” although it’s unknown how they are being used. We can only speculate that short-term rental plays a role, or the owners are wealthy enough to leave the homes empty some or all of the time.
None of this is to say that we don’t need more supply of housing, Mr. Pomeroy adds.
“I’m saying we do need more supply, but if we don’t direct the kind of supply we want, and make sure it is of moderate price or rent, who is it helping?”
The question becomes, why are government officials and members of the real estate and development industry so narrowly focused on building more market-rate supply?
The 2021 B.C. government-funded report “Opening Doors” stated: “A growing number of homes available for purchase or rent will reduce the upward pressure on prices and give renters and buyers more options.” And Ontario’s just-released Housing Affordability Task Force report argued for dramatically more supply.
Mr. Pomeroy takes us back to 1975, when the Federal Housing Action Program was brought in to stimulate residential construction in order to ensure adequate supply of housing for lower- and middle-income households. One of the key components of the program was to incentivize developers to build rental at modest market rents through the Assisted Rental Program.
He says the major difference between the housing discussion back then and today is the emphasis on increasing market-rate homes constructed, by lifting zoning regulations and encouraging intensive development around transit.
“It is implied that such increased supply will result in stalling or reduction of new home prices,” Mr. Pomeroy wrote in a recent article. “I would argue, based on the evidence from recent construction activity and associated prices and rents, that it is not enough to simply stimulate supply of any form.”
Instead, he argues, policy must ensure that additional supply results in modestly priced homes.
“We have had a massive increase in the level of rental supply,” he says. “For the stuff completed since 2016, depending on which part of the country you are in, rents are generally 140 to 160 per cent of the average market rent. So yes, we are building a lot more new rental, but we are bringing new rental on stream that is $2,000 to $2,400 a month. That’s not really helping the affordability issue.”
As well, institutional investors and others have bought up “underperforming assets,” older housing stock that’s been redeveloped or refurbished. Mr. Pomeroy said that between 2011 and 2016, there were roughly 60,000 units of affordable rental units (under $750) lost each year, either torn down or converted into more expensive rental.
“This is especially an issue with municipal intensification policies as older, more affordable rentals tend to be in inner-city areas, which are more likely to be subjects of intensification.
“We are looking at the trees but not the forest,” Mr. Pomeroy says.
Toronto-based Robert Palter is senior partner at McKinsey & Company and co-leader of McKinsey’s real estate practice. McKinsey is an international management consulting firm for business, government, non-government organizations and others, and does considerable housing research.
Mr. Palter says that the census data don’t tell a complete picture. For example, in Toronto, private dwellings increased by 7 per cent and the population by 4.6 per cent. If the housing is for groups of people, it might be sufficient, but not if it’s for single-person households, which have been on the rise. There’s a need for more information on people per household and the type of housing being built.
“Let’s remember the denominator of population is twice the denominator of houses. If you believe the vast majority of those people we added were single-person households, there weren’t enough houses. If you look at it and say, ‘no, the vast majority of people we added came in families of four and five, and they all lived in one house,’ you would say, ‘yeah, maybe we did add enough houses.’”
Mr. Palter says increased construction of housing alone can’t bring down prices because of the highest and best use of the land. Whether it’s a house or an apartment building, the buyer pays the price as well as the cost to renovate or build new. The building will be “maximally valued” for whatever is most profitable, and that’s the challenge.
“I may be in the minority here, but I’m not entirely convinced that just significantly increasing supply will lead to significant price moderation, because … except for derelict parts of cities, real estate is priced at its highest and best use,” Mr. Palter says.
“Here’s an analogy: in the U.S., there are all these ghost shopping malls, around the edges of cities. And most of the retailers have gone bankrupt, and landlords are losing money. People keep asking, ‘why are they not being redeveloped?’ Because when they were built, that [mall] was the most valuable use of that land in that space, and any deal that the landlord receives for that shopping mall is less than what that building is worth today.”
What’s needed to find a balance between market-rate construction and supports for those at the lower end of the income spectrum?
“I don’t believe you can make all pieces fit economically without causing some kind of distortion somewhere, because to make it work, there has to be some kind of subsidy. If you take a purely libertarian view to the problem, there’d be no subsidies and no government intervention, and all you’d have would be incredibly expensive condominiums and super-high-end retail. And that doesn’t make for a very interesting, inclusive, sustainable kind of city.
“If you go to the other extreme, highly regulated, highly subsidized, you run the risk of a mish mash of poorly developed, quasi-uninteresting real estate because the developer does their best to make money but also meet the needs of regulation … That’s not great either. So the question is, ‘How do you meet the middle ground on this one?’”
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