There's an ominous warning for Vancouver and Toronto in a U.S. report examining the property crash in that country - development restrictions played a large role in fuelling a housing bubble in large metro centres, the National Centre for Policy Alternatives suggests.
Both Toronto and Vancouver are hemmed in by development restraints - Vancouver has geographic restrictions and Toronto has greenbelt preservation regulations. The report says that as mortgage credit became easier to obtain, people were forced to bid up house prices because there wasn't enough new inventory to meet demand.
"Gross national house value increases and losses were overwhelmingly concentrated in metropolitan areas with more restrictive land use regulations - known by a variety of names, such as compact city policy, growth management or smart growth," the report says. "Many metropolitan areas with these land use restrictions were not able to respond to the increased demand for homeownership caused by the greater availability of mortgage credit."
The "inevitable result" was higher prices, the centre said, which encouraged speculators to dump more money into the market. It said several things happened from 2000 to 2007:
- In the 10 markets with the greatest rise in prices compared to income, the cost of a house rose by an average of $275,000 (U.S.), relative to incomes.
- Among the second 10 markets with the greatest price escalation, house prices rose $135,000.
- By contrast, in the major markets with the least rise in prices, houses increased only $5,000.
As prices began to fall, homeowners couldn't refinance. That led to a foreclosure crisis that has pushed house prices to their lowest level in six years. The whole country saw house prices double from 1999 to the peak in the fourth quarter of 2006.
Again, from the report:
- From the peak of the bubble in 2006 to the Lehman Brothers collapse on Sept. 15, 2008, more heavily regulated metropolitan markets accounted for 73 percent of aggregate value losses.
- The average loss from 2007 to the Lehman Brothers collapse was $175,000 per house in the 11 markets with the greatest run-up in prices and the greatest fall.
- All prescriptively regulated markets (more heavily regulated markets) accounted for 94 per cent of losses, or an average of $97,000 per house.
And finally, the heart of the bit:
"If the prescriptively regulated metropolitan areas had instead had responsive land use regulations, prices likely would have escalated at a much lower rate during the housing bubble. This is because the land price premiums that grew during the bubble would have been less likely to develop, at least to the same degree.
"If the housing markets in the prescriptively regulated markets had replicated the performance of the responsive markets, it is estimated that the house value losses from the peak of the bubble to the start of the financial crisis would have been $0.62 trillion, one-fourth of the actual loss of $2.44 trillion.
"The average loss per house would have been $17,000 instead of $67,000. These more modest losses might not have set off the financial crisis, or it might have been less severe."
This year saw the second-best May for Toronto real estate sales since the Toronto Real Estate Board began compiling data, according to statistics released Friday.
Sales increased 6 per cent from May, 2010, while prices gained 9 per cent to an average $485,520 (Canadian). The number of listings to hit the market decreased by 15 per cent from last year, meaning more competition through the summer as buyers compete for fewer houses.
Sales are showing signs of slowing in Vancouver, however, slipping 8.1 per cent below the 10-year average in May. The market has caused concern because of the high prices - the city's board said its index price for a detached house was $805,000 in May, up 10 per cent from a year ago.