Supply is the only cause and solution to Canada's housing woes — it's time to be bold
27 Sep 2021
The Liberal plan doesn't even add 100,000 more homes a year
Author of the article: Murtaza Haider and Stephen Moranis, Special to Financial Post
Publishing date: Sep 24, 2021 • 2 days ago • 3 minute read • 5 Comments
The housing platforms of the three leading political parties during the recent election campaign acknowledged the need to increase new housing construction in Canada, recognizing that runaway housing prices are at least partially fuelled by not having enough housing for the growing population.
This rare political consensus could ultimately help the Liberals be aggressive and bold on the housing front in an effort to redress decades of undersupply that has pitched buyers against each other because their needs have been consistently higher than supplies.
The latest statistics suggest that the pace of housing construction has picked up, as evidenced by the increase in the number of housing starts. But one cannot ignore that the high number of starts has only reached the same level observed decades ago when Canada’s population was nearly half of what it is today.
A recently released Bank of Canada report focused on what drives housing prices and why housing in some cities is becoming increasingly more expensive than the rest. The report also offers further proof that prices are inherently tied to the pace of new housing construction.
Nuno Paixão, a senior economist at the central bank’s Financial Stability Department, compared the increase in housing prices in various cities and concluded that prices rose faster in cities where the housing supply was inadequate.
Economics 101 informs us that prices respond to the interaction between demand and supply. But are prices snowballing in some places because of excessive demand or inadequate supply? The central bank’s report has some intriguing answers for skeptics who believe Canada’s housing problem is excessive demand and not the supply.Paixão adopts a unique approach to studying the interaction between demand and supply by contrasting housing prices in a city with that of the larger region it sits in. For example, during boom times, prices rose across the western region, yet prices in Vancouver increased much higher and faster than in Winnipeg. Similarly, the drop in prices in Vancouver was more pronounced than in Winnipeg when regional housing prices declined.
The Bank of Canada’s report controls for such demographic and structural differences across cities in Canada to isolate the impact of housing supply on prices. Hence, Paixão was able to determine how prices would respond to a shift in demand if two cities were identical in all respects other than housing supply.
The report concluded that a one per cent increase in housing prices in a typical (median) city was associated with an increase in housing supply of 2.2 per cent. However, huge differences exist in how cities respond to price increases.
A one per cent increase in housing prices is associated with a 0.63 per cent increase in supply in Vancouver and 4.34 per cent in Winnipeg. The report, therefore, demonstrates that Winnipeg is responding to increased demand with more supply than Vancouver.
Not building enough housing impacts prices. Again, a one per cent increase in housing demand is likely to increase housing prices by 1.57 per cent in Vancouver and 0.23 per cent in Winnipeg. A comparison across all cities in the study revealed that housing prices rose much faster over time in cities with relatively lower supply.
The report concluded, “that cities in Canada with more inelastic housing supply (elasticity below median) faced a higher house price growth during this period than the cities with more elastic supply.”
The Liberal government’s efforts since 2015 have not been sufficient to deliver relief on housing, so its fresh mandate must translate into fresh thinking. It must realize that supply has been the problem for housing affordability, and supply is also the solution.
The current Liberal plan to build or refurbish 1.4 million homes over four years will certainly not be enough because that doesn’t even add 100,000 more homes per year than what will be built under business as usual. Tinkering at the margins has not been effective, nor will it be in the future.
