Ever since it was published by renowned economist Alfred Marshall in 1890, the theory of equilibrium remains unaltered. In Canada’s housing “bubble” for instance, Marshall’s theory suggests that it is both demand and supply of housing units that will determine optimal pricing.
So why then are governments at various levels trying to artificially stifle demand, while paying scant to no attention to the supply side of the equation?
TAMING THE BEAST
Two of the most overheated housing markets in the country are represented by Toronto real estate in Ontario, and Vancouver in British Columbian. In October 2016, the federal government enacted legislation that aims to make it more difficult for individuals to buy property worth $500,000 or more. They did this by raising the amount of down payment that aspiring homebuyers must pay.
There is also a belief that one of the hungry mouths of the Canadian housing beast is represented by foreign buyers – who contribute to the heated market. In a move to dampen rising home prices, the B.C government has introduced a 15% property transfer tax targeting foreign buyers.
The CRA has also been cracking down on unreported capital gains from property sales (investment and secondary properties) as well as requiring all real estate sales (including primary residences) to be reported on tax returns. While many are seeking relief via voluntary disclosure, you can be sure that the CRA will be sending out a few letters to folks looking for further information on real estate transactions.
In a move that’s the first of its kind in Canada, the city of Vancouver approved a 1% tax on homes that are left vacant by their owners.
All these moves appear to be targeted towards curbing the vivacious demand for homes; and are intended to cool down the hot property markets in cities like Toronto and Vancouver. Lawmakers, both at the federal and provincial levels think that, if they manage to curb demand – through mortgage rule overhauls, taxes and levies – the “bubble” will deflate itself.
The truth is far from that. As Alfred Marshall pointed out many centuries ago, taming the equilibrium beast isn’t about starving one side (Demand). It’s also about feeding the other (Supply).
The Other Side
In their Q4 2016 Housing Market Assessment, the Canada Mortgage and Housing Corporation (CMHC) accepts that their data shows there have been “Fewer launches of new single-detached projects in recent years…” The analysis also concludes that “Declining inventories of both new and resale single-detached homes contributed to rapid price growth.”
Summarizing their assessment of yet another hotbed housing market, Vancouver, the report surmises that “…minimal increases in the supply of new listings and low new home inventories continued to fuel steep price gains.” The report concludes that there is no evidence of “overbuilding” – which would signal a problem on the Supply side. Instead, analysts found that “Inventories of new and resale homes remain low”, which contributes to skyrocketing prices.
So while governments at various levels continue to legislate housing demand, no one seems to be paying attention to the 1,000 pound gorilla in the room: Fewer new houses/condos are being built, which is then manifesting itself as steeper home prices across the country.
So how does one tame this beast?
THE UNDERBELLY
At the root of the issue lies in two sets of phenomena that seem to be casting a pale shadow on the supply side of the housing beast:
- NIMB’ism
- Zoning disconnects
Both of these challenges conspire together to deny potential new housing developments from taking root. The end result of both these issues results in potential new housing units not coming on stream – i.e. supply diminishes.
As a result, with housing supply continuing to remain tight, it then fuels price bidding wars for the inventory of remaining units. The end result: Prices go even higher!
Not In My Backyard-ism
NIMB’ism is a phenomenon that has been at the heart of cancelling a number of new developments across Canada, whether it is much needed infrastructure projects, like power plants; or multi-story mixed-used condominium construction, or detached/semi-detached homes. A small group of “concerned citizens” band together to raise vociferous opposition to projects in their neighbourhood – resulting in local governments coming under undue pressure to either cancel, not approve or defer decisions.
B.C has seen its fair share of NIMBY moves, and so has Ontario. As a result, new housing projects, that could have helped to stymie the rising home prices that we see today, may have been prevented from moving ahead.
The Zoning Challenge
Another tone to the dark underbelly of the heated housing market beast is the issue of land use. When it comes to alleviating supply of new homes, zoning of land use plays an important part. Without suitable land to construct the new units, potential buyers of homes will be left fighting a price war for existing units.
A case in point: B.C’s Agricultural Land Reserve comprises a huge land parcel that, by some accounts, equates to a land mass that’s as vast as that of entire nations like Israel, Slovenia and the Bahamas. Zoned almost 40 years ago, this parcel of land has been declared off-limits to home builders.
Other challenges that builders face, when it comes to zoning, is that the land parcels where they are permitted to construct, are often cut-off from much needed amenities, like major highway arteries, public transport and health care centres.
A study released by the Macdonald-Laurier Institute, a public policy think-tank, suggests that Ottawa should use its clout (for funding programs) to convince provinces and municipalities to move out of the way of potential projects that could make more land available for housing projects. That will be a major incentive for lower-levels of government to liberalize and reform land zoning, and encourage construction of new units.
ONE-SIDED SOLUTION TO A REAL PROBLEM
According to a Toronto Real Estate Board Market Watch, a key concern to market watchers still remains supply. The report concluded that:
“Price growth accelerated throughout 2016 as the supply of listings remained very constrained. Active listings at the end of December were at their lowest point in a decade-and-a-half. Total new listings for 2016 were down by almost four per cent”
Canada has opened its doors to roughly 235,000 new immigrants since the early 1990’s. The country was on track to accept nearly 300,000 last year (2016). With so many individuals coming in, they would need more homes to live in. So why then would any level of government not seek to address the problem of supply, and instead focus on dampening the demand for housing?
TREB’s Director of Market Analysis, Jason Mercer, puts it succinctly:
“In 2016, we saw policy changes and policy debates pointed at the demand side of the market. If we want to see a sustained moderation in the pace of price growth, what we really need is more policy focus on issues impacting the lack of homes available for sale.”
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