Market factors, not national strategies, make housing affordable

As homes age, they should filter through various socio-economic strata. But construction approval roadblocks slow that process to a crawl

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Market factors, not national strategies, make housing affordable

612 words, with tag

By Josef Filipowicz
and Steve Lafleur
The Fraser Institute

The federal government’s new National Housing Strategy will benefit specific groups but doesn’t target broader affordability issues in Canada’s most expensive housing markets.

The strategy includes a portable “housing benefit” of $2,500 per year, on average, to low-income households. It also proposes the construction or renovation of hundreds of thousands of social housing units.

But there are obvious gaps in the strategy.

Demand for housing in cities such as Toronto and Vancouver is strong. That demand has translated into mounting pressure to build new, often high-end condos, townhouses or other housing units. Importantly, when people move into more expensive housing, they free-up their former homes for families with more modest incomes, who in turn leave their homes for others.

This process is known as filtering, because as homes age, they filter through various socio-economic strata until eventual renovation or replacement with new structures. For example, a recent examination on the lifespan of several apartment buildings in Portland, Ore., reveals how they were initially marketed as luxury units, but filtered down over the decades. Today’s luxury units, then, are tomorrow’s affordable housing.

However, this natural process can get held up. In markets with particularly strong demand, such as Vancouver, a slow response on the supply side means people looking to climb the property ladder can’t. That has predictable consequences for everyone else on that ladder.

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So what’s holding up the housing supply in Canada’s most in-demand markets?

One major driver is government red tape. Homebuilders aiming to bring new units on the market must first obtain permits from city hall – a process that isn’t always straightforward. For instance, it takes an average of almost 18 months to obtain permits in Toronto and almost two years in Vancouver.

It also costs tens of thousands of dollars, per unit, to comply with local regulations. In Toronto, the approvals process costs nearly $47,000 per housing unit (on average), compared to $21,000 in Hamilton. In Vancouver, these costs and fees amount to almost $80,000 per unit, adding a significant burden to builders and ultimately homebuyers, who pay higher prices, in part, due to these costs.

Regulatory hurdles can significantly slow the housing supply. A study published last year by the Fraser Institute measured their impact across major Canadian metropolitan areas and found that Toronto would have added more than 7,000 new units between 2006 and 2011 had its regulatory burden been more in line with the Greater Toronto Area average. In Vancouver, about 6,000 additional units would’ve been added over the same period. In both cases, an entire new neighbourhood’s worth of housing was caught up in red tape.

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So when the Liberal government of Prime Minister Justin Trudeau announces it will fund the construction of 100,000 subsidized housing units nationwide over a decade, it’s important to view this in context.

For example, a recent report commissioned by the B.C. government confirmed that more than 115,000 new housing units were awaiting approval in six Metro Vancouver municipalities in February. These units could help relieve the pressure in B.C.’s red-hot housing markets by allowing the filtering process to take its course.

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Clearly, due to their ability to allow more homes to be built, municipalities have far greater influence on housing supply than the federal or provincial governments.

As more concrete details about the National Housing Strategy trickle out, it’s important for Canadians to think about how these measures will affect the broader housing market.

Without understanding the mechanisms that increase affordability for the vast majority of Canadians – not just the most vulnerable – we won’t get to the root of the affordability issue in Canada’s most expensive cities.

Josef Filipowicz and Steve Lafleur are analysts at the Fraser Institute.

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