Because of how long it takes to build a building, real estate markets almost always overbuild at the top, and underbuild at the bottom (see yesterday's post about the pig in the python). In a theoretically perfect economic model, supply would adapt instantly to changes in demand. But in the real world of development, this adaptation can take 5 to 10 years.

At the same time, it's not just about the quantity of real estate being delivered at any given time; it's also a question of what kind of real estate. We talk a lot around here about this moment in time being a healthy reset for Toronto's housing market (and other markets). But what exactly are we resetting? I find it helpful to think of it in terms of three prongs.

First, there's customer type. Who will be the buyers and tenants during the next cycle and what will they be looking for? For instance, when it comes to pre-construction condominiums, to what extent will individual investors factor in like they did during the last cycle? Many think they will play a much smaller role.

Second, there's the cost structure. The cost of building is changing, and hopefully we will see continued efforts to make housing more cost-effective to deliver. And third, there's a question of building typology. As the demand profile changes and as costs evolve, it is naturally going to have an impact on the kind of buildings that get built.

My gut is that we will see more housing geared toward end-users in medium-density builds, but only time will tell.

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Here is a chart that we have all seen many times before. This one is from a recent New York Times opinion piece called, "America Needs to Build More Housing" and it shows the relationship between home prices (the price-to-income ratio) and houses built (average housing starts per 1,000 households). In this scatter chart, the four quadrants are as follows:

• Cities that don't build a lot of housing and are expensive (San Francisco)

• Cities that don't build a lot of housing but are still relatively affordable (Chicago)

• Cities that build a lot of housing and are affordable (Austin)

• Cities that build a lot of housing but are still relatively expensive (Hilton Head Island)

This last quadrant has the fewest number of data points and a number of the locations are resort or second-home destinations, which have their own unique market dynamics. Similarly, the lower-supply cities, like Chicago and Detroit, have managed to maintain some degree of affordability by virtue of the fact that their population and economic demand haven't grown as quickly as in other cities.

But generally speaking, the correlation is as one would expect: more homes equals lower prices. It is, however, worth pointing out that not all homes are created equal. The cost and time required to build a low-rise, wood-framed house in the suburbs is not the same as building a high-density, reinforced-concrete tower in the city.

Still, we know that all forms of supply ultimately improve affordability in a market. With this in mind, how might one describe Toronto today? We've been told we're in the midst of a housing crisis, and yet there are lots of available homes on the market, both to buy and rent. Indeed, it's a buyer's and tenant's market. So what's going on?

Well, it's important to keep in mind that a chart like this represents a long-term historical average and that building new housing generally takes a long time (too long, I might add). Right now, we could describe the Toronto housing market like the proverbial "pig in a python."

The market is in the midst of absorbing a huge influx of completed supply and, as our chart suggests, this is having a deflationary effect on home prices in the short term. However, once this pig gets digested, there's absolutely nothing next in the pipeline to digest, and according to basic economics, we know exactly what that will mean for the market.

Cover photo by Artem Labunsky on Unsplash

Chart via the New York Times

Paris has residential rent controls. They were put in place on a test basis starting on July 1, 2019 and, broadly speaking, they limit what rents can be charged on a per-square-metre basis according to the neighbourhood, rental type (unfurnished or furnished), number of bedrooms, and the period of construction.

Since then, there have been various studies examining their effects. Here's a recent one by Apur. In this report, the authors conclude that over the six-year period, the controls moderated rents by -5% compared to where they would have been had they been unfettered. Importantly, they also conclude that the rent control policies have had no meaningful impact on the city's rental supply.

However, it's important to point out that "rental supply" means the supply of rental homes in buildings already built. The report does not talk about new construction. And as I understand it, the rent controls are more flexible for new construction. There's also a complément de loyer (rent supplement) that developers and landlords can charge for new builds that are energy efficient and offer exceptional comfort or amenities.

Regardless of the specifics, it's interesting to think about rent controls in a city like Paris. The central part of the region, Paris proper, is already built out and constructs very little new housing each year. By some estimates, the net amount (factoring in existing units being demolished) is only something like 1,500 to 2,000 units annually. And if you consider new market-rate units, it's an even smaller number.

From a policy standpoint, this presumably means you're a lot less concerned about new housing supply — at least in the central neighbourhoods — and more concerned about the overall affordability of the existing supply.

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