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The housing supply narrative is a sham

That is the argument that Joshua Gordon, who is an assistant professor in the Simon Fraser University School of Public Policy, recently made in this opinion piece in the Globe and Mail. In his view, there’s no evidence to suggest that housing supply can actually help housing affordability. It’s just something that developers throw around to “stymie action on the demand-side” and to help with their rezoning efforts. Really, the housing problem is due to intense demand from foreign buyers, investors, and from “high rental demand.”

Now, as many of you know, I am a developer, and not a professor. So you can take this post however you would like. But I do have a few thoughts.

One, I think it’s an oversimplification to argue that there have been no regulatory changes over the last decade that have meaningfully and negatively impacted the supply of new housing. To give you one example, this fall, development levies in Toronto will complete a phase-in that has seen them double over the last couple of years. Almost a quarter of the price of a new residential condominium now goes to pay government fees and taxes. This has an impact on supply, even if the “regulatory environment” hasn’t necessarily changed.

Two, I don’t buy the argument that, “surrounding cities have also seen rapid price appreciation and it’s easier to build there, so housing supply mustn’t be the problem.” Building outside of cities like Toronto and Vancouver isn’t necessarily easier. In fact, in some cases it can be more difficult if they’re not accustomed to more progressive urban infill-type developments.

Three, it’s important to keep in mind that we have a financing structure in place that biases the types of homes (specifically residential condominiums) that get built. This approach is designed to mitigate financial risk, but it also means that investors serve an important function in the delivery of new housing. I’m not saying that the system is perfect; but I am saying that things are maybe not as simple as they may seem.

Four, just because there are cities with lots of single-detached homes and relatively affordable housing, I don’t think we can safely assume that single-family land use policies have no impact on supply and pricing in cities like Toronto and Vancouver. In fact, I would argue the opposite. This probably goes to show you the importance of an elastic housing supply. Indeed, some of the most affordable housing markets are dominated by low-rise houses precisely because it is a typology that is quicker and cheaper to build than most urban infill housing.

Finally, I’m not sure why anyone would consider high rental demand and a strong labor market to be symptomatic of a problem. Isn’t that what you usually want out of cities? You want there to be an abundance of good jobs that pay people money so that they can, you know, have a life and consume things like housing. But maybe that’s just the way that I look at things. I am a developer after all.

Photo by Wiktor Karkocha on Unsplash

4 Comments

  1. peter paauw

    Brandon it would be great to compare Joshua Gordon’s opinion to history. The best example of oversupply and a subsequent price bust is right in Toronto in 1989. Between 1985 and 1989 the average price of a house in the GTA increased by 113% in real terms or by $240,992 in today’s dollars. Low unemployment of the late 1980s and large inflow of immigrants to the area helped to inflate the bubble. However, one could argue that bubbled was fueled mostly by massive speculative investment.
    During the peak of the bubble, the borrowing cost started increasing and the 5 years fixed mortgage reached 12.7%. Coupled with the early 90s recession, a spike in unemployment, and a drop in the inflow of immigrants to the area, housing prices in the GTA collapsed.
    So the next question is what is defined as oversupply –> price adjustment or undersupply –> price maintenance, increase.
    A good measure for that is units per inhabitant (built and under construction) and on that measure, Toronto is doing better than Vancouver (proper). The funny thing is that suppressed supply does extent unsustainable price growth as scarcity does get enhanced by City’s rent-seeking (increasing development fees). What is the tipping point? 1 unit per 2 inhabitants, 1 unit per 2.3?
    In Calgary the market is balanced, leaning to oversupply –> prices have adjusted downwards both in real terms and especially adjusted for inflation. By comparing history to the facts on the ground today we know Joshua is wrong and the only question is are there empty units that can be occupied or is there undersupply.

    Liked by 1 person

  2. What do you think of Land Value Taxes? I was president of a Georgist Land Tax reform group for 6 years. We compiled over 200 studies showing the Georgist (Henry George – 1839-1897) idea of taxing land and not improvements, like buildings, works. It increases building, building permits, and while it decreases land values at first, eventually the increasing value of the community raises both land values and buildings (mostly buildings) and the cities get a reliable counter-cyclical (because the biggest cycles are fueled by land speculation) income.
    Done right, Land Value Taxes could eliminate the need for all other taxes by collecting full rental value on land, or close to it, while untaxing anything built on it.

    Liked by 1 person

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