Housing Task Force Report Misses the Underlying Economics

Commentary, David Seymour, Housing Affordability, Uncategorized

The Saskatchewan government’s recent Task Force on Housing Affordability report tackles an important topic, but it misses the underlying economics of housing. It erroneously implies that affordable housing is isolated from the rest of the market – which could supposedly never deliver housing for everyone – and that certain policies which have failed elsewhere will somehow work here. Meanwhile, except for an accidental mention, it ignores the growing research that finds regulation is the real driver of house prices.

The Regina housing market is experiencing a major demand-side shock. Vacancy rates, house prices and rental rates all tell the same story. Those on the margins of shelter are hardest hit by this shock. Their housing problems are a symptom of the competition to secure accommodations from a limited supply in a white-hot economy. However, it should be noted that the increase in house prices affects everyone. The two big underlying assumptions of the report are that affordable housing exists in isolation and that the problem affects only those at the margin. The report recommends creating housing solely for these people, and it largely ignores the rest of the market.

In its better parts, the report claims that “traditionally marginalized groups” need more holistic social support in order to find housing. However there is a belief that, even with these supports the housing market could never deliver housing for them. The report implies a swath of market fiddling is required, and this is where some really silly recommendations surface.

Perhaps the silliest is the removal of PST on materials “specifically used to build affordable housing.” For a product also driven by land and labour costs, every supplier arguing that his or her building material should qualify for the 5 per cent saving would woefully complicate the tax system for meager benefit.

The report acknowledges that rent control fails because it prevents developers from covering their costs, and creates even worse housing shortages. It then recommends two sub-species of rent control. Making a proportion of new developments affordable (inclusionary zoning) is a type of rent control that backfired spectacularly in the many Californian jurisdictions that tried it. Longer notification for rent increases amounts to short-term rent control that sidesteps the question of why frequent increases are occurring.

Indeed, there is a growing international literature that shows that regulation of land use and construction drives housing costs. As former New Zealand Reserve Bank governor Donald Brash recently stated, “the affordability of housing is overwhelmingly a function of just one thing, the extent to which governments place artificial restrictions on the supply of residential land.” Econometric studies from the United States – a great policy laboratory with so many housing markets applying different policies – find that the impact of zoning, building regulations and permit delay are responsible for anywhere from 15 per cent to 90 per cent of house price increases. Some might respond that Saskatchewan is leading Canada for building permits, but that is not aiming high enough on a continent that is generally losing affordability from sea to sea.

Perhaps the most supply-aware recommendations are the streamlining of the regulations around secondary suites and the revision of journeymen to apprentice ratios. The report also acknowledges (accidentally perhaps) the effects of regulation on the overall supply when it suggests that some projects should be fast-tracked. The report is onto something, but again it treats only the symptom of low-end affordability rather than the disease of the overall market.

In the normal run of things, housing supply should meet demand just as it has here in the past, and just as it does for other cities and other products. To say that relatively small cities on the Prairies are reaching natural limits is untenable. A look at the ages of houses in major Prairie cities shows that current growth is brisk but not exceptional compared to that of the 1970s and early 1980s. There exist much larger, faster-growing cities in North America that have more affordable housing. Another commonsense observation is that almost every commodity apart from housing can now be purchased for fewer hours’ wages than could be done 20 years ago. If trade and technology have made everything else more affordable, then why not housing?

Tommy Douglas once said that what we want for ourselves we should want for all. If we really want affordable housing for all, the focus should be on why entire housing markets cannot respond to demand with sufficient supply.