Housing Affordablilty – The Global Perspective

Commentary, Housing Affordability, David Seymour

Regardless of where you live in the world, one can buy most needs and wants from a variety of places: food from France, cars from Japan, and oil from Oman at the world price. In contrast, perhaps the most obvious feature of houses is that they are not very mobile. For homes, you must buy those available in your local market, or uproot yourself and move.

Out of six English speaking nations surveyed in a recent Housing Affordability Survey, Canada as a nation is a close second for most affordable housing. However, most interesting is the size of variation between different housing markets within Canada, Canadians stand to gain by understanding this variation and its causes.

Housing prices are arguably more important than any other item for purchase— home ownership anchors people into the community, which they value more when they own a part of it. House prices are also a big lever on the world economy, as recent events south of the border have brutally proven. When prices are high for any reason, they have further to fall and they create losses that are harder for people to recover from. Societies with affordable housing offer community, opportunity, and economic stability. When affordability is lost, many people end up poorer, socially marginalized, and in less stable economies.

What is not understood, first, is the level of variation between different housing markets. When comparing house prices to household incomes in any metropolis (specifically the median price and the median household income there), the variations are huge. In Canada alone, residents of Cape Breton can buy the median house for 2.1 year’s income. In Vancouver that figure is 8.4 years’ income. Parochial Vancouverites might say that a house in Vancouver is precisely four times better than the same house in Cape Breton, but there is at least room to ask whether other factors are at play. Why have some, but not all, housing markets broken so far away from the traditional three years’ income to buy a house?

Second, the causes of these large variations are also poorly understood. Many blame nationwide factors such as interest rates, building materials, and labour. Nationwide explanations for house prices ignore the vast differences among regions, whether in Canada or in the United States.

Clearly, there are major local drivers behind house prices, and academic research is beginning to reveal what they are. The weight of empirical evidence increasingly shows that house prices remain cheaper when cities do not create artificial shortages of buildable lots.

Across the Western world, many city planners embrace an ethos which tells them that they need to push development together so people can live in compact and communal cities. The ostensible goals are to “save land” (a funny thing to be short of in Canada) from urban sprawl and to have lower transport costs. Oddly, some argue such policies—squeezing the supply of land—won’t affect housing affordability; some assert such supply constrictions might even improve it. Whatever the motivations of these restrictive land use policies, it is a fallacy that they can also create more affordable housing. By no coincidence, the metropolitian markets in the world with the most expensive housing also have the most restrictive planning.

In practice, such policies reduce overall land supply and—as every high school economist knows, less supply means higher prices. Such policies also privilege existing land owners whose land is tagged for development. With other potential land sellers in their region blocked out by development plans, land owners with green lights for development are better able to name their price — which is high.

Even though Canada is one of the most affordable nations in the world for housing, Canadians (and particularly British Columbians) shouldn’t be complacent. Recent experience in Saskatchewan and Alberta has shown that Canadian markets do not react well to rapid growth. When above average growth occurs, the supply of housing comes on too slow and prices skyrocket. Regina, for example has gone from most affordable in the survey two years ago to 121st out of 265 cities this year.

There is also no shortage of evidence that restrictive land use planning is housing affordability’s biggest enemy. What is needed at a public policy level is for Canada to realize that the dream of home ownership will remain just that for too many if the current land supply is not freed up.