The Great House Price Dilemma: At what point does getting rich on property values become greedy?

A global snapshot of housing affordability shows that local governments face a choice about land use regulations and housing affordability.
Published on January 27, 2012

“The mayor said today that he was delighted to see that the price of food has risen since last year.  Rising food prices, he said, are a sign that people enjoy eating in [insert town here].”  Of course this isn’t real.  No sane political leader would celebrate food price rises; in fact almost no price rise is politically popular.  In an economy with many sectors buyers almost always outnumber sellers, often by more than a hundred to one. 

Almost everybody wants a higher price for their house, though.  Almost everybody is approximately seven out of ten, because that’s roughly the proportion of Canadians who are home owners and therefore potential vendors.  Mayors and media who know what’s good for them cheer rises and condemn declines in the value of their patrons’ assets.

Higher house prices are popular but surprisingly little is known about them objectively.  How do prices in any given market compare to those in other parts of Canada, other countries, and other times?  When does a nicely appreciating asset for one generation of owners turn into extortion of the next generation of buyers, and could governments do anything about house prices, if they wished?

This month the Demographia International Housing Affordability Survey has shed light on these questions for housing markets across Canada.  The Survey covers 325 housing markets worldwide (not necessarily cities per se, but regions such as the GTA) including 35 in Canada. 

There’s no such thing as the Canadian housing market, rather many and surprisingly varied local markets.  But if one teases the Survey’s data, Canada is the third most affordable country behind the United States and Ireland.  It’s more affordable than (in order) the United Kingdom, New Zealand, Australia, and the city of Hong Kong.  Canada is also losing affordability as a country, with house prices having risen slightly faster than wages over the past several years.

Nonetheless, housing affordability is a local matter.  In Canada’s most unaffordable housing market (Vancouver), the median house sells for 10.6 times the median household income.  At the opposite end, houses in Windsor sell for only 2.2 years’ median income.  In between are, among others, Calgary (3.9), Toronto (5.5), Montreal (5.1) the Ottawa-Gatineau market (3.7), and Charlottetown (2.9).  These variations exist even though building materials, labour, mortgage regulations, interest rates, and federal taxes are similar across all Canadian markets.

We also know that from World War Two through to the 1980’s, in most western, English speaking countries, house prices rarely exceeded three times the household income.  In many markets, housing is massively overpriced compared to historical norms.

No doubt demand is part of the story.  Without meaning to offend anybody, it’s fair to say that more Canadians would like to live in Vancouver than Windsor.  However, demand can’t be the whole story.  There are places in the survey such as Dallas-Fort Worth, Houston, Orlando, Jacksonville, Nashville, Oklahoma City, Sacramento and Indianapolis that are having their growth and affording it too.  In those places, inflows of population and strong economic activity coincide with house price income ratios below three. 

A final pattern revealed by this snapshot of global housing markets is that Housing Affordability is not like bad weather.  There are very clear things policy makers can do about it.  Nationwide factors don’t seem to matter because in no large country is housing unaffordable in all markets.  Local demand is a factor, but not something with which we want to tinker because it would constitute policy to try changing peoples’ wishes instead of accommodating them.

However there is one factor from the data that is slowly becoming better accepted with each year of the survey:  Local policies geared toward making buildable land available are the greatest factor that policy makers could change if they wanted to improve housing affordability.  In markets where governments limit the use of new land for building, shortages occur and prices rise.  Markets where governments take a lighter handed approach to land use regulations can remain affordable even with high demand.

As a society, it all leads to quite the dilemma.  Home owners are the majority of voters and it is not difficult to see why policies that limit the supply of new lots and push up the price housing are popular with them.  However, prices cannot rise forever and the evidence from the Demographia survey suggests it is time to open up the land for a new generation.

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