CMHC Red Warning on Housing Underscores the Need for Reform

Commentary, Housing Affordability, Wendell Cox

Wendell Cox, December 13, 2016

The Canadian Mortgage and Housing Corporation (CMHC) has issued a “red warning” for the entire housing market in Canada.” Red warnings for overvaluation were issued for the Vancouver, Toronto, Hamilton, and Québec housing markets (census metropolitan areas). CMHC also noted that higher prices are spreading to markets nearby Vancouver, such as Victoria and Abbotsford (the Fraser Valley), Kelowna, and to markets adjacent to Toronto. “Moderate” warnings were also issued for Montréal, Calgary, Edmonton, Saskatoon and Regina.

According to CMHC the red warnings are due to “strong evidence of problematic conditions for Canada overall. Home prices have risen ahead of economic fundamentals such as personal disposable income and population growth, resulting in overvaluation in many Canadian housing markets.”

Indeed, house prices have been rising well above the economic fundamentals in Canada for at least a decade. The most serious problems are in Vancouver and Toronto. In the dozen years that the Demographia Annual International Housing Affordability Survey, has been published, Vancouver’s housing affordability has deteriorated to the point that only two major cities out of the 87 ranked in nine nations are more severely unaffordable.

At the same time, in Toronto, house prices have more than doubled since 2004.

In both cities, the largest house price increases have occurred among detached houses. This is not surprising, since detached houses are the most favored by families, especially with children, for whom apartment condominiums will not suffice.

In a single year, price increases of from a quarter to a third have occurred among detached housing in Toronto, Vancouver and the nearby Fraser Valley. This is the simple operation of the law of supply and demand. There is an insufficient supply of detached houses, because excessive local land use regulations has made then hideously expensive to build. Until this supply shortage is resolved, prices are likely to continue their stratospheric rise compared to incomes.

The land use regulations, adopted decades ago in Vancouver and in the last decade in Toronto have made it virtually impossible to deliver the detached suburban tract housing that is so crucial to preserving housing affordability throughout the metropolitan area. These regulations, impose virtual red lines beyond which development is not permitted, which naturally leads to higher land prices and higher house prices. Similar land use policies, called urban containment, have wreaked economic distress on households in other metropolitan areas around the world.

Vainly, planners claim that intensification (higher densities) can restore housing affordability. But land prices in already built-up areas are far too high to build the middle-market housing that is needed. Further, the higher density housing is more expensive per square foot, which means smaller houses.

The resulting smaller “Granny flats” and cramped apartments cannot restore housing affordability, nor can they sustain the standard of living that most households desire. This is inexplicable in a nation The New York Times says has the most affluent middle class in the world (having passed the United States).

This is not to suggest that intensification is inappropriate. There is a smaller market of consumers who seek such housing, and it is being built. But, the greatest growth in both Vancouver and Toronto and in other  CMAs continues to be outside the dense urban cores, where the demand for detached housing predominates. Making adequate housing affordable for middle-income households requires a mix of housing forms, which should be determined by consumers, not bureaucrats.

The CMHC “red warning” is yet another indication that Canada’s housing market is in serious trouble. Previously the Organisation for Economic Cooperation and Development and the International Monetary Fund have expressed concerns about Canada’s house prices. Already, Vancouver house prices have risen to rival the worst levels reached during the US housing bust, which triggered the most devastating US economic recession since the Great Depression. Toronto house prices are rising with a vengeance.

Delivering a sufficient supply of housing that is affordable requires restoration of competitive land markets on the urban fringe. As one Toronto columnist recently put it: “The solution to the affordability crisis isn’t high-density housing and mass transit in the burbs. It’s to give people what they want – by getting the ideologues out of the way and restoring a sensible balance between supply and demand.”

Wendell Cox is Senior Fellow for Housing Affordability and Municipal Policy at the Frontier Centre for Public Policy and co-author of the “Demographia International Housing Affordability Survey.”