Talk continues of the potential for a housing bust in Toronto. Through the end of March, house prices had had increased 33 percent in a year. Bank of Canada Governor Steven Poloz noted that “There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices … Demand is being driven more by speculative demand, or investor demand, as opposed to just folks that are buying a house.” The influence of speculation, or investment, is not surprising. Money is attracted to rapidly inflating assets in rigged markets — and Toronto housing is a rigged market.
Neither the last years’ price increased, nor those of the last decade are due to market fundamentals. From 2004 to 2015, the median house price in the Toronto CMA rose more than 70 percent relative to the median household income. Moreover, in 2004, the price to income ratio was virtually unchanged from 1970. Even during the mini-housing bubble of the late 1980s, prices were much lower relative to incomes than they are now.
The market is rigged by provincial policy, especially the greenbelt imposed more than a decade ago. Also called urban growth boundaries, greenbelts severely limit the land that is available to build the new detached housing that most people prefer. As surely as severe restrictions on oil production lead to higher gasoline prices, the greenbelts drive up land prices, which flow through to much higher house prices throughout a metropolitan area.
Claims that there is plenty of land for development in the Toronto CMA seem like Orwellian “doublespeak,” when Peter Gilgan, founder and CEO of Mattamy Homes, Canada’s largest home builder told Bloomberg that they cannot get planning permission to build enough houses on their own large supply of vacant land. Moreover, prices are now being driven up in the nearby CMAs, such as Hamilton and Kitchener-Waterloo.
Our 13 years of monitoring house price to income ratios in the Demographia International Housing Affordability Survey in now 90 major metropolitan areas in 9 nations leads to the conclusion that urban growth boundaries (and similar land restrictions) are housing affordability’s “killer app.” Wherever there is severely unaffordable housing, urban growth boundaries, greenbelts or similar land rationing policies will be found.
Avoiding “urban sprawl” is a principal justification for the greenbelt. Yet, Toronto is the densest (least sprawling) population centre (urban area) in high-income North America, with more than 2,5 times the density of large US large population centres. This contrast is obvious to anyone visiting suburbs of Toronto, like Markham, and comparing the intensity of development in detached housing neighborhoods to, for example, the suburbs of Boston, many think of as having high density.
“Urban sprawl” is, of course, the bogeyman that some urban planners use to scare public officials from the world’s densest large urban area, Dhaka in Bangladesh to the least dense, Atlanta.
Regrettably, the Wynne government remains committed to the very policies that have created the same land rationing strategies from Vancouver to Sydney, London and San Francisco. Demand side strategies, such as the recently enacted foreign buyer’s tax do nothing cannot solve what is a supply problem. There may be a respite in prices increases, but the middle-income and young households will still have been priced out of the market. The fundamental problem will remain — there are not enough houses of the type households want being built.
A recent report by the Ryerson University Centre for Urban Research and Land Development noted that the public discussion had ignored or downplayed “the role played by the shortfall of serviced sites available to build new homes.” From London to Sydney, wherever there are strictly enforced greenbelts, this happens. Further, the Ryerson researchers characterized “the only viable solution to long term affordability” as “significantly increasing the number of ground-related housing units built.”
Today’s Toronto CMA homebuyer pays twice as much of their gross income those little more than a decade ago. There’s no point to a city on a hill where people cannot afford the housing they need. London School of professors Paul Cheshire, Max Nathan and Henry Overman said it right, people rather than places should drive urban policy.
Wendell Cox is a Senior Fellow at the Frontier Centre for Public Policy, an independent public policy think tank in Winnipeg.
Read the latest paper from Wendell Cox here: https://fcpp.org/2017/06/16/restrictive-land-use-regulation-strategies-effects-and-solutions/