Building more isn't enough to lower home prices
Building more isn't enough to lower home prices
Incentivizing more supply will be one part of the solution, but ultimately, we need a comprehensive, multitargeted approach
The guy who runs Generation Squeeze says building more homes isn't enough to lower prices, because most people buying houses are already property owners. Property owners can either sell their current house to get a load of cash, or borrow against it to get a load of cash. Either way, they can pay a lot for their next property.
As evidence, he mentions that Alberta has less supply per capita than the rest of the country, but house prices are half those of Ontario and BC.
Here are the good bits:
While building more supply is absolutely important, setting ambitious targets does little good if property values continue to rise. Unless they are deeply subsidized by tax dollars, new market units will price in today’s high land values – which have soared well beyond what most can afford with local earnings whether the new homes are intended for renters or owners.
Plus all the focus on “Build! Build! Build” ignores that lack of supply isn’t the only, or even primary, factor influencing the price of rent and ownership. You could be forgiven for thinking otherwise, since undersupply has become the dominant narrative shared by Canada Mortgage and Housing Corp. and a variety of financial institutions.
The Bank of Nova Scotia, for instance, published reports lamenting that Canada has a smaller number of private dwellings per capita than the G7 average, blaming this ranking for much of our unaffordability problem. This leap in logic begs questions, since the same Scotiabank data also show that Alberta has lower levels of housing supply per capita than most other provinces, yet home prices in Alberta are about half as expensive as those in Ontario and B.C.
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Mr. Pomeroy [who published a study about this stuff] encourages us all to widen our focus to include the vicious cycle by which rising home prices drive rising home prices.
First-time homebuyers are a minority of purchasers. They compete with many Canadian buyers who have already owned in the market. Bolstered by the equity they’ve gained from surging home values, existing homeowners bid up the price of housing to levels that are disconnected from earnings paid by local jobs. This was especially true prior to recent interest-rate hikes, because historically low interest rates made it cheap for homeowners to liquefy wealth windfalls created by skyrocketing home values.
Some homeowners bid up the price of housing simply to relocate. Others do so to purchase an investment property in search of additional wealth windfalls.
The latter are among the one in six Canadian homeowners who own multiple properties. Most are over the age of 55. To pay the mortgages on their investment properties, they increasingly collect rent from younger residents with dashed dreams that a good home should be in reach for what hard work can earn.
This reveals that the vicious cycle by which those enriched by high home values bid housing costs ever higher isn’t just ruining the market for aspiring owners. It is also breaking the rental market, as confirmed by the record-high rents reported this summer.
To disrupt this vicious cycle, political leaders must help break Canada’s cultural addiction to rising home prices by endorsing the plan that governments will use all available policy tools to stall home prices for the foreseeable future.
Allow only first time buyers with no other properties to access the new development.
It still doesnt matter if its valued at $650,000 (average home price in Canada).
Even with "only" needing a 5% downpayment as a first time home buyer, thats still a $32,500 nest egg you need to save up for, which I am not convinced a lot of people can do without serious help from their parents or other benefactors.
A massive shift needs to happen to bring home prices back to reality. A 3 bedroom middle class family home should not casually be a million dollar property, as it is in many, many large cities across canada.
Housing is considered affordable if it's repayments and maintenance is 30% of your income.
So a median income in your area should see a median house price at around that. I did a bit of maths and it's around a 4x multiplier given current interest rates in my area.
Also consider that everyone needs a home, so median is not the cheapest available.
In my suburb the multiplier last year was 7.5x, and I just did a check and the cheapest available housing listed is 6.5x
So you are totally right, there needs to be a massive shift
None of the donor class want prices to come down. They won’t be able to price gouge as landlords and the middle class will run out of credit to buy their products.
I feel like it affects a lot of people who want to trade up: sure they can sell their house for a lot more than they bought it, but houses are so stupidly expensive, that they still can't afford anything nice in their area. Unless they have a great income or are willing to take on debt.
Single home owners are the have nots now. You need to own a couple properties, sell them, and buy your 'forever home'.
Ban non-primary use home ownership. Or make the taxes so high it's not worthwhile.
Here are some of Generation Squeeze's suggestions for improving affordability. Here's one that's interesting:
The first step is putting a price on housing inequity by adding a modest surtax on homes valued over $1 million. This surtax will apply only to the top 12% of high-value homes – the vast majority of Canadians won’t pay a penny more. But it will help slow down home prices so earnings have a chance to catch up, demonstrating allegiance to the Canadian dream that a good home should be in reach for what hard work can earn.
Here in the Netherlands we have such a surtax, but it doesn't really work.
I rarely think the USA has the best system, but when it comes to housing equality, the USA has done one thing right: high property taxes combined with deductions on income tax and lower income taxes overall.
Buying a house in the USA for speculation is rarely worth it, because the property taxes are just too high. You can't afford to let a property sit empty. It must either be sold or rented.
Meanwhile, in Canada and the Netherlands, renting out an empty home for 30 nights a year on AirBnB is enough to cover all costs. So it's very easy to have houses sit empty while waiting for the high ticket renter or buyer.
I think the US system could be slightly improved by better regulating rents.
I looked at tax rates for Boston:
That means that the owner of a $500,000 house pays $5,370 this year, not counting the city's homeowner exemption
That's very similar to what the tax rate in Ottawa is. According to this random calculator, tax on a 500k home would be $5,846. I'm not sure how representative Ottawa is, however.
Apparently some US states also have a progressive tax on the sale of a property. You get the first 250k of profit (for example) tax free, but you pay tax on the rest.
That does nothing for the prices at the low end, and it keeps most landlords happily in their current (extremely high) rents. What hope do middle and lower class people have to outbid the rich for the same houses?
Generation Squeeze has a bunch of other proposals that would probably help people in all income brackets.
The point of many of these measures is to take investment out of housing, so people with money don't treat houses as a vehicle to make more money.
Wouldn't this negatively impact people who bought their homes at a much lower price when it was affordable and whose home has since increased in value to 1mil+
While I understand the views of this article, I don't believe it. It's true that if we build 100k homes in each province, it'll do little to dent housing prices. We don't need 100k new homes, we need like a million in each major city. People keep talking about how big of a deal building a few thousand homes are, but they're literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
And while I agree that not everybody would be looking to get their own personal house, increasing housing would vastly let up the pressure on rentals as well. And making rentals cheap enough that you could get one while working part time as a student would also mean that the moment you get a full-time job, you'd have the free time to do everything you could want to improve your life. The fertility crisis we're having wouldn't be such a big deal either, not to mention all the stress the young are dealing with since they know that moving out of home before 30 is a pipe dream for most of them.
People keep talking about how big of a deal building a few thousand homes are, but they're literally a drop in the bucket at this point when we should be increasing the supply not by 1-2%, but a good 20-40%.
I think that's the gist of the op-ed - we're unwilling to build enough houses to flood the market and lower prices. So we need to deflate prices in other ways.
No I think the op-ed is trying to say that no matter how many homes we build, it won't matter because those who already have homes can just leverage those homes to take on loans to buy more homes, preventing those who don't have them from actually buying homes since they're always at a deficit compared to those who are effectively already rich.
What I'm saying is that if the supply of homes increase by something like 40% across the board, it won't matter if many of these people buy a second or third home, as it's not like every person with a house is going to buy more. And even if they do, they'll resort to renting them out because a home they're not actively using is nothing but a cost that has a high chance of costing more than anything they can sell it for in a few decades due to property taxes. If they do rent them out, they'll be competing with a massively increased rental market, lowering prices or else dealing with property that is costing money rather than making money.
A net win even if everything this person says comes true. And if it doesn't, we have a massive influx of homes that'll push down prices. The only issue is that we'll be dealing with a new and long term recession as the retirement plans of millions go out the window. It's a risk but taking this risk is the only way to prevent this problem from increasing perpetually, or else the housing prices crashing due to the bubble popping anyways.
increasing housing would vastly let up the pressure on rentals as well.
The elephant in the room is that the housing market crashed in 2022. Rent is high right now because nobody wants to buy into a crashed market. If you have somewhere to rent, why would you buy right now? The dead cat bounce we're watching might trick a few people, but on the whole? Houses will almost certainly be a lot cheaper in another year. It took around three years to find the bottom when the US housing market crashed and it is likely we'll see something similar.
So, by the same token, what incentive is there for someone to build new units right now? Once the housing market finally does find the bottom those renters are going to start thinking about buying again. The rental boost is only temporary and likely to be gone by the time you get around to building something new – something that cannot happen overnight.
I was looking at the numbers, and while I agree to a certain point (if prices are going down, it's better to rent and hope that prices will continue going down so you can buy at the best price possible) but prices have shot back up since the last year and are almost at the 2021 prices in the span of a single year. We had a temporary dip in prices, not any form of a drop.
And as for incentive, there's a massive amount. With prices as high as they are, it's entirely a seller's market, and if you can make more homes, you basically have as much cash to take as you have homes to sell. The issue is that builders aren't able to build new homes due to legislation, zoning regulations, and plenty of other hurdles placed. I keep seeing so many properties that have "we are planning to build this skyscraper condo here once we have our permit" and the old building just sits there for 3-5 years before they get their approval.
One of the aspects I see rarely mentioned is how bad investors is for people quality of life of people actually living in those places.
For anyone that's been involved in strata affairs they've probably seen many cases where investors refuse to make repairs for as long as possible so they can cash out and make it someone's problem. Or where new builds are accepted with horrible design and finishing. They don't care if the layout so bad that you have to stand on the toilet to open the bathroom door or the tiles have so much lippage it'll slice your foot open, that's s the renter or the next buyers problem.
Here's my proposal on what to do:
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Implement the Ontario HATF recommendations in every province. These are various recommendations on how to remove powers from municipal and provincial governments to block housing development. They're a massive project of upzoning. No more "tearing down a home to build a million-dollar mcmansion" when that lot could support a low-rise building of like 6 $400k homes.
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Adjust processes for colleges, apprenticeships, and for immigration to get more home-building contractors like electricians, plumbers, etc.
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Open the greenbelt, but only for transit-serviced ultra-high-density construction. You can build on farmland if you're going to build Manhattan. We have enough sprawl.
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Create a crown building corporation that funds rental construction with a specific mandate to keep vacancies above some fixed percent in every major market, like how the BoC has a mandate to keep interest below X%. Rent is skyrocketing because there is no vacancy - every unit with a reasonable price gets dozens, even hundreds of applicants. This org would be particularly important in moments of high-interest rates when it's not as profitable for the private sector to build homes.
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Read your Henry George. The housing analog to the carbon tax is the Land Value Tax. The idea is that people should be taxed for what the land they own is worth, not for the property they own is on it, because the land is provided by Canada itself. So if you've a vacant lot or a parking lot or a single-family-detached home in a hyper dense urban space with transit access, you've got a hard cash incentive to find the best use for the land instead of leaving it fallow. Of course, the downside is this would mean throwing Grandma out of the house she's lived in for her whole life, which is political suicide, so only make it apply to investors as an alternate to property taxes (use whichever is higher), with it calibrated that it's only a tax on investors if their land is underused. If you own a high-rise in the core or a rural house? Well, that's realistically all that area could support, pay normal property tax.
Or just tax speculators. 30% of Canadians are hoarding properties. Force them to sell. It's not complicated.
Define a speculator. Is the company that owns an old purpose-built rental highrise downtown a speculator? What if a building like that gets renovated into condos, but somebody buys up like a quarter of the units? How about the student houses in my neighborhood? Without those student houses, those students would not have a place to live - they are not in the market to buy housing.
I can get behind all of those. This one is optimistic though:
No more "tearing down a home to build a million-dollar mcmansion" when that lot could support a low-rise building of like 6 $400k homes.
In Ottawa's downtown I've repeatedly seen modest 600k homes sold to developers who put two duplexes on the same land and sell each for 800k. So four units, each with less floor space, less outdoor play area for kids, going for more than the original.
The improved density is good for land use, but the increased cost makes the units unaffordable to many.
That has more to do with the rapid rate of climb. I've seen so many cases where the housing market moves so fast that absurdities like that happen. Like, various flavours of "OMG this new building won't have any affordable units in it, they're starting at $300k" as the building gets blocked from construction... and by the time the building was slated to be completed, $300k for a unit is a goddamned dream. I would assume that any SFH torn down for multi-units would be still worth more than the units if it still stood, just because of how fast prices go up and how long a teardown and construction takes..
find the best use for the land instead of leaving it fallow.
Leaving it fallow is the best use of the land. Development is a drain on society, using up massive resources and offering absolutely nothing to society in return. If you think you have a better use for the land to your individual benefit, we will reluctantly let you proceed (usually), but you had better be ready to compensate society for the externalities they are to endure. That is what the property tax is for.
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I'm extremely cynical and won't believe anything until something substantial is actually put into motion. Isn't it something like 40% of federal MPs that hold for-profit real-estate? Our GDP is also heavily leveraged on housing. Nobody in a position to do so has an incentive to do anything about it.
It's so fucked. People who aren't in the market already are pretty solidly getting squeezed out. My mom just resold her condo for double what she paid in February 2020. I make pretty good money. I started saving up for a downpayment ~4 years ago, I'm finally getting to a pretty solid amount available from different sources, yet I don't feel much closer to being able to buy.
Every article like this never had a coherent explanation why rents are so expensive.
Like yeah, people hoard investment properties. I get that. But investment properties get rented.
People don't pay rent as an investment.
Investment properties get rented out. So the laws of supply and demand function much more directly here: if rental prices are going up, that means there are people willing to pay those prices to live there and they can't find anything cheaper. That means there's demand vastly outstripping supply.
I'll believe we don't have a housing shortage and the problem really is just speculators watching their assets grow if the price to buy is skyrocketing but the price to rent is low.
Otherwise: no, the landlords and gougers are able to exploit people because there isn't enough to go around.
People don't hoard food, and when they do it's not really a problem, because there isn't a food shortage.
Nobody scalps tickets to my kid's violin recital because there were more seats than the crowd will ever fill.
Compare vs TP in 2020. And the chip shortage. And the baby formula shortage. I think the last few years have given us all a loud demonstration of how shortages impact pricing.
If you have a game of musical-chairs-for-cash and you have 4 chairs and 6 players, the price of the chairs will be defined by whatever the 5th player can't afford.
Add more chairs.
Absolutely, housing was relatively cheap in Alberta for close to a decade because demand was low. Now that we've had a ton of people move here, guess what happened to housing prices (both to buy and rent)?
People don’t hoard food, and when they do it’s not really a problem, because there isn’t a food shortage.
Dairy, poultry, and egg producers hoard food. They have a government-enabled system to ensure it. But you are right that it doesn't turn into a shortage as it is done with the intent to raise prices, while a shortage occurs when price is unable to rise.
Well said. I've made this point in other places and haven't had a satisfying explanation in response yet.
The argument that speculators and investors will just gobble up any new builds, and rent them out for profit, seems to ignore that principles of supply and demand apply to rental homes as well as purchased homes. There are surely enough independent landlords that any price-fixing scheme would be impossibly difficult, so if we had enough homes for everyone and landlords and investors owned an oversized amount, then that should be quickly corrected by the market when rental prices are lowered enough that some landlords decide to sell their investment properties.
then that should be quickly corrected by the market when rental prices are lowered enough that some landlords decide to sell their investment properties.
Quickly is where you got it wrong.
Let's face it, the housing market has already crashed. The average price is down 20% from the 2022 peak and continues to fall. Investors are trying to sell, but buyers aren't having it. More people are renting now, driving up rents, as why would you want to buy at this time? The prices are still falling and are going to be a lot cheaper in a couple of years.
The bottom of the market will take time to find. Eventually investors will have to cut their losses and finally sell at a low price. But there is no big rush. They can sit on a property for a long time in hopes of getting a high price. This kind of thing does not happen quickly at all.
This is the best summary I could come up with:
Unless they are deeply subsidized by tax dollars, new market units will price in today’s high land values – which have soared well beyond what most can afford with local earnings whether the new homes are intended for renters or owners.
The Bank of Nova Scotia, for instance, published reports lamenting that Canada has a smaller number of private dwellings per capita than the G7 average, blaming this ranking for much of our unaffordability problem.
He also offers evidence that shows housing starts since 2003 have generally been higher than required to manage our country’s population growth, despite critiques about slow municipal approval processes.
Bolstered by the equity they’ve gained from surging home values, existing homeowners bid up the price of housing to levels that are disconnected from earnings paid by local jobs.
This was especially true prior to recent interest-rate hikes, because historically low interest rates made it cheap for homeowners to liquefy wealth windfalls created by skyrocketing home values.
To pay the mortgages on their investment properties, they increasingly collect rent from younger residents with dashed dreams that a good home should be in reach for what hard work can earn.
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