Housing crisis

Wendell Cox: Political restrictions caused the housing crisis

The choice we face is clear: a modest expansion of greenfield development or greater housing poverty

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For 18 years, I have been monitoring international housing affordability, as author or co-author of the Demographia Housing Affordability series. The latest edition assesses 92 major markets in eight countries using the “median multiple”: the median house price in a location divided by the median pre-tax household income. In the early 1990s, median multiples in Canada, Australia, Ireland, New Zealand and the United States were 3.0 or less. The median house costs no more than three times the median income.

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Even in the mid-2000s, housing affordability in Canada’s largest “census metropolitan areas” (or CMAs) was still as good as it was in 1971. Toronto’s median multiple was actually 0.4 points percentage. lower than in 1971, at 3.9, while Montreal, Ottawa-Gatineau, Calgary and Edmonton were between 2.7 and 3.1. The exception was Vancouver, which deteriorated from 3.9 in 1971 to a very unaffordable 5.3 in 2004.

How things have changed! Toronto and Edmonton provide the starkest contrast. In 2004, the average market price for a single-detached home in Edmonton was around $200,000, while in Toronto it was $320,000. Real estate reports for March 2021 indicate that the average price in Edmonton is now just over $500,000, while in Toronto it has risen to nearly $1.7 million. In other words, prices increased by about 150% in Edmonton, but nearly triple (430%) in Toronto. In the mid-2000s, Edmonton’s median multiple was 2.8 and Toronto’s was 3.9. By 2021, Edmonton’s median multiple had risen to 3.6, while Toronto’s was 10.5. The difference between the two cities has grown from 1.1 in the mid-2000s to 6.9 in 2021. This is a massive increase, equivalent to nearly seven years of household income.

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How did it happen? The cause was not the underlying demand. Between 2004 and 2021, the Edmonton CMA experienced much stronger population growth, 46%, compared to 27% in Toronto, according to Statistics Canada. Differences in construction costs also do not explain the discrepancy. Data from Altus’ Canadian Cost Guide indicates that home construction costs are actually higher in Toronto — but only about 30% higher, a far cry from Toronto’s 240% higher home prices.

The real difference between the two CMAs lies in property values ​​and regulations.

The only big change in the environment of both cities was Toronto’s “Places to Grow” policy, introduced in 2006, which imposed a green belt. As a limit to urban growth, greenbelts generally prohibit new housing on the urban periphery, where land costs are most affordable. Economic research has associated these urban containment strategies with huge land value increases – typically 10 to 20 times – where development is still allowed, ie. And that’s before the ensuing price escalation, when normal demand growth outpaces the newly rationed supply of land.

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Toronto is not alone in imposing such barriers to affordable growth. Around the world, many metropolitan areas have embraced urban confinement, usually to halt urban sprawl (the ideological term for which is “urban sprawl”). Households have paid a heavy price, as housing costs have exploded relative to household incomes wherever there is a strong policy of urban confinement. From London to San Francisco, Los Angeles, Auckland, Sydney, Melbourne and elsewhere, the result has been the same. Vancouver, which embraced city lockdown much earlier than Toronto, has even more unaffordable housing. His median multiple is now 13.3. Only Hong Kong and Sydney had more unaffordable housing in the latest Demographia report. Skyrocketing yields may attract international investors to markets like these, but they make life unaffordable for normal people.

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In each of these urban areas, the median multiple was around 3.0 before the urban lockdown. After that, house prices doubled, tripled or rose even more relative to income. Lower middle income households have been forced to seek subsidized housing, for which there is insufficient political support to provide an adequate volume. Other middle-income and even upper-middle-income households can no longer afford the middle-income homes that until recently were typical of life in Canada. Meanwhile, the housing affordability crisis has turned into a living standards crisis. In the United States, higher living costs in more expensive metropolitan areas are at least 80% explained by their higher housing costs.

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In this environment, younger generations – Millennials, Gen Z and beyond – face unprecedented challenges in acquiring the same housing that was affordable to their parents and grandparents. At the same time, however, places like Edmonton and many other smaller population centers across the country are still within reasonable reach and may well remain affordable – as long as they don’t opt ​​for urban lockdown, in which case their median multiples would begin to follow those of Vancouver and Toronto.

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However, the crisis is spreading as households leave the CMAs of Toronto and Vancouver to buy the housing they want. This heightened demand, along with similar provincial and local restrictions, has led to rapidly rising home prices in places like Kitchener-Waterloo, Guelph, Brantford and London near the Greater Toronto Area, and Abbotsford, Chilliwack, Nanaimo and Kelowna near Vancouver.

Prospects for material improvement are dim in urban containment markets unless regulations on the urban periphery, even beyond the green belt, are relaxed. Greenbelts sound good and are loved by many, especially those who already own homes next to them. But if middle-income housing is to be affordable for younger generations, affordable land must be made available. The choice we face is clear: a modest expansion of new land development or greater housing poverty.

Wendell Cox is a senior fellow at the Frontier Center for Public Policy and author of Demographia International Housing Affordability.



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