We Need A Clear Goal For Home Prices; Not Just A Target For New Builds

Last time we applauded the bold step that our Prime Minister took by calling for home prices to stall. He deserves credit because this was the first time a political leader has been brave enough to even raise the prospect of home prices stalling.

However, during the same statement, the PM made another comment that helps propagate a myth: that building more homes, alone, will solve our affordability issues.

“House pricing cannot continue to go up…You know I have heard directly from so many families who a few years ago said okay we're going to put aside money and we're going to be able to set up a down payment. A few years later after working hard and setting money aside, they look to see if they're going to be able to buy soon and they are further away from buying a home than they were just a few years before because housing prices are going up so quickly. That is a problem of supply. We as a country are not building enough housing quickly.”

The PM’s diagnosis of the problem with our housing system is misguided.

Research by David Williams, an economist at the Business Council of British Columbia, shows that “there is no evidence of a national housing supply shortage, in aggregate”. According to David’s calculations, “growth in the housing stock over 2016 to 2021 roughly matched growth in the number of households”. In other words, we built enough homes to keep up with population growth, yet home prices still surged by 56% over this period. There is something more going on here, not just a simple supply shortage.

Our research agrees. The chart below shows that the US, UK, Canada, and Ireland all have a similar number of housing units per capita, yet housing in Canada is far more expensive. With a price-to-income ratio of 9.06, homes in Canada are 18% more expensive than in Ireland (7.66) and over 30% more expensive than in the US (6.70) and the UK (6.77).

Calculations by Kareem Kudus. Wage data from the OECD. Home price data acquired from the housing agency of each country.

This comparison illustrates why we can’t only focus on the supply side of the home price equation. Countries with similar levels of supply have less expensive housing than Canada, so there must be more to the story.

The commonly held but mistaken belief that supply is a silver bullet causes us to overlook the full range of applicable solutions, making it much less likely that we achieve the stalling prices that the PM has set out as a goal. In his most recent column for The Globe and Mail (full text below), Paul aims to dispel the supply myth. 

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To restore affordability for all, we need home prices to stall so that earnings have half a chance to catch up. That’s the hard truth.

It’s simple math. When home prices rise faster than earnings, it creates wealth windfalls for owners like me, but makes housing relatively more expensive for everybody who follows. Polling by Research Co. done for Generation Squeeze shows that 69 per cent of Canadians get this and agree that prices need to level off.

While strong majority support should incline politicians to be honest about the need for home prices to stop rising, most dodge the topic. This is a big problem, because we can’t fix the housing crisis until we convince politicians it is politically safe for them to stand by this hard truth.

Only then will our governments use every policy tool available to rein in average home prices relative to earnings, which offers a clear, measurable objective.

Incentivizing more supply will be one part of the solution, especially when we subsidize new, deeply affordable rental housing as proposed for a new National Housing Accord.

But ultimately, we need a comprehensive, multitargeted approach. This will include a fundamental reorientation of our economy to shift investment away from housing as an asset class – which bids up the prices of existing homes – toward investing in new businesses. At the same time, we need to see a tax shift to reduce taxes on income by raising taxes on high housing wealth.

We’re not yet mobilizing every tool, because politicians resist the objective that home prices must stall. Instead, the NDP in British Columbia, Progressive Conservatives in Ontario, the Liberal government in Ottawa and the Conservative Opposition all show a growing fixation with setting goals that focus on the number of new units they want built.

The goal of 1.5 million new homes in Ontario, for example, is now especially (in)famous, after becoming mired in the unethical decisions surrounding that province’s Greenbelt.

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.

Steve Pomeroy, of the Canadian Housing Evidence Collaborative, has published new research that gives reason to complicate our country’s current fixation with undersupply. This includes dismissing G7 comparisons about housing units per capita, because Canadians put more people in each of our (often larger) homes. 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.

Mr. Pomeroy 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.

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It’s not only the prime minister who mistakenly believes that supply is a silver bullet. Chrystia Freeland, Minister of Finance, said that affordability concerns are first and foremost an issue of supply. So did Conservative Party leader Pierre Poilievre, and our previous Minister of Housing, Ahmed Hussen. Romy Bowers, CEO of the Canada Mortgage and Housing Corporation agrees. In 2021 she explained that “the best way to address house price escalation is to provide more supply”. The Bank of Canada is on the same page. Earlier this year, Governor Tiff Macklem said that “the key to the housing market is more supply. Interest rates affect demand, housing affordability more fundamentally will be affected by what happens on the supply side”.

It’s not terribly surprising that our political leaders, 40% of whom are invested in real estate, tend to focus only on the supply side of the equation; admitting that demand is part of the problem would mean implicating themselves, as well as some of their constituents who are also investors. But an effective solution to our affordability issues will require us to face this hard truth.

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We're curious, what do you think about the focus on housing supply?  Do you agree that we need to do more than just build homes? What else would you ask our political leaders to do to take a comprehensive approach to restoring housing affordability?

Reach out in the comment section to let us know, we look forward to hearing from you!