While opinion pieces are interesting - keep in mind, they are just opinions.

 

     I came across an article in the Globe and Mail yesterday titled, "Politicians are selling us a myth on housing: that more supply will be our salvation" by Gary Mason. While these kinds of articles always make for an interesting read - and always sucker me in - thus fulfilling their purpose.

     In response to the author's statement, ultimately - no, the writer did not magically find some exception to the rules of supply and demand.

     While Mason makes a convincing argument that is easy to follow and easy to believe - the crux of the argument is that building more supply won't fix the problem because we are building luxury units for investors and the rich - if we want to solve the problem we need to restrict demand, not fix supply, this is clearly true because they are building highrises in Vancouver, and affordability has not gotten any better.

     Ok - let's address the problem in the arguments.

     First, as repeatedly mentioned, yes speculators and massive real-estate investment are a concern - but it is important to recognize that these actions are a symptom of the problem, not the problem itself. You could not make money in real estate if we were not supply-constrained pushing up the price. Thus it is because of the supply constraints that investors are attracted to real estate because they know as long as supply continues to be constrained, they can continue to make money. Thus to say it again - real estate speculation and investment is a symptom, it in itself is not the problem. Like with medicine, if we chose to just treat the symptoms, we may feel better, but we will just be ignoring the root underlying issue.

     The next issue is that the author, Mason, believes that somehow he has found a situation where the rules of supply and demand do not apply. Mason brings up the fact that despite a high-rise with several hundred units being built, they were all sold off and did nothing to improve affordability. Let me make a similar argument and we can judge how it holds up - it is an analogy I have used before.

     Imagine a case where the water in your kitchen is stuck on, there is no way to turn it off. similarly, while your kitchen drain is working, it is a little clogged such that water is entering the sink faster than it can be drained out. The result - the sink is filling with water. For whatever reason, you ignore this until the sink is near the top and at risk of spilling over onto the floor. You decide that maybe, to prevent the water from spilling over, you can scoop it out with a cup. You do so, but the water keeps rising - clearly, this is not a solution. (Mason's argument).

     Again, in our case - this is analogous to our current housing situation, the flow of water is our population growth - there is no ethical way to turn off the water. As the sink fills, prices rise - If you can fill up cups just as quickly as the flow of water, there is no change. If you can fill up cups faster than the flow of water, then the overall level in the sink decreases, and prices will fall. When the sink gets full and starts flowing over, well that's when we begin to get all of our negative social spill-over effects due to the unaffordability of housing.

     To add to the problem - you have a friend in the kitchen with you who is, chaotic evil, and just wants to watch the world burn. As the sink gets fuller and fuller they are getting more and more joy as the spill-over is getting nearer. Thus, as a result, this friend starts to take a few empty cups and puts them "away" so that they cannot be used to bail out water.

     Mason is arguing that the sink is on the verge of overflowing because the friend is hiding cups, ignoring the fact that the reason the sink is overflowing is that we are not bailing out enough water. While it is easy to blame the friend in this situation - the friend is just being opportunistic given the situation and their nature - the problem at hand is not the friend, but the rapidly filling sink. The solution is not a blame game but rather to get more cups to get more water out of that sink as fast as we can.

    Note: To be clear - it works in this analogy to have the 'friend' be chaotic-evil because there is no other real reason why they would want the sink to fill with water. This is not saying that landlords / real-estate investors are chaotic-evil. In the real world, the rising water (prices) gives them a real payoff and an incentive to continue to hold onto cups (property) - they benefit as long as the sink continues to fill, in this case, they are doing the same as anyone would do if they had the opportunity - trying to make a better life for themselves.

     One of the final points Mason makes that needs to be addressed is that these highrises are building lots of "luxury" units versus entry-level units - thus not really helping. Keep in mind, there are people out there that either (A) make lots of money, or (B) are chronologically blessed and entered the housing market decades ago and are now exceptionally wealthy. Both of these groups want luxury units and are willing to buy them. If these luxury units were not being built, then these two groups would continue to compete with everyone else for the same few units that exist. By building these luxury units, these individuals either are not competing with you for your normal unit or alternatively are the ones selling these regular units as they upgrade to a newer luxury one.

     Finally, I feel it is important to keep in mind, that builders are running a business, they will build what demand is dictating. to make another comparison - a baker will only bake the bread that they feel will sell during the day, If the baker only makes cheap white bread, all the customers are left buying this. If the baker makes loaves of varying quality, then consumers of different means can purchase the bread they desire. The baker will not produce only the most expensive sour-doughs if they do not believe these will all be bought - after all, the baker does not do their job out of concern for your well-being, but rather they do their job out of concern for their own well-being. In this way, the baker will provide the varieties of bread that will sell the best, to maximize their own well-being. We do not fault the baker or any other business owner for this, similarly, we should fault the builder either.

     Always interested to hear your thoughts and opinions on this - feel free to comment below.