This is an interesting opinion piece from the CEO of the Canadian Mortgage and Corporation (CHMC)
As the title sums up, housing should be affordable.
Clearly a normative statement, but just the same, there is definitely a general social belief that everyone ought to be able to afford or have access to shelter. The question then is what should the price of shelter be?
As any first-year Econ student can show, the price of a good will be determined through its supply and demand. As Mr.Siddal outlines in his article, over the last several years demand for housing has gradually increased due to factors such as population growth, speculation, access to cheap credit, etc. while supply has remained relatively constant due to restrictive zoning.
Mr. Siddal discusses many of the current initiatives to ease affordability and rightfully critiques many of them stating that they simply further encourage demand by allowing greater access to the market.
Despite this rising demand pushing up prices, the supply has maintained relatively constant (unlike the picture above, that is, vertical in the short-run). This has simply resulted in inflating prices creating one of the greatest creations of wealth in generations (For the generations who were already owners).
I recently had a very good question in regards to this from a student who stated (Paraphrased).
House production appears to be perfectly competitive, or nearly so. There are many builders. Despite differentiated housing, many are at the point where they will accept any shelter - thus the consumer views the good as fairly homogenous (same). Shouldn't this price increase cause enourmous positive profits to builders and developers causing more to enter, increasing supply and bringing the price back down to a zero profit level?While I tend to agree with the statement, there are some serious issues to this. It is primarily (at least here in coastal BC) the land, not necessarily the buildings which have increased in price - Can't supply more land. Thus the solution would be:
- More Sprawl - frowned upon with increasing traffic congestion, gas prices and known environmental/health impacts.
- Densification - more units per space of land, thus keeping the cost per unit down.
While densification seems like a great solution, it runs into many hurdles such as zoning restrictions and existing residents opposing any development due to the potential of "Changing the nature of the neighborhood". Thus at the municipal level, densification and revision of zoning bylaws have been a large barrier preventing new developments and thus preventing an increased supply of shelter.
What should be done then?
This is clearly a difficult question. As Mr.Siddal states, housing should be affordable. The problem with this statement, however, is "at what price is housing affordable?" how do we determine what this price is? and even if we do determine some price, what makes that price affordable?
Let's assume for a second that we do (somehow) known what an affordable price is. How do we go about achieving such a price?
Restrict Demand? Doing so would cause the demand to shift left, lowering the price. But how does one go about restricting the demand for housing? Furthermore, if you restrict demand by placing tougher stress tests on qualifications, or placing higher taxes on property transfers ... doesn't this in fact just inhibit affordability?
What if we just restrict demand to limit "Speculators". This is what we are seeing right now in the most populous parts of BC with the "Speculation tax". If you follow the news, this is very unpopular amongst many people with comments typically being along these lines:
- We have had a family vacation home in [city] for generations, now I have to pay an extra [$tax] in order to keep this. We spend [X weeks] in this community every year contributing to the local economy, now we won't be!
- I bought a home in [city] as part of my retirement plan. now with this extra [$tax], I won't be able to afford to retire.
That is, families and individuals who are owning second properties for recreation or investment have been labeled as speculators. I have written about this previously, commenting that this should be a vacant homes tax, not a speculation tax - thus being clear that it is to encourage the use of housing as shelter, not simply as a tax on speculation. But just the same the imposition of this tax has alienated a generation who could afford more than one residence and had done so for either recreation or retirement planning purposes.
Restriction of demand then seems to be politically unpopular amongst those restricted (we will see how it pans out with voters).
This then leaves expansion of supply? Causing a shift of the supply curve to the right, which would similarly cause a reduction of price.
How do we go about this? A few ideas are offered such as:
- Easing of zoning bylaws to encourage more development.
- Will fundamentally 'Change the nature' of neighborhoods which has proven to be unpopular with existing residents (NIMBY)
- Engage in a large publically funded and owned building strategy.
- This kicks up many more questions such as "where?" again NIMBY. As well as brings up many memories of "The Projects" amongst many other public housing developments.
That is the problem with increasing supply seems to be that there is not the will to have this happen. It is a great idea, as long as it happens somewhere else. Hence the problem.
Suppose we overcome the NIMBYism (some evidence that some municipal governments are making progress on this) which stimulates an increase in supply and allows prices to come down. This leads to a second question which is one many don't actually want to ask. "Do we want housing to be affordable" That is, do we want prices to fall to a point such that people can afford shelter?
A recent report (news article here) highlighted that current prices would need to be cut in half for millennials to be able to afford to buy.
Thus, if we want affordability (let's assume this definition of affordability for a minute) do we actually want prices to fall by 50%?
Given many factors, the answer to this is likely no. Many Canadians who own their house have used their home as their primary investment vehicle for retirement. This now throws the retirement of many into jeopardy.
Similarly, if we look at the household indebtedness of Canadians we find it is quite high with a big proportion of this being mortgage debt. For these Canadians, a severe price increase would put them in a precarious, if not negative equity situation. Similarly, a big problem impacting the wealth and equity of a large swath of Canadians.
To conclude. Yes, few would argue with the statement that housing should be affordable. the issue with this, however, is that any action to make housing affordable is politically unpopular as the result is the erosion of wealth and equity from current owners in order to allow sustained entry to future owners.
The real solution, if possible, would be some solution that does not result in a zero-sum outcome. That is a solution which allows current owners to maintain their equity while allowing new entrants affordable options.
What are your thoughts? feel free to comment below.
