Economic theory and empirical analysis suggest that housing affordability improves with the supply of new housing. Yet, the “supply skeptics” believe that not to be the case. What gives?
For decades, urban economists and housing advocates have debated the solutions for worsening housing affordability in large cities. Economists mention the age-old axiom of supply and demand. If the price of a good (demand) increases, the supply of the same good must increase to moderate its price.
Not so fast, say the skeptics. “Affordable housing does not come from more supply, if demand grows even faster,” wrote Jennifer Keesmaat, Toronto’s former chief planner and a mayoral candidate. She believed the demand for housing was “insatiable,” requiring a policy response.
Urban economists believe the required policy response is to increase the supply of new housing to meet the demand, rather than choking the supply with restrictive land-use regulations.
Affordable housing has been a major concern for cities that have seen their populations and economies grow rapidly. The abundance of employment opportunities in a city attract workers from other cities and countries resulting in an increase in the demand for housing.
Thus, a common thread that runs through many vibrant cities, such as London, New York, San Francisco, Toronto and Vancouver is a lack of affordable housing. And whereas Canadian cities have encountered housing affordability challenges in the recent past, other cities have grappled with these challenges for much longer and with limited success.
In a recently published article in the journal Housing Policy Debate, Vicki Been and co-authors analyze why supply skepticism exists and how to respond to it. They review a huge amount of existing research to determine whether new housing construction helps address housing affordability.
The conclusion drawn from a review of almost 100 research publications was an unequivocal ‘yes.’ “We ultimately conclude, from both theory and empirical evidence, that adding new homes moderates price increases and therefore makes housing more affordable to low- and moderate-income families,” wrote the authors.
But that’s not all. The authors also observed that the addition of new housing at market prices is a necessary but not a sufficient condition to improve housing affordability for all. Such an approach might miss meeting the shelter needs of those who have been priced out of the market. Thus, the authors advocated for government intervention “to ensure that supply is added at prices affordable to a range of incomes.”
Even though their strongly held beliefs are inconsistent with the preponderance of economic evidence, the supply skeptics have often been successful in restricting the supply of new housing using land-use regulations.
In the Greater Toronto Area for instance, where housing challenges have become acute as of late, housing supply is constrained because of land-use regulations and Nimbyism. Residents of neighbourhoods that predominantly comprise single-family homes oppose any attempt to densify and hence restrict the supply of new housing.
On the other side are those trying to impose arbitrarily high development densities in the outer suburbs and beyond that are inconsistent with demand and land economics. The result is the same: a lack of sufficient housing supply.
The skeptics fail to recognize that even when housing prices do not moderate with new housing construction, it is additional evidence for more housing construction. Imagine the increase in housing prices in the absence of any new housing construction.
The challenge in housing affordability is to ensure that new housing is built to meet the shelter needs across the income spectrum and not just for high-income earners. It is true that even housing built to draw market prices and rents over time, through market filtering, will improve affordability for low-income earners. However, the filtering process takes time.
Housing challenges have prompted Microsoft to commit US$500 million to improve housing affordability in Seattle, where the software giant is headquartered. The participation of the private sector in addressing housing challenges is welcome though not enough.
Consider that of the US$500 million pledged by Microsoft, US$475 million is in “market-rate loans” for the construction of new affordable housing. Microsoft is donating only US$25 million outright to address homelessness.
The current year is an election year in Canada. The federal government is understandably sensitive to housing challenges. In a recent speech, Bill Morneau, Canada’s Finance Minister, announced that the government was exploring ways to improve housing affordability for millennials.
The 10-year $40 billion national housing strategy announced in fall 2017 to improve social and rental housing apparently has not made a noticeable difference in housing affordability. The government, though, is ready to make yet another housing pledge.
To make a noticeable and meaningful difference, all tiers of government and the private sector must come together to leverage all available resources to improve housing affordability for the working classes which are as vital for sustained economic progress as the high-tech, high-earning workers.
Increasing supply needs to be a big part of that solution.
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