Canada's 'housing bubble' deemed close to bursting

[rofina]

Originally Posted by Innsertnamehere

The solution is supply. Lots of it. And doing that means deregulating the industry. I just don’t think there is political capital for that as NIMBYism is so strong and the previous solution to that of building where nobody lives (sprawl) isn’t acceptable anymore either.

If housing is deregulated on a scale that is actually notable, real affordability will increase slowly over time.

The most affordable housing markets in the world are ones that 1. Low/no growth or 2. Low regulation markets that allow the market to properly respond to demand.

Basically people hate suburbs, but at the same time if we can’t build low rise housing in large numbers anymore that type of housing is never going to be affordable again.

Ultimately - the reason housing is unaffordable in this country is entirely self imposed.

We the people have created a set of laws and regulations that favor the asset of housing, over the utilitarian value that housing provides. We have consciously said the financial stability of the asset is more important than providing shelter for people.

No amount of alternate tax schemes or purchasing restrictions or ideas will change that basic fact.

That is the fundamental issue with regulation today. It does not fully capture the reality of the situation.

Its also appears to be an immutable law of the universe that regulation is only increased, but never decreased. Its fascinating, really.

[milomilo]

Originally Posted by csbvan

The solution is not just supply. It's amazing how you can show the data pointing to problems with misplaced investment (too much being directed to housing at the expense of the economy) and people brush by it and just say "supply". Take off the blinders. It is also important for policymakers to attack investment demand. We see how much money is being diverted from more productive investments into housing. We need to make that less attractive so investment goes elsewhere.

Investment isn't pouring into real estate because there's not enough supply. That makes no sense.

We need to increase supply, especially in mid-range segments of the market (larger apartments, townhouses, etc), and we need to make investment in housing less attractive than investing in new startups, technological improvements, etc.

We can't compare that graph to other countries to see if it means much. On its own it means little as it is not a commonly discussed statistic. But you would expect that if house prices keep rising then the % of income going to housing would rise.

What policy implement would you use to reduce investment in residential real estate? Progressive taxation is one, tax those with the most real estate the most and those with the least the least, such that the houses are spread a bit more fairly. But you still wouldn't have enough houses.

[Innsertnamehere]

Investment is pouring into real estate because supply is constricted, creating room for outsized profits as prices are bid up.

Investment chases profits, and an under supplied market is where profits are.

What typically happens is as investment pours into under supplied goods, supply increases, and prices equalize as the market “matures”.

The problem with housing is that there are artificial restrictions on supply, making the market very inelastic. Which means that investment pouring in isn’t achieving the typical market response of increasing by supply to meet demand.

[Nite]

Originally Posted by csbvan

The solution is not just supply. It's amazing how you can show the data pointing to problems with misplaced investment (too much being directed to housing at the expense of the economy) and people brush by it and just say "supply". Take off the blinders. It is also important for policymakers to attack investment demand. We see how much money is being diverted from more productive investments into housing. We need to make that less attractive so investment goes elsewhere.

Investment isn't pouring into real estate because there's not enough supply. That makes no sense.

We need to increase supply, especially in mid-range segments of the market (larger apartments, townhouses, etc), and we need to make investment in housing less attractive than investing in new startups, technological improvements, etc.

and the best way to reduce investor demand is by increasing supply so their is less profit available as when supply is limited. More supply is the one and only solution to the housing bubble.

[csbvan]

Originally Posted by Nite

and the best way to reduce investor demand is by increasing supply so their is less profit available as when supply is limited. More supply is the one and only solution to the housing bubble.

Investors and real estate developers will build themselves out of profitability? Really?

Supply is only going to make a dent in prices if we are providing the right amount of supply for end users. We are building supply. The disingenuous aspect of "supply" only advocates is that they offer no numbers. They simply say the word "supply". If house prices are expensive, there's only one answer "supply". No discussion on the type of supply or who is buying it.

Look at pre-pandemic supply in Vancouver. Between 2016 and 2019 Vancouver saw 106k housing starts (CMHC data) for around 125k new residents (Statscan estimate data). The vast majority (70+%) being apartments, which we apparently have constrained through regulations. Not much end-user focused family-sized units.

That's crazy supply! Almost 1 new unit per new resident is insane. The average household size, and I'll skew lower to take into account the high percentage of apartments in those stats, is still over 2 people. Housing starts are almost doubling population growth. What do you mean "supply"? Supply for whom?

We're building a lot, aiming building toward the unit types desired by investors, not end users, and constraining supply of housing desired by end users. Our issue is housing as an investment and supplying investors with the housing they want, but not what end users want, thus raising costs of the limited supply of desirable housing for end users.

Stop saying "supply" unless you're coming to the table with numbers to debate.

[Innsertnamehere]

They don’t build themselves out of profitability - they build themselves out of excessive profitability.

Look at Seattle’s rental market for example - a surge in apartment construction over the last 5 years occurred as rents skyrocketed. The market saturated, and rents have flatlined for the last while. There are still profits, but the market has equalized.

In a supply constrained market, not enough apartments get built and rents keep increasing. Money pours in to try to increase supply, but in a constricted market they chase more and more expensive options to get housing built, which makes new housing more expensive and makes housing more unaffordable.

[csbvan]

Again, the problem comes down to conjecture vs numbers. Where are we constraining supply? Vancouver, the canary in the coal mine of Canada's housing crisis, is outbuilding new residents by a big margin on a purely unit to resident basis. It's just conjecture to talk about regulation as the main cause, ripped from a UDI talking point while never engaging with the data.

We have an investor demand problem and a lack of the right type of supply problem. The data is currently proving that out. I'd argue more regulation is needed. Regulate the ratios of apartments. Regulate developers to build more affordable family-sized apartments if they want their tower. Currently, every 3 bedroom is a luxury penthouse.

[Innsertnamehere]

Sure. Vancouver completed 22,000 units in 2019. In 2019, the Vancouver metro grew by 48,000 people.

New units are typically occupied at a rate of a little under 2 people per unit as they are primarily smaller apartment units.

Presuming an average occupancy of 1.9, those 22,000 units are enough to house 42,000 people. So a shortage of about 3,000 units to accommodate growth.

This doesn’t account for other pressures on housing though, like shrinking average household sizes. That’s right - even if 0 people moved to Vancouver, it would still need thousands of units a year just because less people are living in each unit each year. So the shortage is actually thousands more than the back of the napkin math above.

Also, the housing type experiencing the least price pressure in Vancouver is apartments. Because it’s the one type of housing getting built in significant numbers. Low rise housing has basically 0 completions, especially detached properties. So of course those are the properties that have seen insane price growth.

Large apartments are never going to be cheap as they are expensive to construct. The cost of a square foot of apartment building doesn’t go down because the unit is larger. If you force those units to be cheaper through regulation, it’ll be offset by other units.

If you want large affordable units, you need to build them in an affordable way.

[milomilo]

Originally Posted by csbvan

Again, the problem comes down to conjecture vs numbers. Where are we constraining supply? Vancouver, the canary in the coal mine of Canada's housing crisis, is outbuilding new residents by a big margin on a purely unit to resident basis. It's just conjecture to talk about regulation as the main cause, ripped from a UDI talking point while never engaging with the data.

We have an investor demand problem and a lack of the right type of supply problem. The data is currently proving that out. I'd argue more regulation is needed. Regulate the ratios of apartments. Regulate developers to build more affordable family-sized apartments if they want their tower. Currently, every 3 bedroom is a luxury penthouse.

Source for Vancouver building more units than population growth? I don't see any evidence for the claim, but if it is true then it is the start of the process for price declines, but it will take time. If it took 20 years of undersupply to create the current shortage, it'll probably take a similarly long time of overbuilding to make things affordable again, if that's even possible.

More regulation is the opposite of what is needed. That just reduces supply.

[csbvan]

Originally Posted by milomilo

Source for Vancouver building more units than population growth? I don't see any evidence for the claim, but if it is true then it is the start of the process for price declines, but it will take time. If it took 20 years of undersupply to create the current shortage, it'll probably take a similarly long time of overbuilding to make things affordable again, if that's even possible.

More regulation is the opposite of what is needed. That just reduces supply.

CMHC and Statscan.

For reference:
https://www03.cmhc-schl.gc.ca/hmip-pimh/...&DisplayAs=Table&GeograghyName=Vancouver
https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710013501

[milomilo]

Originally Posted by csbvan

Stop saying "supply" unless you're coming to the table with numbers to debate.

To be perfectly honest, while numbers give some evidence, they are not necessary. If you want to make the extraordinary claim that the Vancouver housing market is different to every other market ever where increasing supply decreases prices, you better be a Nobel prize winner.

The only number that matters speaks for itself - prices are rising. If it's a bubble, then it will fix itself.

[csbvan]

And there we go. No basic facts. Disengagement with data. Straw man. Hyperbole.

See ya!

[Innsertnamehere]

Originally Posted by csbvan

And there we go. No basic facts. Disengagement with data. Straw man. Hyperbole.

See ya!

I just used those exact sources to illustrate the shortage.

[milomilo]

Originally Posted by csbvan

And there we go. No basic facts. Disengagement with data. Straw man. Hyperbole.

See ya!

So you think you can create a new fundamental observation of economics contrary to everything we've observed, and we should just believe you?

So the numbers you posted appear to show the opposite of what you claim, so thanks for proving our point. Vancouver is growing by about 38K per year, and building less than 30K dwellings, according to your numbers. Show your work.

[milomilo]

Originally Posted by Innsertnamehere

I just used those exact sources to illustrate the shortage.

He was probably responding to me but yes, the sources cited appear to prove the opposite of what is claimed.

Average population growth of Vancouver over last 5 years = 38,750/year

Housing starts:

2016 - 27,914
2017 - 26,204
2018 - 23,404
2019 - 28,141
2020 - 22,371

Of course more than one person lives in a house, but it would appear that Vancouver is at best keeping up.

[urbandreamer]

Ban foreign ownership of real estate.

[milomilo]

Originally Posted by urbandreamer

Ban foreign ownership of real estate.

I'm open to it, just to rule it out as the cause and dampen demand slightly. We certainly shouldn't want foreign investment as a form of demand, but I doubt it'll move the needle much.

[hipster duck]

Originally Posted by Innsertnamehere

Investment is pouring into real estate because supply is constricted, creating room for outsized profits as prices are bid up.

Investment chases profits, and an under supplied market is where profits are.

What typically happens is as investment pours into under supplied goods, supply increases, and prices equalize as the market “matures”.

The problem with housing is that there are artificial restrictions on supply, making the market very inelastic. Which means that investment pouring in isn’t achieving the typical market response of increasing by supply to meet demand.

To add even more nuance, there are multiple sub-markets for homes within a metropolitan region, all of which have different supply and demand characteristics.

In Toronto, Vancouver and most global cities with a desirable core, there's at least 3 separate and major submarkets:

1. Inner city, walkable small units for people who don't care about space (condos/apartments) - somewhat supply elastic
2. Inner city, walkable large units for people who care about space (detached and semi-detached homes in walkable areas) - perfectly supply inelastic. The number of detached and semi-detached homes in pre-war neighbourhoods is only going to stay the same or go down over time.
3. Suburban large units (subdivisions) - somewhat supply elastic

Number 2, of course, sees the highest property appreciation.

Some places have only one submarket that's relatively elastic. A city like Phoenix has basically no restrictions on outward growth, has no core desirability, and most jobs and services are scattered around the metro and connected with an ever-growing highway infrastructure. A new subdivision on the outskirts isn't less desirable than a subdivision built closer in 30 years ago, since there's no "centre" to be close to.

I'm not a Randall O'Toole or Wendell Cox acolyte, but that's pretty much the only recipe for building your way out of escalating housing prices.

Cities that have desirable walkable inner cities can only put a clamp on housing price appreciation if they cease to grow, or decouple housing from assets/investments. By default, their inner cities will be more valuable than their outer suburbs, and as the city grows outward, the inner city gets more valuable.

[CanSpice]

Originally Posted by Innsertnamehere

If you want large affordable units, you need to build them in an affordable way.

You'd need to change a lot of the structural requirements to get truly affordable housing. If you had a non-profit development, you could offer a three-bedroom unit in a wood frame building for $2000 per month rent if you:

1. got the land for free
2. eliminated parking requirements
3. eliminated municipal development fees (DCLs and CACs)
4. received government-backed funding to lower the lending rate

What do you think the odds of all four of those happening are in Vancouver?

[source: https://www.policynote.ca/build-non-profit/]

[someone123]

Originally Posted by milomilo

Of course more than one person lives in a house, but it would appear that Vancouver is at best keeping up.

A lot of the new units being constructed are much smaller than the older units and are not very suitable for more than 2 people (i.e. 400-700 square foot condos probably more common than 2,000-3,000 square foot houses). I wonder what the historical statistics would look like if new square feet of residential were plotted per year going back to the 1950's.

I am not sure if household sizes continue to shrink or if that has changed but for a while it was another reason why demand was higher than population growth alone suggested.

For what it's worth I think the problem of poor and declining housing affordability exists due to many factors, including limited/inappropriate supply and high demand due to immigration, credit, and speculation/investment. I think a plausible fix would mainly be a mix of zoning changes, good quality affordable multi-unit construction (rental or co-ops, rent-to-own that don't allow for investor buyers, etc.), and maybe a different tax structure that doesn't favour housing so heavily (with this one being much harder than the first 2). I don't think the ultra low interest rates and credit bubble will be dealt with internally by Canadian regulators. This combo is part of why people focus on supply.

I don't think that inner city detached houses will be affordable in Vancouver or Toronto in the foreseeable future but I do think a big part of the current prices is due to a mix of high credit supply and bubbliness.