How Weak Housing Supply Is Worsening Housing Affordability

01/03/2017 10:02 EST | Updated 01/03/2017 10:02 EST
Andrew McLachlan via Getty Images
As a result of the housing boom in the Greater Toronto Area (GTA) most of the viable farm land is disappearing to accomodate more and more subdivisions. This subdivision is located in Vaughan, Ontario, Canada.

The year 2016 came to a close with no respite from fast-rising house prices. The prospective homebuyers are perturbed by the prices they deem unaffordable. The policymakers are concerned about the potentially devastating impacts of a housing market crash.

While most agree that a lack of new housing construction is contributing to the house price inflation, the consensus on what's behind the lack of housing supply is missing. The pro-conservation groups accuse builders and developers of land hoarding and creating an artificial scarcity of new housing. The development industry puts the finger on the Places to Grow Act that it believes has restricted the supply of developable land.

The slump in new housing construction in the GTA, which is the worst observed in the past 15 years, can be addressed if one were to understand the fundamental axioms of urban economics. The land is a heterogeneous good whose fertility (profitability) varies widely over space. The provision of low productivity land in undesirable remote places does not qualify as land supply.

Thousands of acres of land in the remote corners of Hamilton will not address the house price inflation in Toronto.

What is needed instead is the provision of developable land in places where consumers would like to live and the freedom to build the type of housing consumers desire. Restricting choices of consumers for location and the type of accommodation will continue to exacerbate the new housing crunch in the GTA.

Not all land is created equal

In a recent panel discussion organized by the Canadian Association of Business Economics the ideological differences on what's behind the housing price inflation came to the surface. Some argued that the municipal authorities have already earmarked sufficient land to accommodate the expected growth and hence there was no scarcity of developable land.

The key to understanding the supply crisis in the GTA is to know that all land is not created equal. Just like the agricultural land with different yields and suitability for various cash crops, urban land also differs widely in its productivity and suitability for various types of development. Moreover, the land is heterogeneous strictly because of its location. Thousands of acres of land in the remote corners of Hamilton will not address the house price inflation in Toronto.

Moreover, a mere availability of land does not guarantee its suitability for development. It's location and zoning bylaws that often restrict the type of permissible development, and market timing determines if the land is developable for profit or otherwise. Public sector urban planners using computer cartography to demarcate developable land ignore the suitability and profitability of land for further development.

It is erroneous to assume that landowners will deliberately ignore market signals, hoard land, and not develop as some naively suggest. The leftover principle in urban land economics states that if the development of a parcel were to be profitable, a developer would purchase the land and build accordingly. It is not the hoarding of land that is preventing development, but the unsuitable location of the parcels or the type of development permitted by the public sector planners that is hindering its development.

Density is in the eye of the beholder

Another hindrance to development is the mandated high development densities. The Growth Plan stipulates greenfield development at a minimum 5,000 persons and jobs per square kilometre. The average population density in the GTA drops below 5,000 persons per sq. km. for neighbourhoods located more than 10-km from downtown Toronto.

Since most greenfield development will occur at distances greater than 10 km from downtown Toronto, an artificially high level of legislated urban density acts as a deterrent for new housing development as it forces built forms not desired by the consumers who prefer living in outer suburbs.

The worsening supply side constraints in the GTA have caught the attention of Canada Mortgage and Housing Corporation. Evan Siddall, president of CMHC, is advocating for "a more aggressive supply response." The Ontario government must act soon to stimulate residential construction in the GTA. At the very least, it should commission an impartial review to determine why the supply of new housing has faltered in the GTA and what is needed to reverse the slump.

Ignoring advice from experts and formulating policy on urban myths that defy urban economic axioms cannot be good policy for the Ontario Liberals who have to find a solution before they head to polls in 2018.

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