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Supply can’t be completely left out of the equation when it comes to housing affordability
September 22nd, 2020 8:05 pm     A+ | a-

Richard Lyall
Richard Lyall / RESCON

Note: Below is an op-ed piece that was written in response to an article by Josh Gordon, a prof at Simon Fraser University, that was in The Globe & Mail.


In his recent piece in The Globe and Mail, Simon Fraser University assistant professor Josh Gordon argues that the housing affordability crisis is not being driven by supply-side factors and regulatory hurdles. While attention is drawn to the factors driving the demand-side of the equation, the notion that we should understand the issue purely in terms of demand-side factors is a gross over-simplification of a complex issue that impacts millions of Canadians.

Home prices are not set individually by supply or demand but by the relation between the two. As population and the number of households grow, there is increasing demand in cities like Toronto and Vancouver. But if excess demand is driving prices up that suggests a lack of supply is contributing to the crisis in affordability.

Focusing only on demand-side issues leads Gordon astray in a few key ways. While rates of housing construction remain consistent, housing completion lags behind the rate at which the number of households is increasing. Furthermore, purpose-built rentals, a crucial housing form in a city of renters like Toronto, remain a shrinking proportion of Ontario’s housing stock. And housing form is indeed critical, as exemplified by the inefficient distribution of bedrooms across Ontario, discussed below.

As the graph below illustrates, increases in the number of families, caused by population growth and the shrinking of average household size, have outpaced housing completions in Ontario. In the past 15 years these dynamics have created excess demand of nearly 250,000 homes. Meanwhile, according to CMHC, construction times have been systematically increasing, delaying the delivery of housing.
                   
Graph: Housing formation rates versus household growth rates

 
Even if a recent uptick in the rate of new builds will start to reverse the trend, purpose-built rentals have progressively made up a smaller and smaller share of the housing stock. Since 1990, rental stock per capita has fallen by a third in the GTHA, and by one-eighth elsewhere in the province.

Finally, and contra Gordon, housing form and zoning are important. As the Canadian Centre for Economic Analysis (CANCEA) has shown, one in eight Ontarians are under-housed (i.e. are in households that do not have enough bedrooms). But more than half of Ontarians are over-housed (i.e. have too many bedrooms which is equivalent to 25 years’ worth of construction)—in fact, there are 400,000 homes in the province that have three or more empty bedrooms. To meet the province’s housing needs by building single-detached homes would not only be inefficient, but would exacerbate the under-utilization of existing infrastructure.

However, zoning regulations restrict the building forms possible on the limited land available in a city.  While Toronto has experienced significant demographic shifts in the past two decades, the city has failed to adapt. Nearly a third of the city’s neighbourhoods (46 of 140) have fallen in density with 220,000 fewer people since 2001.  This has taken away from the use of the valuable infrastructure that was laid to support density.  

All this is not to say that the supply narrative Gordon takes aim at is incorrect, only that the issue is complex. Ignoring either side of the equation, not to mention the different factors impacting supply and demand, is a recipe for bad policy. As CANCEA argues, shelter affordability is not simply about housing prices and when it comes to supply the question is about appropriate supply. Thus, for example, building gentle density near existing infrastructure can help improve affordability while avoiding over-housing.

Based on the provincial government’s population growth projections, Ontario will need an additional 2.3 million homes by 2046. Taking measures to decrease demand pressures due to speculation and foreign investment can certainly help us address this need. But increasing appropriate supply can also help us address increased demand from population growth and shrinking households.

When it comes to increasing supply, we must be creative in our approach if we hope to remedy our affordability crisis. New regulations for short-term rentals in Toronto promise to bring many “new” homes into the market—taxes on empty houses and condos could do the same. The recently proposed conversion of unused buildings and office space into permanent housing would also be a boon, as would zoning changes to allow single-family homes to be converted into multiple units. And new builds also have a vital role to play, not only in generating much-needed housing supply but in helping to fuel the post-pandemic economic recovery in Ontario and nation-wide.

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