Filtering—how markets, not national strategies, make housing affordable

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Appeared in Maclean's, November 28, 2017
Filtering—how markets, not national strategies, make housing affordable

The Trudeau government recently unveiled its new National Housing Strategy, which includes a portable “housing benefit” of $2,500 per year, on average, to low-income households and the construction or renovation of hundreds of thousands of social housing units. But while these policies will benefit specific groups of people, they do not target broader affordability issues in Canada’s most expensive housing markets.

Demand for housing in cities such as Toronto and Vancouver is strong. That demand has translated into mounting pressure to build new, often high-end condos, townhomes or other housing units. Importantly, when people move into more expensive housing they free-up their former homes for families with more modest incomes, who in turn leave their homes for others.

This process is known as “filtering,” because as homes age, they filter through various socio-economic strata until eventual renovation or replacement with new structures. For example, a recent exposé on the lifespan of several apartment buildings in Portland, Oregon reveals how they were initially marketed as luxury units, but filtered down over the decades. In short, today’s luxury units are tomorrow’s affordable housing.

However, this natural process can get held up. In markets with particularly strong demand, such as Vancouver, a slow response on the supply side means people looking to climb the property ladder can’t, with predictable consequences for everyone else on that ladder.

So what’s holding up the housing supply in Canada’s most in-demand markets?

One major driver of a lagging supply is government red tape. Homebuilders aiming to bring new units on the market must first obtain permits from city hall—a process which isn’t always straightforward. For instance, it takes an average of almost 18 months to obtain permits in Toronto, and almost two years in Vancouver.

It also costs tens of thousands of dollars, per unit, to comply with local regulations. In Toronto the approvals process costs nearly $47,000 per housing unit (on average), compared to $21,000 in Hamilton. In Vancouver, these costs and fees amount to almost $80,000 per unit, adding a significant burden to homebuilders, and ultimately homebuyers who pay higher prices, in part, due to these costs.

When stacked up, regulatory hurdles can significantly slow the housing supply. Indeed, a study published last year by the Fraser Institute measured their impact across major Canadian metropolitan areas and found that Toronto would have added more than 7,000 new units between 2006 and 2011 had its regulatory burden been more in line with the GTA average. In Vancouver, about 6,000 additional units would’ve been added over the same period. In both cases, an entire new neighbourhood’s worth of housing was caught up in red tape.

So when the Trudeau government announces it will fund the construction of 100,000 subsidized housing units nationwide over a decade, it’s important to view this in context.

For example, a recent report commissioned by the B.C. government confirmed that more than 115,000 new housing units were awaiting approval in six Metro Vancouver municipalities during the month of February. These units could help relieve the pressure in B.C.’s red-hot housing markets by allowing the filtering process to take its course. Clearly, due to their ability to allow more homes to be built, municipalities have far greater influence on housing supply than the federal or provincial governments.

As more concrete details about the National Housing Strategy trickle out, it’s important for Canadians to think about how these measures will affect the broader housing market. Without understanding the mechanism that increases affordability for the vast majority of Canadians—not just the most vulnerable—we won’t get to the root of the affordability issue in Canada’s most expensive cities.