Michael Geller, Frances Bula and Lisa Boldt were on with Bill Good this morning discussing housing affordability in Vancouver. The thrust of the conversation seemed to be that an increase in housing supply would translate into more affordable housing.
The scent of redistribution was also in the air – variations on the concept of directing the market to provide affordable housing for a minority of citizens by increasing costs for other citizens.
Neither of these solutions will lead to more affordability. Just as you can’t redistribute your way to increased incomes you can’t redistribute your way to improved affordability. Redistribution is simply a way for government to pick winners and losers, or more precisely, a way for politicians to play favourites. Redistribution doesn’t address costs. It just changes who pays those costs.
Increasing supply makes more sense in theory. The law of supply and demand would indicate that more supply will tend to reduce prices. Local experience speaks against this, however. Over the past decade we’ve increased supply significantly. We’ve also increased density. At times demand has outstripped supply for extended periods, leading to sell/list ratios in excess of 100% and MOIs (months of inventory – a measure of demand) hovering between 1 and 3. Today we have sustained sell/lists is the 30% range and MOIs of 13+. Since the beginning of 2012 we’ve faced low sales demand and almost record inventory, but affordable housing is as far away as ever.
Why is that? It’s because supply and demand does not work in the real estate market as effectively as it does in other markets. Real estate prices are sticky on the way down because of mortgage obligations, because sellers are seldom forced to sell, and because housing is not a simple widget style commodity.
Rather than dismiss the panel out of hand (and let’s face it, dismissing someone ideas in the isolation of your car is pointless) I did a bit of digging. I follow Michael Geller on Twitter, and a few tweets confirmed that and increase of supply and redistribution were on the menu. However, a reading of Michael Geller’s report indicates that he identifies government as a problem and that affordability could be accomplished by more density/smaller units.
It’s difficult to dispute this. It’s common knowledge that increased government regulation and fees add to building costs. Comically, the building industry is suggesting that an ombudsman be appointed to resolve conflicts that arise when builders and developers try to reconcile apparently mutually exclusive requirements of competing branches of the same government (there’s an easier solution – require government to make its mind up and shrink itself).
It’s also common knowledge (as well as a market tested practice) that housing (like any product) can be made more affordable to the consumer by selling less product at a higher per unit price. We’ve seen quality and per sq. ft. prices increase in the condo market as overall unit size has shrunk. Consumers pay less for less, and affordability is thereby accomplished.
I believe that those two routes – less active government intrusion and increased density – are the way to accomplish affordability. Geller’s report makes several good suggestions in this regard. Their implementation requires government to back off a bit, which is a challenge for any bureaucracy, but they’ll also require overcoming NIMBYism. It won’t be easy, but it could work.
Redistribution is just wrong and won’t work. There is no reason why I should subsidize someone’s rent or mortgage payment so that Starbucks or McDonalds can keep wages low. Further, the market typically rewards subsidization by increasing prices. Give welfare recipients a bigger housing allowance and rents at the bottom of the market go up. Requiring a developer to subsidize low income earners by providing designated low rent units in market develops simply results in purchasers paying more for their housing.
Like it or not, we live in a market economy. Market solutions hold the most promise for affordability. Government should restrict itself to incentivizing affordability through permits, zoning and taxation while respecting property rights of all citizens.