Recent provincial and federal policies that target demand might be overlooking one of the biggest contributors to increased house prices: local government. C.D. Howe Institute’s Benjamin Dachis joins Adam & Matt to discuss his startling new research on just how much governments cost homebuyers across Canada. Spoiler Alert: Vancouver does not fare well.
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Episode Summary
About Ben:
Ben, Associate Director, Research at the C.D. Howe Institute, is one of very few dedicated urban economists. He holds a regional science degree from London School of Economics. Only a few universities offer a specialization in urban economics and real estate. Ben’s program is so specialized that he was one of only two people in it, and the program was cancelled the following year due to lack of interest. All Ben’s professors were focused on the economic cost of zoning regulations in the UK.
Vancouver and Toronto have not seen anything yet—the UK regulations are full-on bonkers. This is what inspired Ben when he came back to Canada. He’s been looking into the topic since he started at the Institute, just over 10 years ago. He finally got the right data, which had been the main barrier to his project.
On the study he co-authored, Through the Roof: The High Cost of Barriers to Building New Housing in Canadian Municipalities:
The important part for Vancouver is the first part. The basic premise is no matter what economic product or market you’re talking about – paper, computer screens, or housing – a basic, universal economic law lies: in a competitive market without restrictions to entry, in which anyone can provide what people are willing to pay for, over the long-term the cost consumers pay equals about what it costs to produce it (marginal cost). This includes things like labour and construction costs – a basic rate of return on capital (meaning, if a business is very profitable, other companies will come in and start under-selling, under-pricing, and eating up their competitor’s market). This also includes the cost of servicing land (e.g. pipes). This is what the cost of a new house should be to consumers. When there are gigantic gaps between what it costs and what people pay, economists see it as a market failure. There are restrictions on supply and on entry.
On if Vancouver’s geographic restrictions (i.e. mountains, ocean, border) is not as large a driving force of real estate prices as is commonly perceived:
No. If you look at a place like Abbotsford, there is a large amount of land in the area but the question is about access to that land. The restrictions or barrier costs are just as high as in Vancouver. With more difficult to construct areas (e.g. mountainous, infill, and land remediation), you’re seeing the [high] cost of construction where lots of time is spent to make the land ready for housing. This means the cost of construction should go up, so there isn’t a major gap between it and housing prices. When there are barriers to construction, you see the price gap.
On whether with measures like the ALR (Agricultural Land Reserve) we’re forcing land remediation, and building costs are therefore going up:
Partly. In and of themselves, high construction costs aren’t a problem. Edmonton has the highest cost of construction per square foot because of the competition for construction workers going up to the Fort McMurray area. However, the price to consumers per square foot is about what it costs to build—there aren’t any serious barriers to construction; it’s because of the market conditions, which the government can’t do much about. Same thing with infill land. The ALR absolutely influences prices. They don’t have a definitive number, but restrictions on land use is a major driver of housing.
Ben’s paper suggests that government regulation is a huge driving force in the cost of housing, and that cost of housing restrictions in Vancouver lead to about $640,000 in overrun costs for the average new construction, single-family home.
On the types of restrictions he’s referring to:
The $640,000 is the overall cost of all possible barriers, from the ALR, to development fees and cost levies, community amenity contributions, and delays in the zoning approval process. They all contribute to the gap between the cost of construction and what people pay for housing. They are not able to break out the exact causes in Vancouver because the detailed data isn’t available, as it is in Ontario (for which policies can be compared by city and year to see their effect on housing prices).
On the key regulations in Ontario:
- Development cost levies: Development cost levies are much higher in the GTA than in Vancouver (in some Ontario cities they are close to $100,000 per single-family home, which is huge). The largest single component is for water and wastewater construction. However, it doesn’t make much sense to finance this all up front. This is not how we buy homes; we have mortgages instead, so the cost is spread out over many years, just as how we get electricity and other utilities to our homes (the cost to build the infrastructure is embedded into the monthly bill). In Ontario, the cost levy is basically a debt transfer from the cities to households. It’s a much smarter way to finance the infrastructure by charging for it as it gets used.
- Zoning restrictions: They could see what share of zoning applications are approved quickly, instead of going through a lengthy review. As the lengthy reviews increase, housing prices go up. Toronto has one of the highest rates requiring a lengthy zoning review.
- Restrictions on greenfield land use: In Ontario, there is a big debate about the green belt (similar to the ALR). There is also the growth plan, which greatly restricts the ability of cities to approve housing applications for areas between the existing urban growth boundary (where the last house sits) to the green belt or ALR-equivalent land. There is a lot of this type of land, but government has made it almost impossible to access. The cities zone it for agriculture, but it doesn’t make sense when a lot of residential wants to be on this land and a lengthy review process is required for re-zoning.
On how the higher number is arrived at in Vancouver:
The data isn’t available for BC. They are two totally different methodologies, so the overall $640,000 is all of the costs combined. In Ontario – particularly the suburban GTA and Toronto – some cities could see a reduction in pricing by $100,000 or more in single-family homes if they just went down to the provincial average. BC can learn lessons from this, but they don’t have detailed data on development charges or zoning restrictions that’s required.
On why demand has been the focus in Vancouver and Ontario, despite the problem being more about supply and the regulatory framework governing it:
Demand is absolutely increasing in Vancouver; that’s obvious. You only see a substantial increase in housing prices if there isn’t a commensurate increase in supply. This is because you’ll see more developers building more infill housing and more housing on harder to develop lots. In the long term, as this happens prices go up, but only as much as the cost of building goes up. When there is a substantial increase, this is when supply isn’t nearly matching demand. You can have all the demand increase you want, as long as the market is open enough to provide supply to meet demand.
On what cities like Vancouver and Toronto can do to increase supply:
For cities without much land, they can re-zone for slightly higher density. There is a mythical perception of Vancouver that’s all condos, but south of the West End there is tons of broad, open, under-utilized land that can be re-zoned for infill development. Zoning restrictions make this difficult. Even things like laneway housing or gentler increases in density are way too hard to do in Vancouver and Toronto. There is a very high cost to simple zoning.
On how we got here, and what a healthy, functioning municipality looks like:
The politics of restricting zoning supply and increasing costs on new housing are incredibly toxic, and it’s very easy for politicians to fall into this trap. If you’re a councillor or mayor, your voters own homes and have every incentive to want prices to increase. Any new building in their area will dramatically impact the value of their main asset. So, local politicians support development restrictions. In suburban municipalities, you see the “crack cocaine” of development charges for municipal finances. This is a strong incentive to keep tax on existing residences down, and levy charges on those who have not even moved into the area (so those people can’t vote for them). It’s a toxic incentive to keep housing costs high.
On how this plays out for the average consumer:
Whether you’re buying or renting, you will pay a lot more than you need to. In a competitive market you should be paying what it costs to build. Think about the inequality effect: people in poorer areas like Windsor or Niagara, places that have been devastated by recession, who want to come to Vancouver or Toronto for better paying jobs, will be left out, along with their children. Places like San Francisco have been great for social mobility, but that channel is being blocked by high housing prices.
To learn more about Ben and his study, visit https://www.cdhowe.org/