Does Vancouver need more luxury condos? New York Economist Sandy Ikeda argues we just might but not for the reasons you think. He joins Adam & Matt to discuss the concept of “filtering” (and no, we are not talking about your Instagram posts, although there is no question you look better in Valencia). Find out why calls for “the right types of housing” may actually limit supply, create more buying competition for average Vancouverites, and ultimately backfire.
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Tell us about yourself:
I’m a Professor of Economics at Purchase College in New York as well as a research associate at New York University. I sit on the board of a number of urban and economic institutes and centers. My current research is on cities, social cooperation and economic/entrepreneurial development. I’m also writing a book on Jane Jacobs, the famous urbanist.
Breaking down Sandy’s article, “How the housing market works.”
There are similar problems here in New York that you have in Vancouver. We hear the argument made that only the rich can afford the new housing and that it’s too expensive to build for the poor. New anything isn’t always built for the lower income but there are new options for low income such as a Ford Fiesta instead of a Mercedes Benz.
It’s not that low income housing or products aren’t profitable – they can be profitable if you can build at a high volume. But there are restrictions on building development and supply so developers build for the ultra-rich.
As cars and homes get older and are used, they filter down to the lower income market. So even if all new housing is built for the very rich, the filtering will take place. If you restrict ultra rich housing development and force developers to build middle/lower income housing, it discourages development. Developers will take their capital elsewhere. It also shifts demand to the middle income housing market and raises prices there. The rich have options – if you restrict the upper tier of housing they will move down and compete with those of middle income. Restricting ultra rich development will make problems worse.
Costs do not determine value. The expectation of what buyers are willing to pay is what incentivizes builders – not the cost of building.
You say product over time will filter from higher income to lower income – this process takes a while, no?
Filtering is only one force. We also need to look at why luxury housing is being built. It’s a factor of restrictions on building high density homes. A developer can’t make money on moderately priced homes because the volume needed to do that isn’t permitted by local regulations. There are restrictions such as landmarking, maximum density and minimum square footage. Those all make it less economical for developers.
On the forces at work: developers gauging demand and regulation/restrictions on supply:
There is high demand to live in places like Vancouver and New York. Historically, supply changes to meet this demand; entrepreneurs build to the market. If the market only allows for luxury housing, then that’s what gets built. But that doesn’t happen in Phoenix or even Tokyo (which has a higher population than New York City).
The most popular areas in Tokyo are not seeing a big increase in prices compared to New York, San Francisco and Vancouver. Why is that? Lack of building restrictions. Tokyo has more liberal building/zoning codes. There are also non-economic factors at play. In Tokyo, homes are not thought of as long term investments. People tolerate more construction noise/rebuildings and like to buy new homes. The city is constantly rebuilding. This is something that might not be tolerated in North America. It’s hard to translate Tokyo’s culture to ours but we can learn something about flexibility/density to help our situation on the supply side.
We see the ultra rich using housing as a way to park money around the world – is there that same foreign demand in Tokyo?
I don’t have the exact numbers but there is definitely foreign investment in Tokyo. Part of it is pure speculation. But global cities become global cities when companies move in and require an investment in housing. A great city is one that is experimental, able to change and may disappoint. Anything else would just be boring.
Is government intervention in the housing market ever a good idea?
That’s a very broad question. When it comes to safety regulations, yes, they are there for a reason. But if we think about interventions such as promoting single family home ownership (promoted after WWII). That encouraged suburban development and infrastructure which contributes to our current problems of suburban sprawl, environmental issues and racial issues. I’m skeptical of this kind of intervention that imposes a certain vision on an urban environment.
In Vancouver have the foreign buyers tax increase; increase in property tax, a new BC speculation tax, increase property transfer tax, etc. – all policies to curb demand. Do you think these policies are misplaced or a good idea?
These are regulatory responses to a problem that might actually be caused by other regulations/restrictions. So trying to control demand may be secondary to supply side problems. If taxes can be precisely targeted, they may have the desired effect. But it’s very hard to tell why people are buying property. It’s a targeting issue and a knowledge problem.
If you tax something to discourage buying, the success of the regulation will depend on how sensitive people are to price changes. You also run the risk of black market/illegal activity. If the price is so high it’s essentially banning something, we know that prohibition causes problems. It’s a big waste of resources to clean up those problems.
What are your thoughts on speculation?
We all speculate. Land is a fixed asset so it’s more sensitive to changes in demand. So flexibility is crucial – allowing builders, sellers and buyers to adapt. For example, get rid of minimum parking requirements, be aware of the consequences of marking a heritage neighbourhood or landmarking. We need to make people aware of the costs and consequences of what they want to propose.
What is the solution to exceedingly high housing costs?
It’s largely a supply side problem in places where there is high demand. We can’t increase the amount of land so we need to increase the number of dwellings. We need to liberalize density restrictions and eliminate requirements like minimum parking and things that use land in a way that people who rent/buy don’t want. It is mainly a supply side problem. If we fixed our supply issues, we would have a case like Tokyo with housing prices rising 10-40% over the last 10-12 years instead of 400% in that same time frame like they did in New York, San Francisco and London.
Sandy’s article: https://fee.org/articles/how-the-housing-market-works/