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The Progressive Economics Forum

BC’s Urban Housing (Un)affordability

A new study published today by the Frontier Institute for Public Policy finds that Vancouver has the most unaffordable urban housing market not just in Canada, but in all of Australia, Ireland, New Zealand, the United Kingdom and the United States.

This conclusion is based on a very simple, yet effective measure of housing affordability: the ratio of median housing prices to the median household income in each municipality (housing market). This price-to-income ratio measures how many years the median family (the one in the middle of the income distribution, where half of all families earn more and half earn less) would need to work to earn as much as the median house costs. Typically, a housing market is considered affordable if 3 (or fewer) years of household income is sufficient to purchase a home in the area.

In Vancouver, however, the median housing price$540,900 – is equivalent to 9 years and 4 months of the median household income of $58,200 (both are measured in the third quarter of 2009). Wow, just wow.

The rest of BC’s urban areas aren’t doing much better: 4 of the 5 least affordable housing markets in Canada were in BC. In order of lowest affordability, these are Vancouver, Victoria, Abbotsford and Kelowna. The next least affordable housing in Canada is in Toronto.

If you’re curious, the 5 affordable urban housing markets in Canada are Thunder Bay, Windsor, Moncton, Saguenay and Saint John, NB.

What can we do about the rising unaffordability of housing in BC?

First off, we need our policy-makers to recognize that housing affordability is a serious problem and begin to monitor it regularly so they can measure their progress in addressing it (targets and timelines, anyone?). Here’s where I agree with the assessment of the folks at the FIPP that in Canada

housing affordability has received little or no political attention, even in the bubble markets where booms escalated housing prices to unprecedented heights.

It’s time for this to change.

What kind of policy reforms should we be looking at? The folks at the Frontier Institute for Public Policy recommend a market approach of relaxing zoning regulations and getting rid of agricultural land reserves, which they argue will reduce the price of land and thus the price of housing. Increase supply to lower prices – a standard textbook economics solution, but in this case it’s not going to work.

No matter how far you take it, eventually there are hard limits to low-density sprawl. We’ve got only so much land to fill with single family homes before we run out. Paving over agricultural land may postpone the problem for a few more years, but it’s not a long term solution. Moreover, as we prepare to face climate change and peak oil, encouraging urban sprawl may well do more harm than good. And if our world is about to get a lot smaller, paving over agricultural land would soon prove to be short-sighted.

It seems to me that we’ve left the invisible hand work its magic in the housing market long enough by now to know what it is good and bad at. It does an excellent job of providing luxurious condos with ocean views to the highest bidder (and we don’t lack millionaires in BC), but it fails miserably at providing affordable housing to the hundreds of working families. And I’m not just talking about the poor or near poor here – whose situation is dire – but about families with two earners with decent middle class jobs who are finding it more and more difficult to afford a home in the city. It’s time for governments at all levels to intervene in the market and ensure that a share of the new homes build are priced so that they are affordable for middle income families.

And since affordability is not just about housing prices, but about household incomes as well, I’d like to see some action on the income front. A couple of decades of making our labour market more “flexible” have resulted in stagnating earnings at the middle, and falling real (inflation-adjusted) earnings for families in the lower end of the income ladder. We need to address the rising income inequality and increase the economic security of the poor and modest income households. This can be done both through strengthening labour law and through re-distribution via the tax system.

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Comments

Comment from Chrystal Ocean
Time: January 25, 2010, 5:11 pm

There’s no shortage of innovative design ideas for making housing on the cheap. There’s no good reason for anyone in BC to be homeless or to be living in run-down residences, except current property owners’ selfish concern about property values – as if housing as an investment takes priority over housing as HOMES. Here’s a great example of such conflict.

All municipalities must relax property laws to allow smaller lot and house sizes, and the use of new or different housing materials and techniques.

The solutions are out there. The political will, aided and abetted by municipal laws that encourage or emulate NIMBYism, isn’t.

Comment from gabriel sinduda
Time: January 25, 2010, 6:13 pm

The solution is simple. (Okay, not really simple, but it’s doable…) A MASS RENTERS STRIKE for starters. With participating numbers so great that it confounds the system so far as evictions go. Together with an all-out campaign to establish new regulations that limit the purchase, ownership, and transfer of “real estate” as well as new legislation and licensing for “landlords”.

We need to revisit the new norm of “real estate” as investment and return to the essence of houses and other properties as HOMES for PEOPLE.

Comment from gabriel sinduda
Time: January 25, 2010, 6:14 pm

When interest rates go up in June, and the housing bubble officially BURSTS…the time will be ripe for ACTION…

Comment from Declan
Time: January 25, 2010, 10:53 pm

“housing affordability has received little or no political attention”

That’s ridiculous – politicians have been doing everything in their power to support housing prices. The federal government has taken on hundreds of billions of dollars in mortgages to support demand for housing just in the last couple of years alone.

There is widespread agreement in this country that the more unaffordable housing is, the better.

Comment from Andrew Jackson
Time: January 26, 2010, 3:29 am

Nice post Iglika. My preferred policy solution is to subsidize mixed income co op housing which has a proven track record of building inclusive communities along with affordable housing. Ironically, some of the best examples are to be found in Vancouver, the legacy of an earlier era. Leaving it all to the market has huge costs on a number of fronts – see the small book Home Truths: Why the Housing System Matters to all Canadian which I wrote for the CCPA and the Canadian Housing and Renewal Association in 2004.

Comment from Travis
Time: January 26, 2010, 7:47 am

Hey I saw beautiful petite fixer-upper for 680, 000 with a collapsed garage on 25th and Main when I was out for Xmas. I assure you it was a bargain!

Welcome to *locust* land.

Comment from Travis
Time: January 26, 2010, 7:47 am

Hey I saw beautiful petite fixer-upper for 680, 000 with a collapsed garage on 26th and Main when I was out for Xmas. I assure you it was a bargain!

Welcome to *locust* land.

Comment from Iglika Ivanova
Time: January 26, 2010, 11:33 am

Interestingly, the same day that this report came out, the Vancouver newspapers also covered the unveiling of an innovative solution to the lack of affordable rentals in the downtown core. The said innovation is 270 square feet *micro lofts* that would rent for about $750 per month. Wow, what a deal!

You can read more here.

Comment from David
Time: January 26, 2010, 11:04 pm

I grew up in Vancouver, and having moved away for school I’m not sure I can ever afford to move back when I decide to settle down. So I appreciate that housing affordability is a big issue.

But getting the government to “intervene in the market and ensure that a share of the new homes build are priced so that they are affordable” will only make the problem worse. As you mentioned, we’ve got a case where demand is really high and supply is not. Lowering housing prices through government intervention will only increase demand further — more people will want to move to Vancouver if it’s more affordable.

As much as I love Vancouver, I think we should have shelters for the extremely poor, and everyone else will have to pay the big bucks if they want the mild weather, beaches and mountains. Vancouver is awesome — heavy demand is why it’s way more expensive than Windsor and Saguenay. Government subsidized housing isn’t going to lessen demand or fix the problem.

Comment from Darwin O’Connor
Time: January 27, 2010, 11:49 am

I have a theory that because housing demand is virtually infinite, because everyone wants the best house possible, housing prices rise when people have disposable income, then it is no longer disposable. This happens even if only a fraction of the population is bidding up housing prices, because that drives up the cost of everyone.

That’s why there has been little increase in the standard of living even though most families have gone from one income to two over the last few decades.

A problem that it particular to Vancouver, besides the better weather, is that fact that the downtown is on a peninsula, meaning if you want to live near downtown, there are a lot fewer options then in Toronto.

Comment from Purple Library Guy
Time: January 28, 2010, 12:51 am

The peninsula issue may be a problem, Mr. O’Connor, but prices are still ridiculously high even out in the suburbs.

David, if prices are lowered an increase in demand won’t matter much. It won’t be an increase in *effective* demand, because people simply won’t be allowed to pay the prices they might be willing to bid. The result may in effect be a rationing of supply–but that doesn’t matter much because the amount of land is the amount of land, and density is largely capped by zoning regulations rather than demand anyway. So the result won’t actually be a diminution of supply.

With something like land, allowing “supply and demand” free reign simply results in land prices appreciating to whatever the traffic will bear–and since people need shelter, in the end it means the price will be whatever lets them pay a mortgage and still feed themselves, plus a premium to account for the actions of speculators and the wealthy. But what’s the point of allowing this? Better to make some kind of decision as to how much of the economy property is allowed to take up, which doesn’t allow it to swallow up everyone’s standard of living.

Comment from David
Time: January 29, 2010, 7:18 am

I think the solution is on the supply side, which Purple Library Guy seems to get at with his comment that “density is largely capped by zoning regulations rather than demand anyway.” You can say it’s a demand problem or a supply problem, but it doesn’t really matter. The problem is that demand is pretty high and supply is not so high.

Targeting demand through lowering prices will, however, matter. When you say it doesn’t, I think you’re assuming there is a fixed number of people in Vancouver. But I’m sure if housing were half the price, you’d see way more people wanting to move there. Forcing prices down will create a huge increase in demand and make the problem worse.

Better to focus on the supply side. Relax zoning constraints. Incentives for builders. That kind of stuff.

Comment from Iglika Ivanova
Time: January 29, 2010, 11:40 am

I think that there’s plenty of room to work on the supply side that doesn’t have to involve urban sprawl or paving over the agricultural land reserve. For example, there could be incentives for builders (or regulations) to build rental housing or to make a fraction of the units in their development affordable. We can make it easier to start co-ops and develop other models of housing that can be affordable to families who live and work in Vancouver.

What’s happening instead, however, is aptly summarized by luxury condo marketer Bob Rennie (quoted in the Vancouver Sun): “Nobody wants to admit it,” he said, “but Vancouver has become a resort city where rich foreigners live a few months per year.”

“It’s a trend, whether you like it or not, the Olympics is likely to accelerate.”

Comment from Brandon
Time: January 31, 2010, 3:24 pm

When the central bank starts to raise rates from historic lows, BC prices will gradually decline, however I will experience the fallout from the cheap funds provided from various sources. David makes a good point, others make good points too. Our central bank is going too at some point tighten, housing prices will gradually & eventuall collaspe. The reason mortgages became popular since we have had them for so long like the fall in savings rates attributed to a steady decline in interest rates.

Where in my lifetime and my grandmother to 1% rates, if rates have finally bottomed and rise in june with further increases years ahead we in BC will see the adverse affect of interest rates that simply got too low

A Canadian, can never work to save 5% – 20% of their earnings for retirement to accumulate interest in a non speculative way because of a government regulated banking industry, not just anyone can open a bank.

If you want less of something you can always tax it no regulation required another option.

Comment from Doug
Time: February 4, 2010, 1:58 pm

The problem with affordability is the government has intervened for many years with CMHC insured mortgages and made it possible for anyone to purchase a house no matter how unaffordable. Without this insurance the banks would have taken on all the risk. They would not have been so quick to grant mortgages to first time buyers, greater down payments would have been required, resulting in fewer people qualifying for loans, fewer buyers, and lower prices in a range the bankers would feel comfortable.

Comment from Sally
Time: July 28, 2010, 12:16 am

July 2010. The HST has now driven up rents and property purchase (& related costs) to more insane levels in the Lower Mainland of Vancouver. Recall in the fall.

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