Housing Supply and Markets

In my last post we looked at the context of the housing crisis. For the next few posts we’ll look at elements of the problem — because there are many angles to it. Today we’ll look at housing supply.

Economics 101

One of the most fundamental notions of economics is the relationship between supply and demand. If there’s a lot of something, and nobody really wants it, it won’t be worth much; if something is both rare and popular, it will be worth a lot.

In real estate terms, we sometimes refer to a “buyer’s market” or a “seller’s market.” In a seller’s market, there are very few listings and lots of buyers competing for them; housing is rare, and demand is high. Sellers who have multiple offers can often receive offers that go well above their asking price, as buyers compete to make sure they don’t miss out. At the height of the pandemic, it was a record-setting seller’s market; I once represented some buyers who were competing against 35 other offers, on an old bungalow in Trenton. It went for hundreds of thousands of dollars over asking. Now, the market has shifted to be a buyer’s market; there are a lot more homes on the market, and not that many people looking. Prices are still high and interest rates have risen significantly, making it just as expensive as ever to buy a home even without the intensely competitive market of a few years ago, so not many people are looking. That means that buyers can get away with low-ball offers more often, and homes take longer to sell, having an overall cooling effect on the market.

This is one of the largest factors that affects how expensive something is. It also tends to drive commodities markets; and when real estate is as profitable as it has been lately, homes become increasingly treated as commodities. Real estate investment has been booming: from major corporations to first-time investors, people are cashing in on housing.

Imagine you bought your home ten years ago for $200,000. Let’s say you paid off $50k over that time, so you still owe $150k. But because of the increase in market rates for housing, your home is now worth $600k. You could then go to your bank and get a new mortgage to access another $300k to put a down payment on a $450k home and give it some light renovations. The rental rate is high enough (because rental housing is also rare and therefore expensive) to more than cover your mortgage; now this property is paying for itself, and paying you a dividend. Over time, especially if the market continues to rise, you’ll be able to leverage your new property to buy another one. And so on. Smart finances, but when it happens at a large scale it can further drive up rents, even as it makes houses available for home ownership even more scarce as properties are converted into rentals.

In the condo market in Toronto, this kind of investment in housing as a commodity leads to investors buying condo pre-sales — that is, condo units that haven’t been built yet — and often selling them again before the unit has even been built because the market has risen. Sometimes a condo has been sold multiple times before anyone lives in it, with every seller making a profit, and even then it is not owned by the person who lives there. Condos were designed to be an affordable way to own a home; now they’re largely just another expensive rental. This is what happens when the free market determines the price of housing.

There’s Supply, and then there’s Supply

The supply of housing, or the number of housing units for sale, is obviously a major driver of the price. This is why the provincial PC government has focused their messaging and policies about housing on that concept. They want to turn a seller’s market into a buyer’s market by building so many new homes that they will no longer be scarce. That will work in the long term, but their approach largely ignores the complexity of the issue, starting with the fact that not all housing units are made equal.

They’re focused on houses. They give speeches about “the dream of home ownership,” and paint a verbal picture of the white picket fence ideal of the 1950s that ignores the huge variety that should be available in the housing market today. Their policies focus on streamlining municipal approvals of new housing developments (we’ll talk about that in another post), but they don’t specify what kind of development. The reality is that most of North America has been building subdivisions of single-family detached houses since the 50’s, in a style that we now call sprawl, which is the most expensive way to live (we’ll talk more about that in another post too!). They have a negative view of condos because of how unaffordable they’ve become, but they aren’t critical of the market that makes them unaffordable.

They have discussed the “missing middle” — medium-density housing in the form of semi-detached and town houses, which they refer to as “gentle density,” but this type of housing is barely more dense than single-family detached homes, and just as car-dependent. By fiat, the province has therefore determined that up to three housing units can be built in any residential zone. While that’s some progress, housing advocates will point out that a single apartment building can hold more housing units than an entire block of semi-detached homes with basement suites and laneway houses. The province continues to insist that more land is needed for housing (despite municipalities disagreeing, with reports to prove it), a view that led to the disastrous attempt to reopen the Greenbelt for development (thankfully now reversed). So long as there’s cheap land for building housing, developers will not bother to take on the extra investment and risk of building true density.

So what is needed is not just a diverse housing supply in terms of having detached, semi-detached, townhouse, duplex, quadruplex, six-plex, small apartment buildings, large apartment buildings, auxiliary dwellings (ie., basement suites and laneway housing), and tiny homes; but also a diverse housing supply in terms of ownership models, including ownership and rental, but also condominium and co-operative; converted rental, but also and preferably purpose-built rental and non-market rental (i.e., subsidized housing). It will take far longer to house people if we continue to depend upon the 1950’s picket fence; we have better options.

Misallocated Supply

The other side of the issue of supply is that we don’t actually need as many new units as we think. What we need is a better way of allocating housing than the market currently provides.

Consider small-town Ontario, where there are five-bedroom century homes and two-bedroom modern homes. They both take up the same amount of space, in the sense that their lot sizes are about the same. But often the century home is occupied by a senior citizen or two who have been there for decades; their children are gone, but they can’t afford to downsize even if they wanted to, as new homes are too expensive for them, or perhaps they need the care of a retirement home and there are no spaces available. Meanwhile, new homes in the area are nearly as large, but built for people in the same stage of life: people retiring to the country, who only need two bedrooms. There are enough of them that builders can plan on major demand for that kind of home for decades; there’s no market incentive to build homes for families, much less apartment buildings for low-income folks. Builders who do so are following their conscience, not the market.

But when families need a home, they aren’t able to get that old five-bedroom. It’s common to find families squeezing into whatever housing they can afford, and sometimes to find multiple families squeezed into a larger house in order to be able to afford it, at the same time that there are many homes with empty bedrooms and no plans to fill them. A 2017 report indicates that there are 2.2 million empty bedrooms in Toronto. And that’s just looking at homes with more space than people need; a 2022 report shows that there are 92,000 homes in Toronto that are not permanently occupied. Many of those homes are secondary or tertiary homes for people who live elsewhere most of the time; many others are short-term rentals, which are so common now that municipalities regulate them by their density, only allowing so many per neighbourhood to prevent “ghost neighbourhoods” from forming — places where most homes are only occupied a few nights at a time.

All of that to say that supply is a critical factor, but piling on more and more single-family homes not only won’t solve the problem quickly or effectively, it will also cause a lot of other problems. And it’s to those that we’ll look next.

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