Has Policy Created the Housing Shortage?

Chris Castro

The law of supply and demand is strongly recognizable in the housing market, far more visible compared to most markets. Supply refers to the development of houses and the total amount of units available for buyers, whereas demand depends on the household that will live there – such as, their requirements and their annual income. In theory, a high demand can fuel higher supply, but this is not always the case.

With a high demand and lack of supply, the price of housing can rise exponentially – which in turn decreases the overall affordability of a home. A report by the Canada Housing and Mortgage Corporation found the biggest discrepancies between housing supply and demand exist in Toronto and Vancouver, some of the country’s biggest cities.

The lack of affordability has been attributed to a number of different factors, including strict development regulations, foreign investors, high taxation and mortgage rates. All of these play roles in the increasing prices of homes. However, it’s not a single element, but a combination of these that have resulted in high pricing, with past and existing policies playing a role in creating the current housing market. Ensuring that housing supply matches up to existing demand depends heavily on policy and planning. More housing ultimately means more densification, more urban sprawl and more negative environmental impact – all of which are key factors to be taken into account when developing policy.

In Toronto, the focus has been on developing condos, which provide homes for multiple families and while having a low footprint, which puts less burden on the limited space in the city and on the environment. While government policy has been to restrict urban sprawl and envision a Greater Toronto Area that effectively utilizes available space in a sustainable way, the housing market has not followed suit.

Data from the Toronto Real Estate Board shows that demand for single-detached homes is higher, and rising faster, than the demand for condominiums. In the third quarter of 2018, single detached home sales increased by 14.1%, while condominium apartments rose by 1.7%, compared to last year. A growth plan that focuses on high-density dwellings such as condos ultimately results in limited supply which drives prices higher, impacting affordability. A strong demand for detached homes still exists, and not catering to demands can create an imbalance.

According to Statistics Canada, the population of the Toronto Census Metropolitan Area (which does not include a significant part of the GTA) increased by 1.2 million people between 2001 and 2016. In Canada, specifically in the GTA, the number of people needing an affordable housing option is only expected to rise. Therefore, our policies need to be focused on addressing the supply side of the equation.

A better approach to increasing affordability would be to integrate the type of demand into policy making, or to design policies that can effectively adapt the type of demand into what the government has planned. Using Toronto as an example, a focus on developing low footprint, multi-family units in urban areas while there is still a high demand for larger footprint, single-family homes in the suburbs, is neither achieving the policy’s intended objectives of controlling urban sprawl nor addressing the issue of affordability.

As housing demand in the GTA and most of Canada continues to increase, current policies based on controlling low-density, urban growth are not proving to be effective. By using policy that addresses both the demand and supply sides of the housing equation, the existing gap between the type of housing demand and the type of development encouraged by government policies, can be bridged.

By: Rahemeen Ahmed