Housing: The back door wealth transfer

Dan Osborne
March 16, 2014
Canada’s Housing Market has been called the world’s most overpriced. Dan Osborne argues that the boom in house prices amounts to a massive intergenerational wealth transfer that is killing fertility in the millennial generation.

Housing: The back door wealth transfer

Dan Osborne
March 16, 2014
Canada’s Housing Market has been called the world’s most overpriced. Dan Osborne argues that the boom in house prices amounts to a massive intergenerational wealth transfer that is killing fertility in the millennial generation.
Share on facebook
Share on Facebook
Share on twitter
Share on Twitter

 

Can you imagine a $400,000, 400 sq. foot condo being your entry-level home? That is the reality young Canadians face in what The Economist calls the world’s “most overvalued housing market.” Many Canadian Millennials are left asking themselves why they should leave their parents’ basements and why they should purchase a home and start a family. For the first time in Canadian history, young Canadians will not be able to afford a house unless they are very fortunate.

The situation is at odds with Canadian tradition. Canada has always been a vast, young and forward-looking country. Whether it was building a farmhouse in the Last Best West 100 years ago or building a suburban ranch home on the edge of one of our major cities 50 years ago, Canadians have always looked upon development favourably. Despite the inhospitable climate, Canadian homes were among the most affordable in the world. Until about 15 years ago, that is.

Housing is now judged “seriously unaffordable” in Canada’s largest urban areas, such as Toronto, Vancouver, Montreal and Calgary, according to housing analyst Wendell Cox. The average home price stands at $391,000 and is expected to reach $500,000 by the end of the decade, a level that will be unaffordable for even many upper middle-class Canadians.

What has changed? Ten years ago, only two Canadian markets were considered unaffordable – Vancouver and Toronto. Today, all but the smallest and most economically dysfunctional metropolitan areas are considered either “moderately” or “seriously unaffordable.”

The fact of the matter is that the cost of building a new home is not substantially different anywhere in Canada. Carpenters might make a few dollars an hour more in Toronto or Calgary than they do in Moncton or Winnipeg, but the actual difference to the price of a new home is negligible. Those costs have not substantially increased in the past decade. Low interest rates cannot be blamed; they are available everywhere in Canada. Demand is not a substantial reason either; there are economically dynamic regions that are affordable as well as unaffordable. Economically dynamic metropolitan areas like Edmonton have remained affordable whereas less competitive regions like Montreal have become fairly unaffordable.

This really leaves only one reason: land-use regulation.

Consider the case of Ontario, and particularly the Greater Toronto Area (GTA), over the past decade. Following up on a 2003 campaign promise, Ontario’s Liberal government passed legislation in 2005 to limit urban sprawl with new provincial planning policies, and it put a Greenbelt around the fast-growing GTA. This policy required all municipalities to enact the province’s planning policies of constraining growth, even in rural and Northern Ontario. Ontario’s Greenbelt Act restricted 1.8 million acres of prime, developable land surrounding the GTA and the Golden Horseshoe to its current use, making it illegal to develop or redevelop it.

Since Ontario’s government enacted these pieces of legislation and tightened development throughout the province, Ontarians have seen a dramatic decrease in housing affordability. Following the reforms of 2005, Toronto has become a “seriously unaffordable housing market” according to housing policy experts. The area’s median multiple, a common measure of housing affordability, has increased from between 2 and 3 to 5.9. Other previously affordable Ontario cities such as Hamilton and Ottawa have seen similar increases in the same time span.

As other Canadian provinces and cities have tightened their planning and land-use policies, they have seen similar increases in housing unaffordability. As Québec strengthened its agricultural land reserves in the past decades, prices in Montreal have dramatically increased. Calgary has seen a similar run up in prices as the city has made new outward development more difficult. The Lower Mainland of British Columbia, which has had an agricultural land reserve and strict zoning laws since the early 1970s, has been unaffordable since that time. Vancouver has recently been ranked as the second-least affordable housing market in the world behind only Hong Kong.

Consistent economic research shows that the anecdotes about land-use regulation are true; it is the reason for increased Canadian home prices. Since there is little difference in the actual cost of constructing a home in different areas, a lack of a supply of land is the only reason economists can find for the difference in home prices between metropolitan areas. Moreover, in a country as vast as Canada, that supply is artificially, not naturally, constrained.

Just how much of an effect do these artificial constraints have? In a noted study looking at the Boston metropolitan area, Harvard economist Ed Glaeser found that land-use regulations drove up the cost of housing approximately 60 per cent – similar to the increase in Toronto’s median multiple since more restrictive land-use policies were put in place – or about $160,000, enough to buy a home in some U.S. housing markets at the time. Even economists on the other side of the political spectrum concur. Nobel Prize-winning economist Paul Krugman agrees with the assertion that restrictive land-use policy is responsible for expensive housing; he refers to expensive metropolitan areas derogatorily as “zoned zones.”

The result of these “zoned zones” has not just been increased housing prices. They have the effect of indirectly delaying many young Canadians’ transitions out of adolescence and into adulthood. As the price of housing increased over the past decade, more and more Canadian twenty-somethings than ever before have made the decision to live with their parents. Faced with stagnant incomes and low starting salaries out of university, nearly 45 per cent of Canadian twenty-somethings have chosen to live at home, a nearly 50 per cent increase over the rate two decades prior.

In a major metropolitan area such as Toronto, rent on even a modest apartment will take up more than one-third of a young person’s income; the median 25 to 29 year old in Canada with a university degree earns only $29,000 a year. Paying $1,000 a month in rent, not to mention hydro, water, etc., forces many Canadian Millennials to live at home. Cultural variations cannot explain it. Cities with similar demographics, such as Vaughan and Sudbury – both have similarly large Italian-Canadian populations but divergent house prices – do not have similar rates of twenty-somethings living at home.

Some evidence suggests that this may have long-term demographic implications as well. As young people delay moving out of the house, they also delay marriage and children. The declining birth rate due to this phenomenon is particularly pronounced in cities with high housing costs. Research has found that areas with higher housing prices and denser urban environments have lower birth rates than areas with lower housing prices and more dispersed housing. Cities such as Singapore, Hong Kong, Vancouver and New York have dramatically lower birth rates than more-affordable housing markets such as Houston or Atlanta. Vancouver has the lowest birth rate of any North American city; it is no coincidence that it also has the highest housing prices.

~

Dan Osborne is a recent graduate of Queen’s University and sells liberty-themed ties at libertyties.ca. Whilst at university, Mr. Osborne worked with a number of think-tanks working as a Students For Liberty Campus Coordinator and sat on The Prince Arthur Herald’s Board of Directors.

Love C2C Journal? Here's how you can help us grow.

More for you

The Private Sector Must Get a Larger Role in Canadian Health Care

Canada has so far ducked the extreme growth in the Covid-19 hospitalization and mortality rates afflicting some other countries. The worst is certainly still to come, however – and when it does, the shortfall in Canada’s health care capacity will be laid bare. The vulnerability was largely avoidable, points out Gwyn Morgan, if Canada like nearly all other countries had only allowed private health care delivery alongside its public system. When the nation comes out the other side of the pandemic, Morgan writes, a health care policy reckoning will be long overdue.

Future of Conservatism Series, Part V: Could Canada Handle a Trumpian Populist?

Democratic politics must continue even in times of war. Despite suspension of the federal Conservative leadership race amidst the coronavirus, members and supporters still need to think about how to shape their party and pick the right leader to best meet the many challenges of our era. C2C Journal has looked at revived Red Toryism, at uncompromisingly principled conservatism and at the decidedly compromised but successful Harper way. We have sought insight from abroad. And now we turn to populism. Barry Cooper applies his usual fearless thinking and cheerful bluntness to evaluate whether the Canadian political landscape has become hospitable terrain to a Canadian Trump.

Want More Affordable Housing in Canada? Build More Houses

Solving Canada’s housing crisis shouldn’t require more than a single lesson in economics. When prices are high, a free market always responds and supplies more. Yet amidst Canada’s severe problems of housing affordability, this foolproof mechanism is continually frustrated by governments that are either ignorant of how markets work, fixated on preserving the status quo or display naked contempt for the profit motive. Peter Shawn Taylor looks at the scorn heaped on land developers, landlords and the rest of the housing supply industry and wonders how they became the villains of this story.

Thinking Clearly in a Time of Panic

How should the conservative mind respond to the coronavirus pandemic? Panic and despair are in ample supply, and the urge to succumb appears widespread. Others have steered, via deliberate ignorance, to fatalism, though the walls are closing in on such rebels. Both extremes are beneath thoughtful conservatives. C2C Editor-in-Chief George Koch counsels that however dark today might appear, the eternal search for objective truth – the foundation for all conservative thought – is the first necessary step along the path to seeing humankind through to brighter days.

Future of Conservatism Series Part IV: Rallying the World’s Centre-Right Parties

As Canada’s Conservatives evaluate leadership hopefuls and ponder what their party is about and which path might lead to electoral victory, it’s easy to ignore international politics. They should take a look, for the world holds dozens of established centre-right democratic parties, and many are tackling challenges of relevance and adaptation at least as steep as those burdening Canada’s Conservatives. John Weissenberger travelled to Washington, D.C. for the annual conference of the International Democrat Union (IDU) and provides his assessment in this essay. Later this year, once international travel is restored, Weissenberger heads to Vienna to deepen his understanding at the IDU’s 2020 Forum.

Averting “Climate Poverty” for Canada’s Middle Class

Pursuing grandiose visions tends to cloud judgment, and when the vision is saving our very planet from an apprehended climate crisis, it’s little surprise that numbers are fudged, logic is twisted, the hardest-hit are ignored and entire social classes are cast into the trash. Matthew Lau, however, refuses to be dazzled by dreams. In this article, Lau remains rooted in reality and fixed on crunching the numbers to come up with some arresting conclusions about the huge costs of government climate policies to working people here and now, set against marginal if not ephemeral benefits to come over the next 80 years.

Share This Story

Share on facebook
Share on twitter
Share on print

Donate

Subscribe to the C2C Weekly
It's Free!

By clicking SUBSCRIBE, you agree to receive emails from C2C Journal. You can unsubscribe at any time.