Building enough housing to keep pace with population growth is vital for affordability. Critics of supply-side solutions say new homes often cost more and don’t meet the needs of low- to middle-income households. But new research shows that even the supply of mid- to high-priced homes initiates a chain of vacancies that eventually lead to openings in affordable segments, proving supply helps even when housing is built in expensive markets.
Recent Improvements in Affordability
Affordability has recently improved for both rental and ownership housing as prices and rents continue to decline in Canada’s most populous markets. Still, affordability remains a valid concern because a large segment of the population has been priced out of the market for years, while shelter costs increased much faster than incomes.
Skeptics Challenge Supply-Side Solutions
The skeptics have contested the supply-driven path to affordability. Some, including Professor Emeritus Patrick Condon at the University of British Columbia (UBC), have argued that housing growth has outpaced population growth in many urban markets across Canada. Others, including Toronto’s former chief planner Jennifer Keesmaat, have implied that if demand continues to outstrip supply, ramping up supply will not help.
New Evidence from CMHC Study
A recent study by two leading urban economists from UBC, professors Thomas Davidoff and Tsur Somerville, and sponsored by the Canada Mortgage and Housing Corporation (CMHC), provides evidence that more supply works. The study highlights three interesting facts about affordability in rental markets.
Key Findings on Rental Markets
First, rents decline as buildings age. The rental fees charged in older buildings are lower than those in new ones. Second, rents in existing rental buildings decline when new rental housing is built nearby. This phenomenon was more pronounced in Calgary than in Vancouver. The third finding concerned vacancy chains, which are a series of vacancies that occur when a household moves into a more expensive unit than the one they left behind. The chain of moves that follow creates availability in more affordable units.
Contextualizing the Results
The CMHC study’s statistically weak finding that rents in some buildings are unaffected by new rental construction nearby should be viewed in context. Without new housing supply, tenants who would have moved into newly built apartments instead compete for nearby existing rental units. That added competition would push up rents in older buildings as well. New construction therefore helps ease pressure across the broader rental market by giving renters more options and reducing competition for older units.
Revisiting Skeptical Arguments
The supply skeptics play an important role in highlighting the need to improve affordability for mid- to low-income households, but their prognosis needs revisiting. Consider Keesmaat’s argument that if the growth in demand for housing outstrips supply, supply alone will not help. Not building enough housing has been a challenge in Canada since the eighties. Before then, Canada’s rate of new housing construction, normalized by its population, was much higher. The other path to affordability, besides ramping up supply, is to slow population growth or reduce population size. However, this would have unintended consequences for a rapidly ageing labour market.
Canada’s housing crisis won't be solved by denying the need for more supply in a country with rapid population growth and shrinking household sizes. The real risk isn't overbuilding but underbuilding, leading to exclusion, overcrowding and declining affordability.
