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Monday, December 6, 2021

Want to solve the housing crisis? Address Super-Charge Demand

A recent news item about New Zealand’s radical new housing law and whether such measures might work in Canada means that the rise in home prices is due to a supply crunch.

In its election platform, the Liberal Party proposed investing $4 billion in a municipal supply accelerator with the aim of creating more housing. This is the wrong way.

If policy-makers and the newly-elected government want to improve housing affordability and the ability of young families to become homeowners, they need to turn their attention to the primary driver of price rise – the super-charge driven by the holy cow. Demand made for non-taxation of capital gains on a principal residence.

Voices from bank economists to the real estate industry uphold the argument that the primary reason for skyrocketing home prices is a lack of supply. This approach has been reinforced in media reporting, and emphasized in recent election platforms.

This “lack of supply” view is based on the basic Economics 101 textbook, where an increase in supply causes a decrease in price, using the example of widgets and a simple supply and demand curve.

But there are no home widgets. They are unique entities, both a basic need and, increasingly, an investment commodity. They are also fixed in the location and their prices reflect the characteristics of the locations that buyers value and are willing to pay a premium for.



Read more: Federal election 2021: More supplies won’t solve Canada’s housing affordability crisis


homes outweigh homes

Between 2006 and 2016, Canada added 1.636 million homes and built 1.919 million new homes, according to Canada Mortgage and Housing Corporation and Census data. Therefore, an average of about 30,000 additional houses were built every year compared to the increase in the number of houses.

According to Canada Mortgage and Housing Corporation and census data, households versus households in major Canadian cities between 2006 and 2016.
(CMHC/Census data), author provided

In Vancouver, new construction outpaced home growth by more than 19 percent. In Toronto it was one percent, and Ottawa fell short of domestic growth by four percent.

So, in theory, between 2006 and 2016, we should have seen most price increases in Ottawa and less price pressure in Vancouver. But prices rose 93 percent and 96 percent, respectively, in Vancouver and Toronto, but only 47 percent in Ottawa.

Inadequate supply can be a contributing factor, especially in cities where home growth exceeds new home construction, but it is not the primary or most important cause.

The more important reason is demand – and not just the quantity demanded, but the quality of the demand.

Over the past few decades we’ve seen a new phenomenon of super-charged demand created by households who have substantial accumulated equity from a steady appreciation in their home values, coupled with strong income growth and decline and historically low mortgage rates. is combined.

homeowners do business

In Canada, we sell approximately 700,000 homes through resale and newly built homes per year. There are 14 million households here, so it is only five percent of the total households.

Two construction workers work on the roof of a house being built
New homes are to be built in May 2021 at a housing construction development in the west end of Ottawa.
Canadian Press/Sean Kilpatrick

Many of these buyers are existing owners who are doing business. Only a quarter to a third of buyers are first-time buyers (most in higher income groups and with parents’ help). It is the larger group – the buyers who are trading – who have the ability to pay these higher prices. Certainly a small percentage of them may be foreign buyers and some are investors, but most are just regular households.

Many current owners have well above average incomes. They have also significantly increased purchasing power from historically low interest rates, and have derived substantial wealth from unearned windfall gains from years of rising prices.

More significantly, they undermine the hypothesis that excess supply will halt or slow the rate of price increase. All cities have coveted properties in desired neighborhoods – often on a large scale of modest, older housing. Due to prime location, for example homes in inner-city Vancouver can sell for between $2 million and $3 million, or perhaps $800,000 in Ottawa.

Developers often buy those lots, demolish the existing home and replace it with two or three contemporary new homes. Pricing will reflect the values ​​that consumers attribute to that area, essentially exceeding the original home price.

role of developers

In central Ottawa, for example, existing modest homes are being bought for $600,000 to $700,000, demolished and replaced with a semi with each side selling for $1.2 to $1.4 million. has gone.

The same thing is happening across the country, with new homes costing well over – as much as twice – what an existing home would have cost. That old house would have been marginally affordable for a young family if they had not been bid on by the developer.

A construction worker lays wood on the roof of a house mid-construction.
Builders North Vancouver, BC. I work on a new home build
Canadian Press/Jonathan Hayward

Clearly this form of intensification (reconstruction of exclusive single-family neighborhoods) and expanded supply will do nothing to stop or slow down price growth, especially with accumulated wealth seeking property in these locations. Keeping in view the demand of the buyers. Therefore, more supply does not mean lower price.

So if super-charged domestic purchasing power is driving up home prices, not insufficient supply, the necessary policy response should aim to curb or suppress this demand by forfeiting the windfall portion of the accumulated appreciation.

That means taking on the holy cow taxation of capital gains on households – young Canadians will thank them for it, and may even vote for a party that has the guts to do so.

This article is republished from – The Conversation – Read the – original article.

World Nation News Deskhttps://www.worldnationnews.com
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