The federal government’s newly announced housing strategy is a sham. It will do nothing to end the rapid rise in the cost of housing because it does not address excess demand, which according to the iron law of economics, drives up prices. The excess demand has persisted for many years because the supply of housing produced by the private sector has been insufficient to meet the demand.
This failure of the private sector is due mostly to municipal regulations that require the completion of red tape and use much costly time to issue building permits, prevent the creation of greater population density and the construction of housing on land dedicated to other uses like agriculture and parks. Municipal politicians are aware of this problem, but easing them has been prevented by the political opposition from influential voters.
Municipal politicians have faced less opposition to the imposition of taxes on speculating foreigners, who have no votes in elections, but this policy has no impact on supply. Speculators typically hold their purchases for only a limited time since they have to sell their investments to realize their profits. As a result, speculators merely move forward in time price increases that would otherwise have taken place later.
At the same time municipal politicians maintain rent controls, which protect them from the loss of votes by renters but which reduce the supply of housing
Municipal politicians unwilling to deregulate the housing sector or eliminate rent controls have pressured the federal government to end the housing crisis by adopting policies that increase supply. The response by Ottawa has been the adoption of a “housing strategy”, which was announced with great fanfare. It promises to lead to the construction of up to 60,000 new homes over the next 10 years, the repair of up to 240,000 existing community homes and the payment of rental subsidies of up to $2,500 annually to 300,000 needy families.
The policy adds only 600 new houses a year to the supply in all of Canada, which is shown below to be trivial given the annual additions to demand. The renovation of existing stock will not increase supply and subsidies to renters will, if anything, increase the demand for housing.
The federal housing strategy is silent on the demand for housing, which is determined mostly by the growth in population through natural increases (birth minus deaths) and immigration from abroad. In recent years the growth in population has been dominated by immigration, which during the years 2006-2016 (net of emigration) has increased Canada’s population by 240,000 annually, which is equal to 65 percent of the total increase of 3.8 million (http://www5.statcan.gc.ca/cansim/a47).
Assuming that on average three immigrants make up a family requiring housing, immigration policies have added an average 81,126 housing units a year to the country’s demand. This figure will rise to 120,000 a year by 2020, when immigration will reach the government target of a maximum 360,000. That year the federal housing strategy will provide 6,000 housing units above those created by the private sector, which clearly is a sham.
However, this is not the end of the story. Immigrants tend to settle predominantly in the metropolitan areas of Vancouver, Toronto and Montreal, which in 2011 have received 14, 37 and 15 percent of all immigrants, respectively (http://www.metrovancouver.org/). For the Vancouver area this means that during the 2006-2016 period an average 11,357 immigrant families have settled there, which means that they have demanded 947 housing units per month or about 237 per week. The analogous figures are 625 for Toronto and 257 for Montreal. By 2020 these numbers will rise by 50 percent as a result of the announced higher level of immigrants.
The implication of the foregoing analysis is that to prevent the development of an ever increasing housing crisis, municipal governments will have to relax existing regulations to increase the supply of housing. Increased federal subsidies would help, but to be effective they would have to so high as to add intolerable amounts to the fiscal deficit.
Therefore, the only federal policy with any chance of dealing successfully with the housing crisis is to reduce immigration levels to perhaps 50,000 or 100,000 a year for a limited time. Once the private supply of housing has eliminated the backlog and prices have stabilized, immigrant numbers can be raised again to levels reflecting the economy’s absorptive capacity and their contribution to the well-being of Canadians.