Canada's nosebleed housing costs are a policy failure
Policies benefit homeowners and developers, not home buyers.
Altus Group publishes a report of Canadian building costs annually, expressing those costs as price per square foot of most types of residential and non-residential construction. My immediate reaction to the report has for several years been the wide gap between average building costs and the prices of real estate in the respective markets. When home prices exceed building costs by a wide margin, developers are having a field day.
Take Vancouver, one of Canada’s hottest housing markets. Altus Group reports a construction cost range of $145 to $265 per square foot for single family residences with unfinished basements. Based on those estimates, a two thousand square foot home could be constructed for between $290,000 and $530,000. Log on to realtor.ca and see what a two thousand square foot home costs in the Vancouver area and you are unlikely to find one for less than $1 million. The difference is the cost of serviced land.
Anyone who has lived in Canada for more than two weeks has learned that Canada is not short of land. We are a country comprising about 10 million square kilometers or, for old coots like me, 2.4 billion acres. Building a new home for each of Canada’s 32 million people wouldn’t put a dent in our available land.
So why is the land so costly? The answer is regulation, zoning and the use of the “Official Plan” for every municipality which pretends to create a balanced community but in fact is a developer’s playground. Visit the planning department of any town or city in Canada and you will find a line up of developers who are applying for zoning changes and building permits. This gives Mayors, members of Councils, and Planning Department executives a lot of power in their local community and that power translates into all sorts of backroom deals and in some cases outright malfeasance.
If Canada wanted to make home ownership more affordable, it would not tinker with interest rates since lowering rates manifests itself in higher prices, not lower prices, as carrying costs for property are lowered and buyers bid up prices in a supply constrained market. Canada rarely builds enough homes to match organic growth let alone immigration and the underbuilding has one root - inadequate supply of serviced or serviceable lands.
Nobel prize winner Robert Shiller has studied housing markets in North America and developed comparisons of house prices and building costs. The gap between these curves is developer profit less costs of corruption where corruption is present. The divergence of home prices from building cost began in earnest in the year 2000 and widened dramatically over the ensuing several years.
I have seen reports from many economists who blame the rise in home costs on lower interest rates and higher land costs or a combination of both. Governments exert control over both. While our Ottawa government pays lip service to “attainable housing” and seems to think the remedy is to build homes with government money, that theory is as weak as most of the rhetoric coming out of Liberal Party leaders. If government built homes and gave them away they would soon change hands at market prices and the only beneficiary would be the recipient of the largesse.
The long term solution to Canada’s housing affordability crisis is surprisingly simple, so simple that one wonders why it evades the minds of the bright lights we elect to manage Canada through Parliament, our Legislatures and our Municipal Governments. Expand the supply of serviced or serviceable land and make it easier for builders to acquire and develop the land. What is complicated about that?
If Ottawa insists on intervention in the economy, make it an intervention that has a ghost of a chance of nudging the economy in a direction that relieves the issue being addressed. One government approach that would work would be for our government to spend about $30 billion to sever and service 1 million residential lots on Crown land and then auction them off. There is no shortage of crown land and the costs to sever and service a lot is rarely greater than $30,000, although it is not beyond the capability of bureaucrats to manage such a program so badly the costs might balloon to double that amount. Most Canadians or developers would line up to buy a serviced lot for less than $50,000. A quick review of available lots in Barrie, Ontario (not the hotbed of the GTA or the GVA) sees building lost prices from $300,000 to over $1 million and the same holds true here in Collingwood.
One thing is relatively certain. If Canada expands the supply of serviced land in areas where the population is already growing, it will take pressure off the costs of housing.
I am from Moose Creek, Ontario in the Ottawa valley. In 1988, I purchased from my grandmother’s estate a 166 acre farm which had been in our family since at least 1850, for the grand sum of $75,000. At a density of 6 homes per acre (which by today’s standards is a relatively large building lot) that farm could host about 1,000 homes a short 45 km drive from the Parliament buildings. The old Blair farm is surrounded by dozens of similar farms, the majority of which stopped farming decades ago. The drive from Parliament to our old farm passes literally thousands and thousands of acres of vacant land. It would be child’s play to develop some of that land.
Drive a few miles from the city anywhere in Canada and look out the window. What you see is acres and acres of undeveloped land alongside the highways. Some of it is farmland which we need to protect, but a lot more is just vacant land.
Canada’s lack of attainable housing is just another government failure, not that there is any shortage of government failures.