It’s Supply Stupid
Housing affordability has been all the buzz lately. When you go onto Google and type “housing affordability in Canada,” it brings up 31,100,000 searches! During the recent election, the Federal parties shared their bright ideas of how they were going to solve the housing problem and create affordable housing for all Canadians. As a side note, their master plans all sucked. The real question to ask is, “Why is housing for many Canadians unaffordable?” Supply and demand are often the easy go-to answers for this question as those two factors are what influence the real estate market. In fact, these two factors are the main drivers of all things when we think of capitalism and economics.
So, if supply and demand are the main drivers, why do we have a problem with affordability in Canada? We live in the second largest country in the world. The landmass of Canada is a whopping 9.1 million square kilometers with a population of only around 38 million. If we take a look at the US for comparison, it has approximately the same landmass as Canada; however, they have a population of 330 million. With all this land, why would Canada have a supply issue?
Looking at real estate market real price appreciation (adjusted for inflation) by www.economist.com, over the past 10 years, Canada has ranked 2nd with an increase of 162%. New Zealand holds down the top spot with a staggering appreciation of 187%. If we look at the US, their country has only seen an increase of 42% over the last decade. Incidentally, the US market appears to be a bargain when looking at these numbers.
It is no secret that Canadians like to congregate and hang out within 150 kilometers of the US border, causing clusters of people and cities. This is exaggerated in locations like Vancouver, Toronto, Montreal, and their surrounding areas. The balance of population is found in small to medium size communities, other than a few larger cities like Calgary and Edmonton, that are north of the magnetic US border. As for land, the balance of 9.1 million square kilometers is literally wilderness with only a few hardy Canadians and wildlife.
The affordability question must be bigger than a supply and demand issue. And it must be bigger than Canadians clumping together in a few large metropolitan areas. Why do we continue to see prices appreciating across the country and the challenge of first-time buyers purchasing a home?
There are many influencers in the Canadian market that greatly impact the supply and demand issue. The most common influencer is the local government overregulating the development industry and creating so much red tape. It often takes a development three to five years from concept to home ownership in markets like Vancouver and Toronto. These are the benchmark markets; and even though sub-markets may not have some of these same issues with their local government, the idea that a high tide lifts all boats can be said about the benchmark markets playing a role in the sub-markets appreciating in value and creating unaffordability issues as well.
It is clear that this influencer is a major factor in the supply chain; however, there are several “out of the box” influencers that I believe are escalating the supply issue and causing the hyper demand in the market. This then causes the dial to be turned way up on appreciation and unaffordability. These “out of the box” influencers are taxation, land transfer tax, and replacing, or the “where do I go after I sell” mindset. We could also include demographics, work patterns, and work opportunities, but I will leave these for another day.
Taxes are necessary for a country like Canada—a country for all people—however, governments at all levels use taxation as a way of hiding their fiscally bad decisions, poorly managed departments, pet projects, and support of many minority groups. Of course, this is all at the expense of the public, or in this case, the property owners. The ultimate tax for the Federal government regarding property is the capital gains tax which is currently only applicable to investment properties for Canadians; however, I believe this will soon be applicable to personal properties, too. This will certainly compound the supply issue immediately. If a homeowner is going to be taxed on a percentage of their home’s appreciation, no matter how big or small, I believe that many homeowners will say that they will stay in their homes rather than selling—especially the retirees and seniors where every dollar helps through their retirement years. This will slow down the supply of existing properties coming to the market. In addition, if capital gains tax is implemented, it could bring a strong surge to the reverse mortgage market.
Another tax that the Provincial governments have fallen in love with, and cannot live without, is the land transfer tax. Ontario and BC are addicted to this tax! Ontario is currently looking at adjusting their tax table, and BC recently changed theirs. BC collected $1.6 billion in transfer tax revenues in 2019/2020, and Ontario collected $3.1 billion. The land transfer tax on a home in Toronto valued at $1,500,000 is a staggering $52,950! The same house in Vancouver has a land transfer tax of $28,000. The BC government brought in an exemption for first-time buyers and new construction; but for many, it does not apply because prices have exceeded the exemption price threshold. This specific tax is greatly impacting housing affordability, yet the government will not relinquish control on this tax. If the government used this taxation money to support housing in a meaningful way, I could get behind it. But unfortunately, the billions of dollars go directly into the general account to pay for their fiscally bad decisions, poorly managed departments, pet projects, and support of many minority groups.
My last thought on the supply issue is that homeowners hoping to move simply give up. The search of finding their new home turns into frustration. Lack of inventory or supply makes it challenging to find their next home. The enthusiasm of selling and moving often ends with, “Where do I go after I sell?” The next home either does not exist in the “low supply/hyper demand” market, or if it does exist, the demand pushes the prices where they cannot bridge the financial gap, or they lose their enthusiasm in the ultra-competitive market. Once again, the supply is tightened and the prices increase.
Michael Ferreira from Urban Analytics gave a presentation at the 2016 Urban Development Institute of Vancouver. He opened the presentation with the hashtag #itssupplystupid. In 2016, supply was an issue in the market. Here we are in 2021, and it is still #itssupplystupid. #itsupplystupid can be solved if the Federal, Provincial, and Municipal governments come together and stop overregulating the development industry by getting rid of the excessive red tape, as well as understanding the negative effects of over taxation and the land transfer tax. Let’s put an end to #itsupplystupid.
Speaking of #itssupplystupid! Throughout the Fraser Valley and Vancouver, only one property type had more supply or active listings than the previous September 2020. That property type was detached homes in Vancouver West. Have a look at the “trend” stats package and compare active listings to the previous years throughout the region. Active listings are at stupid low numbers. Generally, if supply is low and demand continues even at the same level, prices tend to appreciate. If supply is stupid low, like it currently is, and demand increases, prices tend to appreciate at stupid rates. This is what we have been experiencing in the last 12 months with 25% +- increases in much of the Fraser Valley market. A quick comparison of the active listings for all property types in the Fraser Valley is shocking. Active listings last September was 6691 versus active listing for this September was only 3325. #itssupplystupid.
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STR (Sell Through Rate) Formula = Sales ÷ Active Listings + Failed Listings + Sales
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