Urban containment policies driving up land values and housing costs

Posted on November 2, 2023 by Vauxhall Advance

Canada has a severe and intractable housing crisis that could become existential for the middle class, eroding the standard of living. Our new Demographia Housing Affordability in Canada report (published by the Frontier Centre for Public Policy) reveals that more than half (24) of the 46 rated housing markets have severely unaffordable housing.

Two of the markets, Vancouver and Toronto, have such costly housing relative to incomes that they ranked the third and 10th least affordable among the 94 major metropolitan markets rated in our Demographia International Housing Affordability report for 2022.

Demographia uses the median multiple (median house price divided by median household income) to evaluate housing costs. A median multiple of 3.0 or below is considered “affordable,” while a median multiple above 5.0 is considered “severely unaffordable.” Among the major markets, Vancouver (median multiple 12.0), Toronto (9.5), Montreal (5.4), and Ottawa-Gatineau (5.2) are rated severely unaffordable.

In Vancouver and Toronto, median house prices have more than doubled relative to incomes in the last two decades. Montreal and Ottawa-Gatineau have more recently become severely unaffordable, as surging telecommuting created a demand shock for larger homes and larger yards in distant suburbs. Housing remains more affordable in the Edmonton (4.0) and Calgary (4.3) markets.

Most of the other severely unaffordable markets were in Ontario and British Columbia, where strong net migration away from Toronto and Vancouver drove prices up in markets such as Guelph, London, Brantford, the Fraser Valley, and Nanaimo.

The more severe housing affordability crisis in the Vancouver and Toronto markets has existed longer. Vancouver house prices have been rising well ahead of incomes for decades, while the Toronto housing cost escalation has occurred within the last two decades. Unprecedented price increases in both markets followed the adoption of international urban planning orthodoxy (anti-sprawl policy, especially greenbelts and agricultural preserves). These strategies (called “urban containment”) have been associated with substantially increasing land values. Much of the house price difference between the most severely unaffordable and more affordable markets is due to higher land costs rather than construction costs.

Urban containment cartelizes the outer suburban land market, driving prices up. The far fewer landowners gain windfall profits as the underlying land costs make housing less affordable. This accelerates land speculation. Retaining or restoring affordability requires eliminating windfall profits by ensuring a competitive market for land on the periphery.

Further, there is an urban planning preference for higher-density housing, such as high-rise condominiums. While some households and singles prefer high-rise condos, households with children prefer ground-oriented housing (detached or semi-detached). Pricing these households out of the housing market reduces their standard of living and sends some into poverty.

This indicates a troubling paradox: unaffordable housing is far more concentrated in markets that have embraced the planning orthodoxy, such as Vancouver and Toronto. But it is not unusual. The same applies to international markets like Sydney, Auckland, London and San Francisco, where severely unaffordable housing has been associated with urban containment policy.

Housing affordability is better in the Atlantic and Prairie provinces, as well as in Quebec, to the east of Montreal. This affordability needs to be preserved, as that is where households are seeking refuge from unaffordable housing. The best affordability in Canada is in markets such as Moose Jaw, SK; Fort McMurray, AB; Saguenay, QC; Fredericton, NB, and Cape Breton, NS as well as larger areas, such as Regina, SK, Quebec, QC; Saskatoon, SK; Winnipeg, MB and St. John’s, NL.

Surprisingly, there has been a shift in net interprovincial migration to areas with smaller populations, which tend to be more affordable. The census metropolitan areas (100,000+ population) have lost more than 250,000 net domestic migrants over the past five years, while the smaller census agglomerations (10,000 to 100,000 population) have gained about 125,000, and other (even smaller) markets have also gained about 125,000.

It will be important for these new magnets of inter-provincial migration to ensure that their peripheral land markets remain competitive. Otherwise, it may not be long before houses cost as much relative to incomes in markets like Regina, Winnipeg, and Moncton as they have become in Vancouver, Toronto and nearby markets.

Wendell Cox is a Senior Fellow at the Frontier Centre for Public Policy and author of the 2023 Edition of the Demographia Housing Affordability Index in Canada.

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