Fixing Vancouver’s Housing Supply Problem

Political will needed for smarter zoning, cutting red tape
August 10, 2016 Updated: August 11, 2016

Vancouver’s scorching housing market badly needs more supply. Analysts say excessive red tape and wasteful zoning are preventing supply from meeting ferocious demand. It’s another challenge for politicians who have just taken steps to cool demand from foreigners.

Vancouver’s real estate market attracts international attention for its natural beauty, with mountains, the ocean, and a temperate climate. The provincial economy is booming: British Columbia has the lowest unemployment rate in Canada at 5.6 percent with 85,000 jobs created in the last year.

Home prices in Vancouver are up 33 percent over the last year and have doubled in the last 10 years. Because of Vancouver—and Toronto to a lesser extent—Canada has one of the most overvalued housing markets in the world, according to the Organisation for Economic Co-operation and Development (OECD). The Bank of Canada and private sector observers keep warning of a potentially messy popping of the real estate bubble.

While the province is targeting foreign buyers with additional taxes, the locals, who have seen home price appreciation dwarf their income growth for years, are left with a highly unaffordable market.

Ineffective Zoning

“The only way to have a decisive impact on affordability would be to weaken the building restrictions that sharply restrict new housing supply in most of Vancouver and the Lower Mainland,” said the B.C. Housing Affordability Fund, a group led by local real estate economists including Thomas Davidoff.

Everybody wants affordable housing, but nobody wants it in their backyard.
— Thomas Davidoff, University of British Columbia

Davidoff, a professor at the University of British Columbia’s Sauder School of Business, says the critical issue is zoning. Vancouver needs more apartments and townhomes.

“We have insanely restrictive zoning,” Davidoff tells Epoch Times. “Around Vancouver most residential land requires single-family homes—detached single-family, which is a ridiculous waste of resources.”

The municipalities face a conflict of interest. On the one hand, they want to protect existing homeowners who like the neighbourhood the way it is. But “upzoning” a neighbourhood and building apartments would make the land more valuable and serve a greater need.

“Everybody wants affordable housing, but nobody wants it in their backyard,” Davidoff says. So instead of having the land used to the best advantage—apartments and townhomes—wealthy foreigners make up a high proportion of those who can afford single-family homes. The benchmark price for a detached home in Greater Vancouver, at $1.578 million, is up 38 percent from last July.
“Single-family zoning is a big subsidy to rich guys coming into the market from outside,” Davidoff says.

The municipalities follow their incentives, so it is up to the province to change the charters under which municipalities operate, he says. “You cannot let municipalities have the authority to zone in a narrow selfish interest,” Davidoff adds.

Cutting Red Tape

The Fraser Institute, a Canadian think-tank, says that if Vancouver were regulated like its suburbs, it could have more housing in its highly desirable neighbourhoods.

In a July study, the Fraser Institute pointed to costly and challenging land-use regulations that pre-empt supply’s responsiveness to demand. More regulated districts in Canada tend to see less growth in the housing stock and, consequently, higher prices. The converse is true as well, according to the study of Canadian cities.

You clearly have a case where governments’ red tape is tripping up its agenda.
— Ken Green, Fraser Institute

The study compared the growth of housing stock between 2006 and 2011 based on five measures of land-use regulation. Those measures include project approval timelines, uncertainty around those timelines, the impacts of city council and community groups, costs and fees, and the prevalence of rezoning.

The shorter the process is for obtaining building permits, the better for increasing certainty and confidence. This then leads to more investments in housing stock, says Ken Green, the Fraser Institute’s Senior Director of Natural Resources.

“Staffing, streamlining, and maybe even simplifying the process, less different agencies to have to go back and forth with, are all things that can be considered to improve things,” Green tells Epoch Times.

The study finds that the dense urban centres like Vancouver and Toronto fare worse with project timelines than their suburbs.

“You clearly have a case where governments’ red tape is tripping up its agenda,” Green says.

The irony is that differences in regulation incentivize builders to build where fewer people want to live—in the outlying areas.

“It’s a matter of learning from your neighbours and seeing how long it takes to get permitted,” Green says. “If they harmonize the housing regulations, we would expect them to attract more growth of supply.”

For example, the study suggests that if Vancouver’s regulations were similar to that of the suburb of Langley, its housing stock would be 2.3 percent higher.

Of course, there are logical reasons that explain why getting a permit can take more time in certain areas. Building in a densely populated area is more complicated than building a new subdivision. It’s reasonable to expect that sorting out the infrastructure (underground pipes, electricity, etc.) would be more complex around previously built structures.

But, “that’s no excuse for super-long backlogs,” Green says.

Auckland’s Experience

Auckland, New Zealand, like Vancouver, is seeing skyrocketing house prices due to low interest rates, record net immigration, and foreign investors. The International Monetary Fund estimates that New Zealand home prices are around 20–40 percent overvalued.
Across OECD
Reserve Bank of New Zealand (RBNZ) Deputy Governor Grant Spencer touched on the lack of supply problem in a July speech and offered a few solutions.

“Housing supply response has been constrained by planning and consenting processes, community preferences in respect of housing density, inefficiencies in the building industry,” he said.

Despite a serious housing supply shortfall, what is encouraging for Auckland is that apartments and townhomes made up 42 percent of new residential building consents over the past two years, compared to 28 percent nationally.

A more radical approach supported by the RBNZ is the creation of Urban Development Authorities (UDAs), which are government entities. They can acquire land, accelerate planning, and consent processes, and oversee coordination of all parties involved in housing developments.

Spencer noted that different forms of UDAs have been used in Australia, the U.K., and the U.S. “By their nature, the role and powers of UDAs would be contentious and their creation would have to be carefully managed,” he said.

Multi-Family Housing Rebounds

Multi-family housing starts in Vancouver have been playing catch-up. They’re now back to making up a very high share of total housing starts, similar to before the onset of the financial crisis in late 2008. Over the past 12–18 months, prices have surged much like those of single-family homes.

It is an encouraging sign although much more supply is needed after a few years of relatively minimal price appreciation and building.

“Normally what we’d see in a market is that if demand is high, then supply rises to meet the demand, and that’s not happening in the most attractive markets in Canada, where regulatory structures and institutions are suppressing the market’s ability to meet demand, effectively driving up prices,” Green says.

Davidoff thinks the zoning issue could be fixed quickly if the province is willing to take the political heat. Existing homeowners want to preserve the character of their neighbourhoods. Politicians can cater to that or they can say they’re not going to indulge that preference any longer.

“If you were serious about supply, that’s what you’d do,” Davidoff says about the latter option.

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Follow Rahul on Twitter: @RV_ETBiz