Why do Vancouver and Toronto have such high housing prices?
Recent news that Toronto has caught up to Vancouver with single detached homes averaging more than $1 million raises an interesting question as to why these two cities have such high housing prices relative to the rest of Canada.
High housing prices are surely affected by low mortgage rates, but this is true for all housing markets in Canada. Yet, the most expensive housing markets experience price acceleration that is faster than other cities. According to the Canadian Real Estate Association, for the period March 2013 to March 2014, average house prices have risen 7.3 and 5.6 per cent respectively in Toronto and Vancouver, which is more than the 4.9 and 1.5 per cent in Calgary and Edmonton respectively.
It is all about demand and supply. If demand rises faster than supply, housing prices increase, as in many western provinces and Ontario metropolitan cities. If demand is less than supply, housing prices will fall, as in the case of Quebec City and Halifax.
Demand for housing depends on population growth, demographics and investors looking for property investments in Canada.
Calgary (4.3 per cent) and Edmonton (3.8 per cent) have one of the fastest population growth rates among metropolitan areas in the country. Toronto and Vancouver are less at 1.5 and 1.4 per cent respectively, which is more typical for Canada as a whole.
Those cities, with younger populations becoming homeowners for the first time, will also push up demand — Calgary and Edmonton have the youngest populations in Canada. Marriage breakdowns also increase the demand for housing. So will investors who buy houses to rent out, hoping to cash in on higher prices in the future. Rental vacancy rates in 2013 are least in Calgary at one per cent. Vacancy rates are below two per cent in Toronto, Vancouver and Edmonton.
Yet, Toronto and Vancouver prices continue to rise faster than Edmonton and Calgary. Why is that so, since demand factors suggest that prices should be booming most in Calgary? To answer this question, one needs to look at supply conditions for home building.
The cost of new homes will drive up housing prices since new supply will not be forthcoming unless prices are sufficient to cover costs. The 2009-12 Canada Mortgage and Housing Corp. new housing price index has risen fastest in Toronto, while Vancouver’s, Calgary’s and Edmonton’s has been more muted, although Calgary’s new housing prices have risen sharply recently at 4.9 per cent.
An important factor influencing the cost of new homes are land prices, since building costs per square metre don’t differ as much across cities. Toronto and Vancouver have quite high land prices, which is why detached homes are so expensive there.
Land prices are heavily influenced by zoning and urban growth policies. A recently released paper by Calgary’s School of Public Policy provides a comparison of policies adopted in Calgary and Edmonton with those of Vancouver and Toronto. While the authors, Zack Taylor, Marcia Burchfield and Anna Kramer, do not examine the impact of urban growth policies on housing affordability, their analysis provides some important food for thought for urban planning in the future.
In the past two decades, Vancouver has followed intensification strategies, requiring new housing to be built on an existing area of land and greater transit use. Toronto has also pursued intensification in recent years, although some suburban expansion has continued. In contrast, Edmonton has followed an expansionist strategy, although with some densification in the past decade. Calgary’s urban growth has been expansionist, similar to Edmonton, although it has adopted an intensification strategy since 2009.
An intensification strategy provides a number of benefits to communities by making more efficient use of land. The inner city is less hollowed out since the population cannot move further from the centre. Density increases to accommodate new demand and growing cities develop new business centres, not just those at the core. Greater use of transit helps reduce environmental costs related to pollution.
As desirable as it is for urban planning to prevent urban sprawl, intensification has consequences that should not be ignored. Calgary’s younger and migrant families prefer houses with land that are typically more affordable in the suburbs. Without expansion, housing which is desired by new owners will become less accessible, driving up prices for detached homes, like has happened in Toronto and Vancouver in the past decade.
After all, if more people are added to the same available land, it is bound to push up land costs for housing. Only if the city releases existing land in its boundaries for housing development will it be possible to bring on enough supply to keep housing prices sufficiently low. Otherwise, higher housing prices per square metre will force people to live in smaller houses to maintain affordability, or move to surrounding areas beyond the urban border where housing is cheaper.
While accelerating housing prices have not yet occurred in Calgary, which faced an economic recession in 2009, housing affordability may become an issue if insufficient new housing is being built. This could lead to increased demand for low cost housing, which could be partly relieved by relaxing regulations such as those with respect to secondary suites.
Calgary’s policy regime is not built in stone since it is so different from the past. If housing becomes much less affordable in the future, the voters may demand from its mayor and council a new approach that provides better balance between intensification and expansion.
Source: Jack Mintz, Calgary Herald
July 11th, 2014 at 8:37 pm
The high housing pricing could be because of low interest rates, and the cycle of 10 years renters saved enough to buy a house and the new immigrants moving to those renters places. I could be wrong, but witnessed this cycle twice in my family.