Why Housing Crisis?

In Canada, especially in some of the more populous provinces and cities, housing issues are the core topic of every election. After each government comes into power, they almost always take some measures to ‘solve’ the housing problem. However, these measures do not seem to have a positive effect. On the contrary, if measured by ‘housing affordability,’ the housing crisis has become increasingly severe. It can even be said that the more the government regulates, the more serious the housing crisis becomes! Please see the comparison of housing affordability in the following three cities since 2000.

A Tale of Three Cities - Vancouver, Calgary, Victoria

The More the Regulations, The Worse the Housing Affordability

The chart above was created by the National Bank of Canada based on data from the Statistics Bureau. Since 2000, Vancouver’s housing burden has worsened dramatically, with the average mortgage expenditure as a percentage of income soaring from around 50% to over 100%. A similar situation has occurred in Victoria, where this ratio has risen from around 48% to about 90%. Meanwhile, Calgary has remained relatively stable during this period, with the burden of housing co-operatives even improving significantly, as the mortgage expenditure as a percentage of income has decreased by about 10%.

Victoria and Vancouver are two major cities in British Columbia (BC), while Calgary is a major city in Alberta. BC is known for its cumbersome and strict housing regulations, while Alberta rarely adopts such measures. For example:

BC has rent control, with the government regulating the annual increase in rent; Alberta does not.
BC has a real estate transaction tax, a foreign buyers tax, and a vacancy and speculation tax, and will implement a house flipping tax after this year; Alberta has none of these.

In fact, the situation in Toronto is similar to Vancouver, as Ontario is also a province with more housing regulations.

Maybe Other Factors？

Of course, there are many factors that affect housing affordability. However, various signs indicate that market regulation is the main reason.

For example, rapid population growth is often considered to bring serious housing problems. If that were the case, then Calgary should have more severe housing issues because since 2000, Calgary’s population has increased from 927,000 to 1,665,000, an increase of nearly 80%.

On the other hand, Vancouver’s population over the same period increased from 1,959,000 to 2,683,000, an increase of less than 37%.

Population Growth - Vancouver vs. Calgary

Policy Effects on Housing Affordability

The analysis above may be somewhat loose, so let’s take a look at whether housing affordability has truly improved after the implementation of specific regulatory policies. In the illustration below, we essentially add timelines for two regulatory policies to Vancouver’s housing affordability chart:

Tax Policies - Two straight lines, the left represents the time when BC implemented the foreign buyers tax in August 2016; the right represents the time when BC implemented the empty house and speculation tax in January 2018.
Interest Rate Policy - Several elliptical markers, orange represents rate cuts, and blue represents rate hikes.

From the chart, it can be seen that the implementation of the foreign buyers tax in 2016 did not curb the prices of low-cost housing (strata housing), and housing affordability continued to deteriorate. There was some impact on high-cost housing (non-strata), with a slight improvement in housing affordability, but it was very short-lived. After the spring of the following year, housing affordability rapidly worsened again. Therefore, the BC government had to introduce a new tax - the vacancy and speculation tax. Shortly thereafter, there seemed to be a significant improvement in housing affordability. However, it should not be overlooked that before the implementation of the Vacancy and Speculation Tax, the central bank had raised interest rates slightly but frequently, up to five times and 125 bps in total, which played a crucial role in curbing house prices and improving housing affordability.

However, this does not mean that raising interest rates will improve housing affordability and lowering them will do the opposite. In fact, the impact of interest rates on housing affordability is a double-edged sword, working in both directions: on one hand, lowering interest rates may reduce mortgage expenditure; on the other hand, it can also drive up house prices.

Generally speaking, a slight increase in interest rates has little effect on increasing mortgage expenditure, but it has a significant marginal effect on curbing house price increases, so it is beneficial for improving housing affordability. On the contrary, a significant increase in interest rates noticeably increases mortgage expenses, while the marginal effect on curbing house prices decreases, so it is not conducive to improving housing affordability, which has been evidenced by the severe deterioration of housing affordability across Canada since the beginning of the interest rate hike cycle in 2022.

Illustration of Policy Effects

Solutions to Housing Crisis?

Now that government regulations cannot solve the housing problem, where then lies the solution to the housing issue?

The answer, of course, is market mechanisms. Canada’s housing market has long been not a free market economy, which is evidenced by:

The market pricing mechanism is distorted by the brokerage commission system;
Market demand deviates from the constraints of income levels.

If the government truly wants to solve the housing problem, the correct approach is not to replace the market with government intervention but to establish an institutional environment that ensures the free operation of market mechanisms and market signals.