It’s always easier to blame someone else than to acknowledge their wrongdoing. In order to stem the rapid rise in house prices, the federal government has just prohibited foreign investors from buying a residence in Canada. In the case of permanent residents — those people who already live here — they will have to wait a minimum of two years before becoming owners.
According to Federal Housing Minister Ahmed Hussen, banning foreigners from buying properties here will help ensure that “all residents of the country have housing that is affordable and meets their needs”. What the minister is trying to do is tackle demand in order to reduce the pressure on the market. The effect is likely to be counterproductive.
In British Columbia, for example, long the poster child for the housing shortage, residences owned exclusively by foreign owners account for only 3% of the housing stock – 4.1% in the Vancouver metropolitan area -, i.e. 53,000 doors. The figure does not seem negligible, yet it is when compared to the 570,000 missing dwellings in the province, according to federal government estimates.
Instead of blaming foreign buyers for unaffordable home prices, we should instead talk about the source of the problem: the many barriers to increasing the supply of housing erected by the provinces, and especially by the cities.
It’s no secret: our cities are particularly attractive. The metropolitan region of Montreal, for example, today hosts the homes of 715,500 more Quebecers than 20 years ago. This is the result of both births and immigration and a general trend towards urbanization. The same trend can be observed in Quebec, Toronto, Vancouver and in the other large cities of the country.
To the extent that supply growth can follow demand growth, population growth should not cause affordability problems. Alberta, for example, saw its population grow by almost 50% over the same period, but managed to maintain a housing market within CMHC’s affordability scales.
Unfortunately, in many other Canadian cities, including major Quebec cities, supply has not kept up with demand. This is due to the difficulty of building new housing in many places.
This is, moreover, the observation made by economists when they consider the question of prices: the places where it is easier to build new housing to meet demand are those where price increases are the most weak, even non-existent when expressed as a percentage of the average income of citizens.
There may of course be geographical barriers. Toronto cannot expand into Lake Ontario, and Montreal depends on the capacity of its bridges, for example. In the Canadian context renowned for its wide open spaces, however, this aspect is rather minimal.
Barriers
What weighs the most is all the institutional barriers — those famous sticks that our governments more or less intentionally put in the wheels of developers. Think provincial land use planning regulations, tough municipal zoning rules, or the panoply of bureaucratic requirements to meet before the first shovelfuls the ground.
Each regulation comes with its cost, either in the form of a tax or in the form of time and consultant fees associated with it, which complicates the construction process and reduces the supply of new housing. This statistical relationship is well documented. The higher the regulatory index, the higher the price will be and will tend to rise rapidly.
This regulatory cost is not minimal either. A study by the CD Howe Institute showed that already in 2016, the excessive level of regulation in Ontario had the effect of increasing the average price of houses by more than $100,000. It was six years ago. Prices and regulation have had time to grow further since then.
Holding foreigners responsible will not solve the housing shortage. Our governments must recognize that they are contributing to the current situation and see what they can do to remedy the situation. Somehow they have to stop looking for scapegoats, and take the sticks out of the way of those who can fix the problem.