The Skyrocketing Housing Markets of Toronto and Vancouver

One of Canada’s biggest news stories in 2016 was the skyrocketing housing prices in Vancouver and Toronto. To get a sense of the scale of the problem, some family homes in Metro Vancouver increased by as much as 40% in one year. According to Demographia, the median household in Vancouver was sold for 10.8 times the median wage. This, combined with fairly stagnant wages, led to economic concerns by local citizens.

The original stance from the provincial governments was to do nothing. This was clearly not a politically stable position for them to take, as many families were completely priced out of the market – especially first-time buyers.

The increase in prices can be explained by a few factors. First, foreign investment has been increasing greatly. Further, the population is increasing in both cities while the size of households is going down. In addition, mortgage rates has been low which making borrowing much easier. All of these factors creates a much greater demand. Specifically in Vancouver, supply is naturally restricted as it is surrounded by sea and mountains. In fact, it is the most densely populated city in Canada, and fourth in North America. This means that if demand increases, supply cannot increase naturally increase with it, and would raise prices.

Economics 101 explains that pricing is determined by two things: supply and demand. Thus, there are two ways to approach this problem.

The BC government has decided to approach this problem from the demand side. BC introduced a 15% tax on foreign buyers. Theoretically, this should shift the demand curve to the left, therefore reduce the price of housing. This, roughly, has worked in practice. Foreign investment has shrunk in the past few months in Metro Vancouver, though it is still too early to tell how effective the policy has been to discourage foreign buyer speculation.

In addition, the provincial governments in BC and Ontario have decided to give help to first-time home buyers. Basic economics would suggest this is a poor idea. A tax rebate would shift the demand curve to the right, and increase housing prices, theoretically.

Meanwhile, on the supply side, Economics 101 would tell us that building more homes would also help to solve this problem. However, neither BC nor Ontario have decided to approach the problem this way. One way to do this, is to make building homes easier as current laws make it difficult to build homes easily. For example, current regulations in Ontario result in long and uncertain building permits, effectively slowing the building of new homes. In addition, costly fees and opposition by local citizens slows construction. Building more homes and loosening regulations would shift the supply curve to the right, and decrease the equilibrium price.

Clearly, housing prices will be a hot-button topic in 2017 and beyond – and will impact you throughout your lifetime. It goes to show that even the complexities of the evolution of housing prices can be understood applying basic economics.

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