Vancouver and the Supply Side Argument

Much has been made of the availability of credit promoting asset price bubbles. If the availability of credit is loose and an asset is seen as scarce, asset prices tend to rise. But what if there was an ability to quickly supply new product onto the market, such that an asset cannot be seen as scarce for long periods? This is the argument of Demographia and their annual house price survey. This survey is famous for marking Vancouver as one of the most unaffordable metropolitan markets in the English speaking world. The authors of the survey argue that while loose credit conditions lead to bubbles, the inability for a market to quickly react to changes in investor and owner demand can exacerbate bubbles:

Higher land prices have been the principal contributor to rapidly increasing housing prices in unaffordable markets. These land prices include the cost increasing  influence of land supply restrictions (such as urban growth boundaries), excessive infrastructure fees and other overly strict land use regulations. In Australia, 95 percent of the increase in inflation adjusted new house (and land) costs were attributable to land, rather than construction from 1993 to 2006. In more restrictively regulated San Diego, house prices were 250 percent higher than in Dallas-Fort Worth in 2007, yet cost only 15 percent more to build.

It may be easy to quickly discount this report’s arguments as, of course, asset bubbles are not prone to form without the propagation of relaxed lending. Remove the loose lending, remove the bubbles. But I would argue it’s worth a deeper and critical look into what the authors are stating. Unconventional Economist A.K.A. Leith Van Olsen has written dozens of posts on a similar theme, that cities that experienced or are experiencing severe asset bubbles also have severe land use restrictions.

The posts are long and the comments are equally as interesting as the posts themselves. An important point in the debate is that Van Olsen and others are arguing about supply responsiveness, not total supply. Indeed we know that supply must at least equal demand, or rents would be increasing significantly. Van Olsen clarifies:

Readers should note that unresponsive housing supply is a different issue to the ‘undersupply’ of homes or ‘housing shortages’ commonly mentioned by mainstream commentators. The former relates to the speed and cost at which new (generally fringe) housing supply is built, whereas the latter refers to the physical quantity of homes available for the population.

In my view, Australia does not have a housing shortage. But housing supply is certainly unresponsive and overly expensive on the urban fringe of Australia’s cities and towns. As a result, the critical ‘inflation vent’ provided by cheap fringe housing in places like Texas and Atlanta (despite very high population growth) is missing from the Australian housing market. As such, there is no supply mechanism available to quickly dampen house price inflation before it turns into a speculative bubble (and later bust).

So, he argues, there is opportunity to maintain price stability by decreasing response time of new and desirable supply becoming available on the market. Faster response times can be accomplished by: reducing permit and planning application times, removing centrally planned blanket zoning restrictions (such as agricultural reserves), and providing more local authority and accountability on land use. Interestingly this approach has been used in bubble-averse Switzerland and Germany, as investigated in Bigger, Better, Faster, More: Why some countries plan better than others by Alan W. Evans & Dr Oliver Marc Hartwich, who, when comparing the plights of the British Isles and Australian housing markets to their European continental brethren, state:

In Ireland and Australia,with planning systems derived from the UK’s, restrictions on the supply of land, densification policies and central planning fail to provide the kind of homes people want, and lead to high real house price inflation. Successful planning systems, as found in Germany and Switzerland, leave planning decisions to local planners and politicians while ensuring that they face the full costs and benefits of their decisions.

Applications to Vancouver

There is some argument that the Vancouver area faces multiple Byzantine tiers of land use policies and restrictions, from the Agricultural Land Reserve, shared utility and resource planning at district and provincial levels, and municipal-level zoning change and permit application processes. While all serve a purpose, from time to time it may be instructive to take a step back and look at the successes and failures in other jurisdictions in avoiding destructive asset price bubbles.

A rational debate around the role of land use planning has been notably absent from BC’s mainstream media. It is unlikely any of us would live to see a significant overhaul of land use policies in the city and province, but studying land use policies and other supply side impedances (such as flexibility of labour markets) in other jurisdictions — and their purported catalytic effects on asset bubbles — does serve to provide some context to Vancouver’s prospects in the coming generations.

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patriotz
Member
Real rents in Vancouver are lower than when the ALR was introduced in the 1970's, and that is objective proof that supply of housing has outpaced demand. The supply of housing for sale at any given time for any given price, and the demand to buy housing at any given time for any given price – which determines the market price – has nothing to do with actual supply and demand for shelter. Rents do. Loose planning restrictions don't prevent bubbles, they just result in more excess housing being built during a bubble and a bigger bust, as we have seen in Florida, Ireland, and Spain. That is a greater misallocation of capital and thus a bigger damage to the general economy than where less overbuilding took place, e.g. in the UK. The way to prevent bubbles is to restrict… Read more »
VHB
Member
VHB

Big thanks to paulb for his service with the numbers. But, looks like we are in the hands of LarryY for now, unless someone else steps up.

Everyone be nice to Larry!

AG Sage
Member

Land use changes would have to include punitive measures. Developers buy up large tracts and then hold them until the price has been driven up sufficiently to create a nice profit.

During the bubble, California was building building building, it wasn't lack of supply or even lack of responsiveness of supply that drove up prices. It was Tulip mania that drove up prices coupled with speculators taking units out of use (either by design or by demanding too high of rent because they were virgin landlords waiting for a flip), exacerbating a false sense of constrained supply.

patriotz
Member

@AG Sage:

Developers buy up large tracts and then hold them until the price has been driven up sufficiently to create a nice profit.

Again, the most effective way to keep property (developed or undeveloped) from being unused is higher property taxes.

In particular, taxing any land as though it had been developed to its currently allowed zoning would stop speculative holding dead. Principal residences could be exempted, they're not the problem.

Dave
Member

@patriotz:

Dumbest idea ever. Wow. Just wow.

nonymouse
Guest
nonymouse

"Real rents in Vancouver are lower than when the ALR was introduced in the 1970′s, and that is objective proof that supply of housing has outpaced demand."

Could the demand for real estate investment opportunities simply be stronger than that for actual housing?

registered
Member
registered
Las Vegas had restrictive land use policies? That city was running out of land? Las Vegas has huge tracts of empty homes for pennies on the original dollar. As does the Inland Empire. Please. If land use policies drove home prices up, how did they fall? Re: the notion it only happened in '10 markets', in the 2010 Dec Case Shiller Detroit is at 50% and still falling: http://img848.imageshack.us/img848/6205/201012cs…. Anyone who knows anything about Detroit knows the core is a ghost town, entire blocks of homes gone. Empty tracts of land they can't pay people to live on. The Comp 10 isn't that much better than the Comp 20 (roughly 10% of the population.) Demographia in infamous for shilling land development, I trust them about as much as I do Phillip Morris medical doctors.
Dave
Member

@nonymouse:

Could it be that the metric more closely measures the type of rental housing that has degraded over time and is now the low end of the market?

Anonymous
Guest
Anonymous

I'm a bear, but I visit this blog to gather as much information as I can on both sides of the issue. I'm all for a bull argument if it is supported by fact or theory or even educated opinion. Dave, you obviously are in direct opposition to patriotz' suggestion to tax undeveloped land in order to reduce speculation. Would you care to elaborate as to why?

taylor192
Member

@Dave

Dumbest post ever. Wow. Just Wow.

Look around Vancouver to find how many sites have put up "community gardens" to avoid paying property tax. These are all properties in prime locations.

If you cannot see these you're blind, and dumb.

Best place on meth
Member
Best place on meth

The land use argument is very cute and all, but whatever effects it has on our bubble is still minuscule compared to the effects of rock bottom interest rates and extremely loose lending standards.

These two problems are both correcting as we speak.

Dave
Member

@Anonymous:

Because speculation in land is hardly occurring. Taxing vacant land won't get it developed any faster than telling a cancer patient to suck it up will cure them. You would only worsen the situation.

The cost to sit on land or flip land is already quite high. When you sit on vacant land, it generates no income and your money could be used elsewhere (opportunity cost). The cost to transact commercial or industrial land is also quite high.

There are lots of reasons why land can sit vacant. Don't assume that all vacant land is due to speculation.

Dave
Member

@taylor192:

Sigh… you assume much.

Dave
Member

@taylor192:

Name a few and I will tell you the reason why each one of those is vacant.

taylor192
Member

There is a suite for sale in my building for $310K. 10% down for 30 years @ 4% is $1300/mn plus $150 condo fee and $150 property tax == $1600/mn for 480 sqft without a bedroom. Similar units rent for < $1200/mn.

A 900sqft 2bdrm just rented for $1750/mn.

There was a young couple looking at buying it, I couldn't fathom it. I would probably kill my partner if I had to leave in such a small space, with less money available to do things outside of the space.

Dave
Member

@jesse:

All of the above. Name a few. Try me.

registered
Member
registered

@12 jesse Says: "The report argues not that prices stay perpetually high, it’s that severe price distortions, on the upside and downside, are the result. "

You explain the coherency in that reasoning. What kind of constant market friction, which is what restrictive land use policies and procedures amount to, creates turbulent instability? Show why price fluctuations in all those markets were synchronized. Were changes in land use polices also synchronized? Demographia's reasoning is handwaving, not science. They would have done as well to say 'ta-da!'.

BTW, I questioned their motives, not their intelligence. Nice straw man. Coupling with an argument from authority is cute.

"Las Vegas and Phoenix actually do have restrictive land use policies …"

http://daily.sightline.org/daily_score/archive/20

Dave
Member
Drachen
Member

@Dave:

Corner of 8th and Vine. Used to be an eight unit rental townhouse set-up. It's been vacant for 4-5 years now.

8th and Arbutus. It's been vacant for at least 10 years.

7th and Arbutus. Vacant for 5-7 years.

All three are double lots or larger, suitable for 6-10 units with the current density in the area. They could be developed and sold for approximately a million dollars a unit at the current rates.

patriotz
Member

@jesse:

tax regimes that facilitate efficient utility have been a large part of the success of certain regions avoiding asset bubbles.

Note that Texas has among the highest property tax rates in the US.

Anonymous
Guest
Anonymous

@Dave: Davie and Burrard. How about that one?

patriotz
Member

@Dave:

Taxing vacant land won’t get it developed any faster than telling a cancer patient to suck it up will cure them. You would only worsen the situation.

Yeah I can hear it now.

"I've let this land sit vacant for 5 years paying $5000/year in taxes, and now I'm going to have to pay $50,000/year? Why I'll.. I'll.. just let it sit for 10 more years! That'll show them!"

Bwah ha ha.

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