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.

243 Comments
newest
oldest most voted
Inline Feedbacks
View all comments
trackback

[…] Kanuk at vancouvercondo.info March 8th, 2011 at 12:28 pm- “Texas is a subject near and dear to my heart. I lived in Houston for 5 years (left about 6 […]

trackback

[…] at vancouvercondo.info March 8th, 2011 at 9:19 am- “There is a suite for sale in my building for $310K. 10% down for 30 years @ 4% is $1300/mn […]

Anonymouse
Anonymouse
9 years ago

@Thurston Howell:

'“Dave” up to his old tricks, posting from several computers.'

Evidence?

Dave
9 years ago

@Anonymous:

At least this is a new one and keeps it interesting.

Anonymous
Anonymous
9 years ago

http://www.mortgagedave.ca/

buy before its too late!

Dave
9 years ago

@Thurston Howell:

Project much 'Thurston"? You have been stalking me for years with that accusation.

Thurston Howell
Thurston Howell
9 years ago

"Dave" up to his old tricks, posting from several computers.

I have to agree with the other bears, it's become too obvious, he is the nut case who messed up his blog big time, and now he is lost.

Sad, so sad he has so little else.
Vomit, be kind give him some attention,

Dave
9 years ago

@Keeping An Eye On The Pimps:

She'll find herself another rich old fool and have that winery running in no time.

Easy come, easy go.

Dave
9 years ago

@VanRant:

Different people fixing the numbers?

Dave
9 years ago

@paulb.:

It might be a little flat for the month after, but I think you guys are putting too much hope into this change. It would be another thing if they increased the down payment requirements.

paulb.
paulb.
9 years ago

@VHB:

Good stuff VHB. Bring on the 18th.

VHB
VHB
9 years ago

I filled in the missing days of data using the 5-day moving average. What are you gonna do. Anyway, here are the projections given the data we have so far this month. Better than nothing!

March 2011 month-end projections

Days elapsed so far 7

Days remaining 16

5 Day Moving Average: Sales 187

5 Day Moving Average: Listings 324

SALES

Sales so far 1285.4

Projection for rest of month (using 5day MA) 2987

Projected month end total 4272 +/- 416

NEW LISTINGS

Listings so far 2275.92

Projection for rest of month (using 5day MA) 5177

Projected month end total 7453 +/- 523

Sell-list so far 56.5%

Projected month-end sell-list 57.3%

Sell / list Ratio
Sell / list Ratio
9 years ago

@Dave:

Yes Dave is right big sales day 325!

big list day as well 576!

price changes 235; 90% price reductions, most seller are getting the message the window is narrowing, and want out.

Even most underpriced are not getting the bidding frenzie the strategy once achieved.

fixie guy
fixie guy
9 years ago

#226 Dave Says: "I sense big sales numbers today."

Maybe you'll do better than those who claimed the Vancouver market was on fire in January:

http://www.vancouversun.com/business/home+prices+

Best place on meth
Best place on meth
9 years ago

@Dave:

Nothing special for the 8th last day before the 35 year goes bye-bye.

Vancouver East & West*

New Listings – 102

Back On Market Listings -0

Price Changes -20

Sold Listings – 69

Vancouver All Areas*

New Listings – 312

Back On Market Listings – 0

Price Changes – 73

Sold Listings – 191

*Attached & Detached – Date: 03/09/2011 Time:18:50 Pacific YatterMatters.com:Courtesy REBGV. Data believed to be accurate but is not guaranteed.

Best place on meth
Best place on meth
9 years ago

The Economist should try comparing Hong Kong to other cities, not other countries.

For all intents and purposes it's just a city.

fixie guy
fixie guy
9 years ago

@218 other ted Says: "I don’t buy the argument made by demographia. A city they are big on is Calgary. "

Especially odd given in that degree and speed of 'bubbliness' the Teranet HPI shows Calgary trumps Vancouver.

http://img844.imageshack.us/img844/7460/201012ter

Dave
9 years ago

I sense big sales numbers today. Too bad Paul doesn't have access anymore.

Devore
Devore
9 years ago

@chip: If you need to finance a $40 million project, $1.6 just won't do. So much easier to borrow, than to spend a chunk of your money.

REIC is watching us
REIC is watching us
9 years ago

@oneangryslav2: The grow-op was probably busted and the owner is trying to hide that fact.

chip
chip
9 years ago

@Keeping An Eye On The Pimps:

It's unlikely she was a billionaire to start with. She apparently borrowed less than $150 million for her grandiose projects. Why would you have trouble financing that debt if you're earning $1.6 mil a week in interest.

oneangryslav2
oneangryslav2
9 years ago

This ad from Craigslist gives us another glimpse into the Vancouver economy and real estate industry.

http://vancouver.en.craigslist.ca/van/apa/2256972

What I don't understand is if the place is being used as a grow-up why the need for renters. Moreover, if you were running a grow-up in a house, why would you want to rent it out and risk being found out?

Maybe the owners consumed a little bit too much of their own product.

Keeping An Eye On Th
Keeping An Eye On Th
9 years ago

@VanRant:

>>><<>>>>>>

Because we have a minority government, who tells the bank governor what to set the rates at to increase the probability of achieving a majority government, while the homeowner is still under the illusion of being wealthy.

The Bank of Canada Governor in theory is independent, but that is just a theory.

Please don't interpret my knock on the politicians as anti Conservative, the opposition would likely do the same.

VanRant
VanRant
9 years ago

Question. How could Australia's inflation/interest rate be at 2.7%/4.75% and ours (Canada's) 2.3%/1% ?

painted turtle
painted turtle
9 years ago

About the Economist article:

To me that study does not make much sense when talking about France. There are many rules there to protect renters, like a cap on the rent increase. I know an older lady who rents a 2500 sqft apartment downtown Toulouse for $500 (market price: $2000). That's because she started renting more than 30 years ago. The apartment is worth a fortune, but the landlord could never kick her out (and he tried, believe me! The building was even sold, but the new landlord had to keep the renters). May be the price/rent ratio does not have the exact same meaning in different countries, so comparisons are not as valuable as it might first seem.