Housing Affordability Solutions Must Focus More on Supply: Leading Economist

August 17, 2016

Housing affordability solutions that only focus on reducing demand or limiting people’s abilities to buy at higher prices could have a negative effect on the overall economy, according to a leading economist.

Avery Shenfeld, chief economist at the CIBC, warned in an August 11 research report entitled This Needn’t End Badly that the new foreign buyer tax, as well as any increase in interest rates or tougher mortgage policies, could be successful in softening house prices but also damage the wider economy. He stated that long-term supply-side solutions should be put into place instead.

Shenfeld said, “Interest rate hikes or much tougher mortgage policies could put a damper on house prices, but at the expense of economic growth. But there are ways that governments could tame regional house price inflation that would be bullish for GDP ahead.

“If efforts to stem housing inflation are focused on limiting demand, there will be negative spillovers to GDP growth. To the extent that the resale market slows in the wake of the BC foreign buyer tax, that would cut into the GDP generated in real estate agent fees, mortgage services, legal fees and home renovations, which often get ramped up by a new owner.

“But while it won’t be as quick a solution, enhancing the supply of new housing can also cushion further price appreciation and generate additional GDP growth in the process.”

He added, “Releasing more land for single-family homebuilding, and speeding the approval process for new construction, would be part of that process. Improving urban transit, so that land outside the city core is a closer substitute for the inner-city locations where prices are reaching the greatest heights, would do the same. Approving more high-rise construction would help contain condo prices and apartment rents, although that would eat into land for singles. Multiple-unit homebuilding could also be enhanced by a greater policy focus on social housing, where the needs might now be greater, given the reduced affordability of other housing.

“The supply of such housing would also help address one of the downsides of rising house prices — the diminished ability of businesses to find workers that can afford to live within commuting distance.”

Shenfeld concluded, “The memories of the US financial crisis have left the impression that all house price booms end badly for the broader economy. With the right policy mix, it needn’t be so.”