E No Housing Bubble In Canada: It Is All About Supply Constraints

By now, the surge in housing prices in Canada, and in particular, Toronto and Vancouver, have received a wide spread attention. International observers label the market as a bubble that has to burst. Observers point out that average house prices in these two cities have more than doubled in the past decade, a rate that is considered unsustainable. The concept of a “bubble” relates to a buying frenzy that is totally demand driven and virtually unrelated to supply considerations. But that interpretation must be corrected if one is to really get a handle on the true state of the housing market in these two major cities.

A recent assessment by one of Canada’s best housing authorities, Ben Tal of the CIBC, makes the case that “the long-term trajectory of the market will show even tighter conditions. The supply issues facing centres such as Toronto and Vancouver will worsen and demand is routinely understated.”[1]

Let’s look at the supply issue.  In the Greater Toronto Area (GTA) land prices have soared over the past couple of years. Land costs today command 55% of the total cost of housing, up from 35% in 2011. It is the scarcity of land that drives housing prices. Toronto has no geographical constraints and, in theory, has lots of land to devote to housing. So, what is behind the land scarcity?

As Tal, argues, the regulators have designated land to be developed based upon projected population and established density ratios. The bottleneck is that the implementation of the plan is well-behind schedule. In other words, the GTA has designated sufficient land for housing, but the speed with which land is released is causing land prices to take off. Population growth exceeds the ability of the GTA authorities to release land in a timely fashion. This will only intensify the land shortages in the coming years. Starting behind the eight-ball, means there is little expectation that supply will catch up with demand in the near term.