How Fighting Urban Sprawl Inflates Housing Prices

Imposed greenbelts drive up land prices, which leads to much higher house prices in a metropolitan area

Wherever housing prices are severely inflated, you’ll find urban growth boundaries, greenbelts or similar land rationing policies. Toronto is a perfect example.

Talk continues of the potential for a housing bust in Toronto. Yet through the end of March, house prices had increased 33 per cent in a year.

Bank of Canada governor Stephen Poloz noted that “There’s no fundamental story that we could tell to justify that kind of inflation rate in housing prices. … Demand is being driven more by speculative demand, or investor demand, as opposed to just folks that are buying a house.”

The influence of speculation or investment isn’t surprising. Money is attracted to rapidly-inflating assets in rigged markets – and Toronto housing is a rigged market.

Neither the last year’s price increases nor those of the last decade are due to market fundamentals. From 2004 to 2015, the median house price in the Toronto metropolitan area rose more than 70 per cent relative to the median household income. Moreover, in 2004, the price-to-income ratio was virtually unchanged from 1970. Even during the mini-housing bubble of the late 1980s, prices were much lower relative to incomes than they are now.

The market is rigged by provincial policy, especially the greenbelt policy imposed more than a decade ago. Also called urban growth boundaries, greenbelts severely limit the land available to build the new detached housing that most people prefer. As surely as severe restrictions on oil production lead to higher gasoline prices, greenbelts drive up land prices, which create much higher house prices throughout a metropolitan area.

Claims that there’s plenty of land for development in the Toronto region seem like Orwellian “doublespeak.” Peter Gilgan, founder and CEO of Mattamy Homes, Canada’s largest home builder says they can’t get planning permission to build enough houses on their own large supply of vacant land.

Moreover, prices are now being driven up in the nearby areas, such as Hamilton and Kitchener-Waterloo.

Our 13 years of monitoring house-price-to-income ratios in the Demographia International Housing Affordability Survey in 90 major metropolitan areas in nine nations leads to the conclusion that urban growth boundaries (and similar land restrictions) destroy housing affordability.

Avoiding urban sprawl is a principal justification for the greenbelt. Yet Toronto is the densest urban area in high-income North America, with more than 2.5 times the density of large U.S. population centres. This contrast is obvious to anyone visiting suburbs of Toronto, like Markham, and comparing the intensity of development in detached housing neighbourhoods to, for example, the suburbs of Boston.

Urban sprawl is, of course, the bogeyman that some urban planners use to scare public officials from the world’s densest large urban area, Dhaka in Bangladesh, to the least dense, Atlanta.

Regrettably, the Ontario government remains committed to the very policies that have created the same land rationing problems from Vancouver to Sydney, London and San Francisco.

Demand-side strategies, such as the recently-enacted foreign buyers tax, do nothing. They can’t solve what is a supply problem.

There may be a respite in prices increases, but the middle-income and young households will still have been priced out of the market. The fundamental problem will remain – there are not enough houses of the type buyers want.

A recent report by the Ryerson University’s Centre for Urban Research and Land Development noted that the public discussion ignored or downplayed “the role played by the shortfall of serviced sites available to build new homes.” From London to Sydney, wherever there are strictly-enforced greenbelts, this happens.

The Ryerson researchers said “the only viable solution to long-term affordability” is “significantly increasing the number of ground-related housing units built.”

Today’s Toronto-region homebuyer pays twice as much of their gross income as buyers a little more than a decade ago.

There’s no point to creating a city on a hill where people can’t afford the housing they need.

London School of Economics professors Paul Cheshire, Max Nathan and Henry Overman were right: people, rather than places, should drive urban policy.

By Wendell Cox

Wendell Cox is a senior fellow at the Frontier Centre for Public Policy, an independent public policy think-tank in Winnipeg. T

he Frontier Centre will be releasing “Restrictive Land-Use Regulation: Strategies, Effects and Solutions,” a new report by Wendell, tomorrow. To download the embargoed report, click here.

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