Housing prices threaten growth

Wednesday, September 1st, 2010

There are reasons why Vancouver has become forbiddingly expensive, and they are no mystery

Michael Goldberg

‘We did it: We are the least affordable city in North America.”

Those are the words of Sun columnist Don Cayo, who recently wrote a series of articles about housing prices in Metro Vancouver. Much of his discussion focused on growing housing demand from people moving here to enjoy our globally renowned quality of life, resulting in higher prices.

In a normal market, rising prices create new supply to meet demand and prices typically abate. Indeed, in most markets there are periods of undersupply followed by oversupply as developers overreact to prices and overproduce, pushing prices down. In Metro Vancouver this oversupply cycle is damped so we have not seen major price drops. So let’s look at supply.

But first, congratulations are in order. Vancouver is now the least affordable city among 272 in Australia, Canada, Ireland, New Zealand, the U.K. and the U.S., according to the 2010 Sixth Annual Demographia International Housing Affordability Survey.

This achievement was made possible by a potent mix of dysfunctional local policies, processes, public attitudes and a wanton disregard for the economic realities of present and future residents and of the future ability of the region to attract and retain jobs.

Supply is severely restricted by low densities over most of Vancouver compared with other cities our size. Height, setback and view corridor rules further limit supply. Add to this lengthy and costly approval processes and the result is a significant continuing restriction in supply, which, faced with growing demand, means rising prices. An unintended but predictable result of limiting supply with rising demand is gentrification, killing what little affordable housing is left as people seek out new and affordable neighbourhoods, in the process making them unaffordable to current residents and later to others.

Witness South Main Street (SoMa), Woodward’s and Northeast False Creek inexorably gentrifying the Downtown Eastside (not a bad thing necessarily) and the likely gentrification of Fraser Street and the Great Northern Way slopes.

The solution is expanding supply and potential supply more rapidly than demand expands. This by no means implies widespread destruction of single-family neighbourhoods. Quite the reverse: It means raising residential and commercial densities in strategic areas. If done properly, this takes pressure off single-family neighbourhoods and helps preserve them and stabilize their prices.

What would such a targeted density-raising strategy look like? First, densities around rapid transit stations will rise significantly. The most under-zoned areas are Broadway-Commercial, Broadway-Cambie and Oakridge, with Cambie and Southwest Marine Drive following closely behind.

The Marine Gateway proposal at Cambie and Southwest Marine Drive is a current and particularly egregious example of planning restrictions destroying large amounts of much-needed potential rental housing. Building rental housing economically requires density. At the Marine Gateway project, the developer originally planned a dense development on the southeast side of Cambie and Marine Drive on underused industrial land. The developer wanted to create more than several hundred rental units. After density and building-size reductions, 85 per cent of the rental units were cut, a significant loss of badly needed rental units. Similar, if less extreme examples abound in Metro Vancouver with potential housing supply being greatly reduced, it will lead to higher prices as demand continues to grow.

More broadly, density increases should be considered at major bus-route intersections, especially on commercial streets, with much higher densities allowed where buses meet rapid transit stations. This densification strategy would spread density increases widely so that all neighbourhoods add to supply and choice and reduce pressure to rezone interior parts of single-family areas.

To a very modest extent, this has occurred in Kerrisdale and Dunbar along West 41st Avenue. The aggregate potential supply of such widely dispersed strategic upzoning can add many thousands of housing units across Vancouver, draining off price pressures, making us more competitive economically and reducing forces to gentrify and erode affordability in single-family areas.

Vancouver has 25 per cent of Metro’s population, so similar strategies are needed across the region, such as those on the Millennium and Expo lines at Metrotown, Brentwood and New Westminster and notably, the exemplary transit-oriented development at Surrey city centre.

Failure to pursue major densification policies will result in pricing ourselves out of global markets as newcomers, hoping to fill tomorrow’s jobs, cannot to afford to live here.

Michael Goldberg teaches at the Sauder School of Business at the University of British Columbia.

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