When housing affordability, demographics, and tax bills collide
By David Seymour
Consider three basic facts about Canada, and how they are likely to interplay over the coming decades.
First, the recently released Seventh Annual Demographia International Housing Affordability Survey has shown that while Canada as a country retains relatively affordable housing, some markets are severely unaffordable for home buyers. While a median priced home in Windsor costs the equivalent of 2.1 years' median household income, the same figure in Vancouver is 9.5 years. In Montreal it's 5.2 years and in Toronto 5.1.
Second, High house prices are partly caused by a high demand to live in a given market, they will also drive people away towards markets where housing is more affordable. Overpriced California has lost hundreds of thousands of residents to inland states with more affordable housing such as Texas over the past decade. Canada has recently witnessed the same dynamic. From around 2006 onwards Albertans and members of the Saskatchewan diaspora have been cashing up and moving to Regina and Saskatoon, whose house prices have now equilibrated to Albertan levels.
Third, Statistics Canada has reported that due to the baby boom, lower fertility rates in more recent times, and longer life expectancies, the proportion of Canadians over 65 will dramatically increase over the next two decades. In 1946 it was 7.2 per cent. In 2006 it was 13.2 per cent, and by 2056 it may be as high as 25 per cent. This shift will dramatically reduce the proportion of the population that is producing wealth and paying taxes, while it will increase the proportion who are dependent on government services and pensions.
Putting these three factors together, there is a case to be made that offering affordable housing may be one of the most important things that governments within Canada can do to maintain their jurisdictions' competitiveness. Statistics Canada also reports that internal migration has a powerful effect on different provinces' population age structures. This will become more important as young and mobile workers become scarcer and older less mobile retirees become more numerous. Alberta, being a migrant magnet, has the youngest population. Atlantic Canada has the oldest.
Until a couple of decades ago, housing affordability was not an issue for internal migrants. Like most industrialised nations, housing typically cost three years' income across the country. In those times, the key drivers for internal migration were opportunities, jobs and incomes. It is only in the past two decades that some Canadian markets have broken ranks and come to offer stupendously high house prices.
The baby boomers and elderly, who have the highest home ownership rates, are no doubt delighted to be sitting on the levels of wealth that they are in high priced markets. However by holding so much wealth in housing, they may suffer cruel poetic justice over the next three decades as provinces compete to retain a young workforce and young workers look for houses.
If their jurisdiction lacks workers to pay for the government spending and pensions they expect, older Canadians may find that they are forced to dissave their housing assets to pick up more of their own healthcare and living costs. Except if young people are not around to work and pay taxes, they won't be around to buy housing either.
But this isn't like bad weather. There are proactive things that cities and provinces can do to improve housing affordability. A considerable weight of evidence including numerous studies of large samples of U.S. cities has shown that municipal and regional planning policy has the capacity to influence housing affordability. In brief, the more prescriptive is the planning ethos of a municipality, the more difficult and expensive it is to build more housing. It is a basic axiom of economics that constraints on supply will push up prices.
Cities and provinces concerned about their future scenarios for attracting and retaining a diminishing pool of workers from in Canada and from overseas will do well to consider the role that housing affordability might play. With the affordability differences across Canada, there is much scope for many cities to consider how they might return the cost of new housing to the traditional ratio of three years' income per house. This way they can hope to keep their young people as workers and as home buyers. If they do not, and young people vote with their feet, they may face a double collapse.
David Seymour is a Senior Policy Analyst at the Frontier Centre.