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Regulations separate from local property prices can make housing affordable

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Murtaza Haider and Stephen Moranis, Special for Financial Post A house under construction in Calgary. Photo by Gavin Young / Postmedia Files

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Canada is finally recognizing the interaction between insufficient housing supply and skyrocketing prices. Romy Bowers, the new general manager of Canada Mortgage and Housing Corp., has also identified new construction as the best tool for coping with rising home prices.

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We have long argued that the road to affordable housing is paved with more housing. However, this path is littered with regulatory hurdles that could undo measures to build more living space.

Land use regulations are essential for the orderly development of cities. These laws protect environmentally sensitive land, promote mixed-use developments with active modes of transport and make provisions for social housing. But regulations separate from local property prices can make housing affordable.

Some have made land use regulations a regulatory tax for residential consumers. For example, an analysis of housing prices in the metropolitan areas of Florida found that this regulatory tax was an integral part of the selling price, which had increased as a percentage of the selling price.

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The researchers on this study, who wrote in the Journal of Housing Economics in 2009, analyzed the overall rise in Florida property prices in three cost components: land, materials, and regulation. They concluded that strict land use regulations were “a significant part of the rise in house prices in most metropolitan areas”.

Similarly, a 2014 article in the Journal of Urban Economics set out the relationship between land use regulations and housing and land prices in the San Francisco Bay Area. That paper confirmed that cities that “require a greater number of independent reviews to obtain a building permit or zone change have higher land prices”. The higher the property price, the higher the price for the living space built on it.

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Another research paper published in the Journal of Policy Analysis and Management in 2009 found a similar relationship between apartment building and restrictive land use regulations.

Strict regulations lead to higher prices, because strict regulations often restrict new residential construction. For example, the economist Kristoffer Jackson found in the Journal of Urban Economics in a study of cities in California that the implementation of a new regulation reduced housing permits by four percent.

Another study of Manhattan house prices, which has the dubious difference of being one of the most expensive housing markets in the United States, found that the selling price of existing homes was twice the building price. Researchers believe land use restrictions are responsible for the gap between property prices and their utility costs.

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And a relatively new paper published in the Housing Policy Debate in 2019 used both theoretical and empirical evidence to conclude that “the addition of new housing will moderate price increases and therefore housing for low and middle income families makes it more affordable ”.

However, the paper also noted that building more marketable housing may not be enough to improve affordability. Hence, governments need to step in to enable housing to be built that low-income households consider affordable.

There is an acute need to tighten land use regulations to allow for a significant increase in housing construction in Canada. While the local governments are increasingly responsible for the local land use regulation, the provincial governments regulate the regional growth policy. Provincial and local governments need to work together to accelerate the delivery of new housing.

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At the same time, local governments need to set benchmarks to measure their regulatory effectiveness. For example, a review of more than a million building applications in Ireland found the following metrics for local planning authorities: the average time taken to make planning decisions, the proportion of projects approved, and the average number of conditions placed on applicants.

If published regularly, such statistics will inform both the general public and policy makers whether the supply is lagging behind due to regulatory obstacles.

In addition, the land use regulations must be informed or changed by the development of housing prices at the local level. The current regulatory framework does not reflect the local price dynamics, so that there is no impetus to accelerate the approval for new residential construction in the event of rapidly rising apartment prices. This gap between housing supply and prices requires immediate attention.

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Local governments responsible for regulating local land use must also be given adequate resources to carry out their mandate. Any delays in planning approvals due to insufficient human and material resources are likely to contribute to house price inflation. As a result, local and provincial governments must provide land-use regulation departments with resources appropriate to their mandates.

After all, where supply skeptics dominate planning practice, the contract to regulate local land use must be given to departments that value the urgency of accelerating housing construction subsidies to improve the affordability of housing.

Murtaza Haider is Professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached on the Haider-Moranis Bulletin website www.hmbulletin.com.

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