Opinion: "Supply and demand" considerations alone won't solve housing

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Written for Daily Hive Urbanized by David Fine, an award-winning local filmmaker who also moderates the VanPoli Facebook group.

Build more housing, and prices will fall. It is the law of supply and demand economics, or “Econ 101” and any economist will tell you it is so. In fact, attempts to suggest otherwise are akin to denying gravity, or claiming the earth is flat. At least that seems to be the claim. I am a strong believer in both gravity and a basketball-shaped planet Earth, but with housing, it’s a different story.

At the same time, I want to be clear, this is not a screed about the evils of development or supply. We do need developers and we need supply, but the simple claim that housing is subject to the very same laws of supply and demand as anything else is just not born out by reality.

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“If we only build more, prices will fall. They have to because when you have more of something, it mitigates demand and that makes prices go down, not up.”

This is a principal argument of housing supply activists who will tell you that this is how we get to the holy grail of affordability. It works the same for cars, apples, bananas… Whatever commodity you can think of because that is the law of “Econ 101”. Except it isn’t.

Most commodities do react to supply variables, but with housing, there are so many contributing external factors that are unique to housing and do not apply to other goods. For instance, the impact of land lift, building, and marketing to investors, using homes for short-term rentals instead of supplying homes for locals, and especially the fact that developers do not want to build in a falling market.

This last thing is key because it means that if developers build enough to cause prices to fall, the investment thesis falls apart and so many cease to continue building. We see this playing out right now, despite the need for supply, every project needs to “pencil”. That is, they need to be profitable to justify the investment. These things don’t happen with, say, bananas.

To quote University of British Columbia economics professor and housing activist Tom Davidoff, “Econ 101 tells us that if there are more bananas, the price of bananas goes down.” That is true, but Davidoff insists the same applies to housing. Vancouver has seen a huge increase in rental construction. Which way have rental costs gone? This summer a one-bedroom average rent hit a record high of over $3,000.

As new supply comes online are we seeing lower rents, or does the new supply create new benchmarks which have the effect of raising rents in older units as people vacate for newer ones? The real world tells us that there is no such thing as trickle-down rent causing prices to drop because land inflation and new benchmark highs in rent cause a knock-on effect.

How do interest rates impact bananas? Are there limited banana workers which makes it harder to find necessary labour and so drives up production costs? What do developers do when prices are falling? And what if you supply mostly very tiny bananas when many people strive for large bananas? What happens to the price of the limited, but very sought-after larger bananas? Does more supply of small bananas make large bananas fall in price or go up? If the land used to grow those large bananas gets used for growing small bananas, even fewer large bananas are produced which, of course, makes them even more expensive, not less.

The banana analogy is getting tiresome, but if you’ll forgive just one more, what would happen if banana growers grew a type of banana that was marketed primarily to international investors rather than hungry local people? The investors would sell, or lend the bananas to the hungry people, but at inflated prices, or just store the bananas so no one gets to eat them. These are all material reasons why “Econ 101” does not apply the same way to housing.

A telling scenario in Vancouver where the City removed the “burden” of the Empty Homes Tax on new-builds because developers lobbied. They have the units built, but they don’t want to sell them at the current lower market rates today, they want to be allowed to keep them sitting empty so they can wait for prices to recover.

You could not have a more literal example of how developers will resist reacting to the market by lowering prices, even if it means holding the units empty for a year or two. The same thing is happening with private sellers. There is very low inventory for sale because sellers deem this point in time as not a great time to sell, so they don’t.

That’s why housing is not subject to the simple rules of supply and demand, or, as it is referred to “Econ 101”.

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