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Supply constraints increased prices of apartment condos in Canadian cities (CMHC, December 2018)
In Vancouver and Toronto, but not Montreal
Supply constraints increased prices of apartment condos in Canadian cities. CMHC, December 2018.
There's a huge gap between the construction cost to add another floor and its selling price in the Vancouver and Toronto metro areas, but not Montreal. In 2018, the gap in the city of Vancouver was almost 2X.
In other words, there’s a huge incentive for people in Vancouver to build more housing. They can’t do so because the city doesn’t allow it.
Roughly speaking, if the city of Vancouver had no height restrictions and people could just build as much as they wanted until that gap was reduced to about 1.3X, the cost of buying or renting an apartment would be reduced by about a third.
From the report:
In the Toronto and Vancouver Census Metropolitan Areas (CMAs), prices per square foot of new condominium units are much higher than the cost per square foot to provide more of them. Further, the number of new units initiated has little relation to the price of new units in previous years. Supply constraints, and not market power, are constraining construction and increasing the price of apartment condominiums in Toronto and Vancouver. This is not true for the Montreal CMA.
The report also notes that high prices in Toronto and Vancouver don’t result in any more building.
In Vancouver and Toronto, the relationship between new units and past prices is almost non-existent. Vancouver’s relationship is weakly negative with a very low R^2 while the relationship in Toronto is almost flat with an R^2 of zero. It is clear that response from past prices to current construction is very weak, indicative of some sort of supply restriction. Meanwhile, in Montreal a robust positive relationship exists with an R^2 of 47%. This suggests that builders in Montreal are able to respond to price changes. Combined with the previous analysis, the only market that currently has a price to cost ratio indicative of a normally functioning market, Montreal, is the only market where developers are able to respond to price signals. This suggests that supply constraints have muted supply responses in Vancouver and Toronto while existing supply constraints in Montreal, like its height limit, do not bind new construction.
Research note with the highlights
Why Is Manhattan So Expensive? Regulation and the Rise in Housing Prices. Edward L. Glaeser, Joseph Gyourko, and Raven Saks, 2005. The selling price of an additional floor in Manhattan was 2-3X cost of construction
Urban kchoze blog, May 2014. “The cost of building new units is essentially what provides a ceiling to house prices.” To anyone living in Vancouver or Toronto, this sounds really strange. But in Montreal, it’s actually true.