Urbanarium debate #17: speaking notes

"The province is right to assert its powers over land use"

[Update: Video from the debate.]

For last night's Urbanarium Debate #17, at UBC Robson Square: The province is right to override municipalities.

Opening statement

We need more housing. When we have lots of jobs and not enough housing, prices and rents have to rise to unbearable levels to push people out. On the left, we see how much home prices have risen since the early 2000s, and that it’s gotten especially bad since Covid. On the right, we see that high housing costs act like a barrier keeping people out. You have to have a high income to move here.

Because housing costs are so high, real incomes for renters and first-time homebuyers are low. After you pay for rent or a mortgage, there's not much left over. It’s hard to convince someone to work for low pay, so we also get labour shortages.

Even if you're an older homeowner, it’s a bad situation. How's the healthcare system going to work when nurses retire and hospitals can't find new ones?

After Covid, the housing shortage is no longer confined to the Lower Mainland. It’s like it spilled over, with prices rising much more in the rest of the province. Suddenly there were a lot of people working remotely, needing more space at home, and willing to move. When remote workers move from Vancouver to Nelson or Nanaimo, it’s great for them, but it’s bad for local renters and homebuyers. It’s like they’re now suburbs of Vancouver, with prices and rents to match.

It’s not just the big cities. We need to build more housing everywhere. Even if we cut way back on population growth, which is happening now at the federal level, our pre-Covid housing stock simply doesn’t line up with where people want to live and work.

Per-capita, homebuilding in BC peaked in the 1970s and never recovered. But this is fixable. We have people who want to live here, and other people who want to build housing for them. The problem is, we don't let them. We regulate new housing like it's a nuclear power plant, and we tax it like it's a gold mine.

I’m not criticizing the hard-working city staff who keep the current system running, like Andrew, or Sarah in her former role. The problem is the system, not the people.

For city staff, it’s like the movie Fury Road. It takes everything you have just to keep moving forward. You’re constantly being attacked by angry people trying to stop you.

Let me switch to a more mundane and less heroic view of the current system.

I’ve talked about the costs of housing scarcity at the region-wide level. To fix this, we need more housing, and this has traditionally been left to municipal governments.

They have tight zoning restrictions on most of their land, making it illegal to build apartment buildings. The thing is, it’s pretend zoning. They sell permission to build apartment buildings, one at a time, through “spot rezoning.” As part of this process, they collect a lot of revenue, called “impact charges” (or development charges or CACs). This allows them to keep property taxes low.

This means that under the current system, municipal incentives are backwards. They’re both a regulator and a vendor. They maximize their revenue by following the OPEC strategy of selling permission to build housing in limited quantities, at high prices. If they allowed enough housing to bring down prices and rents, that would be a financial disaster for them, because they need all the money they can get.

This shows how it works. How much a project can pay for land is the selling price of the new building, minus all the costs of building it. That’s shown on the right, the green part. But the municipality imposes tight restrictions on what you can build, so until you have their permission, the value of the land is heavily discounted, shown in blue. When the municipality agrees to give you permission to build, they charge you 70-80% of the green part. They’re taking away your ability to build more housing on your land, and then selling it back to you.

The problem is, the “land lift” is what provides the incentive to redevelop. It’s also what absorbs cost increases, because costs are always changing. It’s like a shock absorber. Costs have gone way up since 2019.

When there’s too many bites out of the apple and the land lift is gone, what happens is, projects no longer make sense. If you build something and subtract all the costs to build it, you end up with something worth less than what’s already there. So then nothing happens, until prices and rents rise further. In other words, it’s renters and first-time homebuyers who end up paying higher rents and higher prices. This is true for both new and old housing, because they compete with each other. When new housing is expensive, old housing will also be expensive.

By raising their fees as much as they can, municipalities are raising the floor on prices. Prices can’t drop below total costs. In theory municipalities could lower their fees to counteract other costs going up, but they’re counting on that money. So prices can never go down, they can only go up.

Looking again at how the system works, from the point of view of a municipality, everything looks fine. They limit the rate at which things are changing, which keeps their voters happy. And because prices and rents are so high, lots of people want to build, and they can extract a lot of money. They’ve turned a feedback loop into a money pump.

So their incentive is to maintain the housing shortage. And the costs of the housing shortage far outweigh the benefits of the extra revenue. This is why the province needs to intervene.

Even without provincial intervention, municipal funding is a huge challenge. A lot of projects have switched from strata to rental, which sells for a lower price and doesn’t provide much land lift.

One suggestion is to use residential water metering to pay for water and sewer infrastructure. People are willing to pay for water, just like they pay for electricity.

When you’re talking about something that provides benefits to the whole community, like a community centre, it’s better to use a broad tax base with relatively low rates, instead of a narrow tax base with high rates. Trying to get a relatively small number of newcomers to pay the bill means they’ll need to pay a lot.

A third suggestion is to use a fixed mill rate. This is common in US cities like Houston. This means that if you’re adding a lot of new housing and adding to total property value, this automatically provides more revenue.

There’s a number of other ideas that have been proposed.

One final comment: I would emphasize the need for solidarity, the feeling that we’re all in this together, and we need to cooperate with each other. That’s how we got through Covid: younger people were willing to make sacrifices to protect older people. We need to have the same spirit in tackling the housing shortage.

Closing statement

Younger people are being crushed and driven out by the high cost of housing. It’s a terrible situation, and it’s bad for everyone. The current system is backwards because it’s based on the idea that housing is unwanted, that you need to beg for permission to build it, and that it’s reasonable to stick new residents with as much of the bill as you can. It fails to recognize that not building housing imposes huge costs.

The BC NDP has been pushing hard for more than a year to get municipalities to speed up approvals and reduce costs, passing legislation and setting hard deadlines.

There’s two bottlenecks, the approval bottleneck and the cost bottleneck. Without provincial intervention, municipalities are moving in exactly the wrong direction on the cost bottleneck, trying to increase their impact charges as much as they can. They’re making things worse.

On the approval bottleneck, I think municipalities are moving in the right direction, but it’s agonizingly slow. It’s like there’s a train being chased by a monster. The people driving the train are reluctant to go any faster. Meanwhile, at the back of the train, people are being eaten alive.

References

• The MacPhail Report - housing is scarce and expensive because we regulate new housing like a nuclear power plant, and we tax it like a gold mine

• CAC explainer - how municipalities use pretend zoning to extract revenue

• “Masters of the old paradigm” - municipalities like Burnaby that build a lot of housing, aiming to maximize revenue rather than push down prices

• Unwanted housing - a surprisingly gripping paper by Manville and Monkkonen describing the basic problem

• Municipal finance ideas - some alternative options for municipalities to raise money