Image of the day: Estimated housing shortfall in Metro Vancouver

Based on the rate at which demand decreases as prices rise

From Housing targets, a post a couple days ago by Jens von Bergmann and Nathan Lauster. The city of Vancouver has the largest shortfall.

The estimates are based on the CMHC report on the “wedge” or gap between selling price and construction cost per square foot, combined with a range of estimates for “demand elasticity.” This measures how quickly demand decreases as prices rise, or equivalently, how much supply is needed to bring down prices.

To translates our wedge estimates into current housing shortfall estimates we need to assess the demand elasticity of price. For BC overall CMHC has estimated a demand elasticity of -0.5, so all else being equal for every 1% of increase in housing supply prices fall by 2%, the inverse demand elasticity.

Ideally one would try to get more detailed estimates for Vancouver, but the reality is that the shape of the demand curve is difficult to estimate and comes with large uncertainties, suggesting we should probably report ranges rather than point estimates. We add estimates using demand elasticities between -0.7 to -0.3 that roughly cover the range seen in the literature.

Combining this with housing stock estimates this gives us estimates of the current (2018) housing shortfall, which should be interpreted as the number of dwelling units needed to compete away the excess cost.