People want more space

We need to think about both population growth and demand growth

Jun 20, 2023

Last week Statistics Canada released a report noting that housing growth has been outpacing population growth, even in the Vancouver metro area: from 2019 to 2021, housing stock increased by 3.6%, while the population increased by 2.1%.

So why is scarcity getting worse, as shown by vacancy rates, prices, and rents?

When thinking about how much housing we need, we need to consider growth in per-capita demand (how much space each person wants), not just population growth:

Covid means more people are working from home and want a home office.
Younger people want to move out on their own.
Families with children want more space.
People want more space as their incomes rise.

When Covid hit, New Zealand closed its borders … and housing prices still went through the roof, rising 20% in 2020.

The Economist:

Research published by the Bank of England suggests that shifts in people’s wants — such as the desire for a home office, or a house rather than a flat — explained half of the growth in British house prices during the pandemic. In many countries, including Australia, the average household size has shrunk, suggesting that people are less willing to house-share. And at a time of higher inflation, many people may want to invest in physical assets, such as property, infrastructure and farmland, that better hold their value in real terms. All this could mean that housing demand will remain higher than it was before the pandemic, limiting the potential fall in prices.

Matthew Yglesias, Remote work is boosting housing demand and driving inflation, May 2022.

In an interesting new paper, John Mondragon and Johannes Wieland argue that “the shift to remote work explains over one half of the 23.8 percent national house price increase over this period.”
... White-collar workers all across the country realized that they were going to be spending more time at home, and so they wanted to get larger dwellings.
Some of that could be families moving to larger houses. But I’ve seen a fair amount of evidence that we’ve lived through a surge in household formation — adult children no longer living with their parents, roommates splitting up to get a place of their own — which also fit into the same frame. When people spend more time at home they want more space, and when a large minority of the population all changes in the same way at once, it pushes up housing prices considerably.

Comparing US economic stats to projections from January 2020, pre-Covid:

One interesting gap that is relevant to inflation:
— Total population is slightly smaller than forecast
— There are ~2 million more occupied housing units than was forecast
In other words, housing costs are up but so is real consumption of housing.