Housing Market Realities: Part I

housing market

By Julie LaPalme and Nicholas Gazzard

The residential rental market differs from other consumer markets in certain key ways that result in the market being unable to meet the housing needs of many Canadian households at a price they can afford. So what are the causes of this market failure?

To begin with, prices in the rental market are not even across market regions. Prices for rental housing are determined by local market conditions. For most other consumer purchases I can shop in one part of Canada and pay the same price as I would anywhere else in the country. I can buy a car in one market and move it to another. Not so with housing. It is not portable. I cannot rent in a more affordable market and move my housing to a more expensive market. I must go to the housing, and pay the going rate for the local market I need to live in.

Second, the supply of rental housing is also very inelastic. Increases in demand do not result in increased supply in the short or medium term. When demand for a product is increased and supply remains fixed, the result is inflationary pressure on prices. We have only to look at historic patterns of supply and demand for oil and the effect on oil prices to see that this is so.

Third, there are competing uses for land and construction: commercial use competes with residential uses; development for ownership competes with rental development. The supply of land is fixed and as noted it cannot be moved, unlike the supply of raw materials for other commodities. A real estate developer will always opt for the best return on investment. Thus the price of land (and what is built on it) will always be determined by its so-called highest and best use, the maximum possible return on investment. In the unfettered free market land will always be priced at its highest market value regardless of its actual intended purpose.

 

– Nicholas Gazzard, Executive Director, Co-operative Housing Federation of Canada

 

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