Traditionally, the basic economic principle of supply and demand tells us that increasing supply should bring down prices.
So if housing prices are too high, it seems straightforward to solve the problem by building more units.
When we have more housing supply, prices should come down.
Are there any exceptions?
A recent report by Oxford Economics estimates that Canada must build 4.2 million new homes in the next 10 years to restore balance in the housing markets.
So we need to build 420,000 homes every year over the next decade
That’s nearly 70% more than the average construction output we had in recent years.
If we can achieve that, homeownership would theoretically be back within reach for typical households by 2035.
Of course, it is a big question mark how feasible it is to significantly increase our construction output.
But that’s not what I want to talk about today.
I want to share a very unique perspective from the report.
There are 2 cities in Canada where affordability may not be restored even if we could build 4.2 million homes in the next 10 years.
In fact, more supply could lead to less affordability in these cities.
How does that make any sense?
Let’s zoom out of Canada for a moment and take a look at other cities worldwide.
If I say that a never satisfied housing demand and persistently high prices are signatures of London and New York, I don’t think anyone would disagree.
There are 6 common factors behind.
#1 Global Financial Hubs
Both London and New York are famous hubs for finance, business and culture.
They draw in international companies, top-tier professionals and expats from around the world.
This global attraction keeps demand high for both residential and commercial properties, constantly driving up prices.
Whether people are moving for career opportunities, lifestyle or investment purposes, the interest in these cities means the competition for real estate never really cools down.
#2 Population Growth and Immigration
London and New York are magnets for people looking for better opportunities, education, and an improved quality of life.
With so many people constantly moving in, the demand for housing just keeps growing.
#3 Limited Land and Space
Both cities have geographic constraints that limit the amount of land available for development.
In London, the Green Belt restricts outward expansion.
New York has similar challenges with its dense urban core and surrounding waterways.
This scarcity of developable land naturally increases competition and drives up housing prices.
#4 High Investment Demand
Both cities are attractive to foreign investors seeking stable real estate markets and potential capital gains.
This can lead to speculative buying and price appreciation, making housing less affordable.
#5 Social and Economic Infrastructure
Both cities offer world-class infrastructure, amenities and social networks, which make them highly desirable places to live and work.
The reputation and status associated with living in these cities add to the demand, ensuring a constant competition for housing.
#6 Cultural and Lifestyle Appeal
London and New York offer diverse cultural experiences, top-tier education, and an unmatched lifestyle, attracting residents who are willing to pay a premium to be part of such dynamic environments.
This adds a persistent layer of demand, particularly in central and well-connected areas.
Did you notice that these 6 reasons also apply to 2 cities in Canada?
That’s right.
Vancouver and Toronto.
And that’s exactly why a never satisfied housing demand and persistently high prices are also signatures of the cities.
So how come we can’t solve the problem by simply increasing housing supply in London, New York, Toronto and Vancouver?
The issue is with induced demand.
Let’s think about the problem of traffic congestion.
We want to reduce the congestion, so we widen the road.
It works initially, but soon enough, the widened road attracts even more cars and congestion returns again.
This is called induced demand.
It is the same thing with increasing housing supply.
Building more housing in desirable locations can attract new residents to the city.
This influx of people adds to the overall demand for housing, which can potentially offset the initial increase in supply and drive prices back up.
Increased housing construction can signal a booming market for investors.
More investors are attracted because they see the opportunity for further price appreciation.
This increased demand can potentially drive prices up as well.
There is also a portion of the population who have been delaying or avoiding homeownership because of high prices or limited options.
With more housing available, they will become more active.
That can also add to the demand, further increasing competition and potentially driving up prices.
You see, while increasing housing supply is crucial, it is not a standalone solution to the affordability crisis in cities like Vancouver and Toronto.
The interplay of induced demand, global attraction, limited land and slow pace of new construction creates a complex market dynamic where simply building more homes may not lead to significantly lower prices.
Even though we are undergoing a major correction in the housing market right now, a massive price crash of 30% or more in Toronto or Vancouver is very unlikely because:
One, the desirability of these cities remain high, driven by employment opportunities, lifestyle and immigration.
Two, governments are likely to intervene to prevent a dramatic housing crash due to the potential ripple effects on the broader economy.
Three, long-term supply shortages and strong population growth typically create a floor under prices.
Next week, we will be doing a market update based on the August market watch report.
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