The average Kelowna homeowner paid $207,000 more for their home than it is technically worth, thanks to zoning regulations, development charges, and other policies dramatically pushing up the cost of construction.
A new report from The C.D. Howe Institute shines a light on what authors Benjamin Dachis and Vincent Thivierge say are barriers to building new homes that are responsible for the high prices in some of Canada’s tightest housing markets.
The report starts with the well-studied idea that, in a healthy housing market, a new home should sell for approximately what it cost to build.
If a home is priced far above the cost of the labour and materials it took to build it, the report says it’s usually because there are “barriers that inhibit new construction,” and that those barriers usually stem from “excessive regulations.”
The problem, the authors say, is that most governments trying to tackle housing shortages have focused primarily on pushing down demand, without taking “meaningful” steps to increase the housing supply.
“Yet evidence from around the world shows that government policies limiting the supply of housing are among the key causes of higher house prices,” the authors say.
They argue that owners of vacant land compete with each other to sell their land to housing developers. In a market with lots of vacant plots, landowners will compete fiercely, reducing the cost of land.
If land is scarce, however, landowners in areas where governments allow development have market power. As a result, they can charge developers a higher price for land–and that will be reflected in a higher cost for the homebuyer.
To determine how this dynamic affects home prices, the authors calculated how much it should cost to build a home in specific areas, if developers only had to worry about materials and labour. They then compared that number to the actual cost of homes in the area.
In most cities, the difference between the building construction cost per square foot and the market price per square foot is “close to zero,” something the authors say is usual for a “normally functioning” housing market.
However, in the eight cities where the difference was most dramatic, homebuyers paid an average of $230,000 extra for a new house thanks to limits on building.
In Kelowna, which is among those cities, the average new home cost $207,000 more than it would in a “normally functioning” market, with restrictions bumping up the price by a full 27 per cent.
To combat these extra-high prices, the authors recommend “three obvious steps” for governments trying to regulate home prices.
First is to remove zoning barriers that restrict building on certain, in-demand land.
Next, the authors say municipalities should remove water and wastewater services from development cost charges, and replace them with a utility-based, fee-for-use model. DCC’s can inflate the cost of a development, and that cost gets passed on to homebuyers.
Finally, the authors recommend easing restrictions on greenfield housing development (not long ago, a UBC professor advocated for developing on the Agricultural Land Reserve in Kelowna as a way to combat rising home prices).
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