Why more rental units won’t lower house prices

There’s been a lot of talk as of late about how unaffordable housing is in Canada’s two hottest markets: Toronto and Vancouver. This talk prompted more than a few stop-gap solutions—some more ridiculous than others. Still, there’s one option, when it comes to addressing housing affordability, that tends to get less than its fair share of press: build more rental units. (The theory is more options for living space, helps reduce demand in the neighbourhood and this helps lower house prices.)

This is one of the solutions put forward in a recent Vancity report. As Vancouver’s largest credit union, Vancity analyzed the lack of affordable housing in this west-coast city. The result was a shocking snapshot of this west-coast city:

→ Between 2001 and 2014, Metro Vancouver housing costs increased 63%, while salaries only rose 36.2%

→ Vancouver housing is projected to rise by 4.87% a year, but salaries will continue their low growth: wage rate growth with only rise between 0.6% for some occupations to about 3.2% for others

→ By 2025, the household income required to maintain the average mortgage will be $125,692

→ Economically vital occupations such as industrial electricians, civil engineers, construction managers, police officers, firefighters and general practitioners will not meet this threshold

To address these problems, Vancity’s report provided 16 tangible ideas on how to alleviate the housing affordability crisis in Vancouver. Ideas that could easily be adopted in other Canadian cities that also face a housing crisis. These 16 solutions were divided up between governmental, business and individual initiatives and the options ranged from more inclusive zoning, to repurposing community housing land, to developing a living wage, to giving up on the idea of home ownership altogether. It’s this last suggestion that could be both a launching point to building more vibrant cities, but also a suggestion that is sure to get stuck in a person’s throat.

“It’s a fallacy that home ownership needs to be the cornerstone of a strong financial plan,” says Andy Broderick, Vancity’s VP of community investing. “It doesn’t have to be.” The idea is that a refocus away from homeownership to neighbourhood redevelopment would help create more vibrant and sustainable cities—cities that could nurture current as well as future residents.

In the least affordable cities this means focusing on more family-centric rental housing. This would enable planners to concentrate on providing more opportunities for residents that “fuel and build a city to live in that same city,” says Broderick. Building rental units in sought-after urban communities would also help  reduce environmental damage caused by longer commutes and deter or prevent a possible flight-of-talent that may occur in the near future if more and more middle-class urbanites are unable to afford to live in the city they work in.

In theory this all makes sense. In practice, we’ve actually already seen a bit of this: many real estate investors in Vancouver and Toronto (as well as other cities), for instance, turned their downtown condos into rental units. This prompted an urban-core revitalization and more and more renters tried to find suitable accommodation in the same high-demand neighbourhoods they rent in.

But when I went looking for evidence on how building more rental units could ease the upward pressure on house values, I was stunned to learn that this might not actually be the case. An analysis of studies on whether or not affordable rental housing led to property values by the Greater Real Estate Board of Vancouver showed that:

“Most often, average home prices increase more in areas where there is new high density development than in areas where there is not, according to research in seven communities done by the BC Housing Policy Branch.”

Woa. I thought the whole point of building more rental units was to help housing affordability—both for those that want to live in the least-affordable urban cores, but also for those that want to add home ownership to their net-worth statement? So, I’m still not convinced that focusing on rental housing will help with our nation’s housing affordability crisis.

This is probably a good thing, considering I feel more than a bit hypocritical telling a generation of would-be homeowners to give up on the idea of home-ownership, even as I pay my mortgage each month, and watch my net-worth grow. It’s like telling a kid in a candy store: Look but don’t touch.