I made the apparently controversial observation that adding people faster than we can build housing will increase housing costs.
This led to a LinkedIn discussion where people informed me that the real problem is “affordability,” that builders could supposedly ramp up housing production almost immediately, and that invoking supply and demand makes me sound like an Ayn Rand caricature. Apparently arithmetic has a political affiliation now, sigh.
Affordability Is the Outcome
I have serious problems with monopolies, oligopolies, speculation, price manipulation and large companies using market power to squeeze ordinary people. I am quite comfortable breaking up monopolies and going after anti-competitive behaviour.
However, none of that changes the underlying mathematics. In short, “Affordability” describes the outcome. It does not explain the mechanism.
Saying housing is expensive because people cannot afford it is circular. Why can they not afford it? What caused prices and rents to rise faster than incomes? How many households need housing? How many suitable homes exist? How quickly can we add more? These are supply-and-demand questions.
CMHC estimates that Canada needs roughly 430,000 to 480,000 new homes every year until 2035 to restore affordability to 2019 levels. The projected construction rate is about 250,000 per year. I do not think people realize how bonkers that number is.
In Canada, we are not missing a few houses around the edges. We need something approaching almost twice our current construction pace.
Builders Cannot Magically Ramp Up
Yet, Builders cannot simply “ramp up” tomorrow because buyers suddenly have more money. Housing requires serviced land, permits, financing, equipment, infrastructure and skilled workers. Those resources are fundamentally limited.
As a means of example: Suppose everyone looking for a house receives another $100,000 while the number of available homes stays the same. We have not created housing. We have given the same group of people more money to bid against each other. Sellers capture much of the increase through higher prices.
Oddly enough, one person in the discussion argued that housing became more expensive when two-income households became common. That example proves the point. Purchasing power increased faster than supply, allowing households to bid more for scarce property.
In short, giving people more money does not automatically make a scarce product more affordable.
Work on the Actual Curves
There are many legitimate ways to work on the supply and demand curves themselves.
We can allow more density. We can speed up permitting. We can examine whether every building standard produces enough safety or public benefit to justify its cost. We can encourage smaller and cheaper homes. We can expand infrastructure and serviced land. We can address speculation and concentrated ownership. We can ban or tax AirBNBs and speculative condos/homes. We can enforce competition law and make it harder for dominant players to manipulate markets.
Each of those policies changes supply, demand, costs or market power. That is why they may work.
Price controls tend to treat the visible number as though it caused the problem. Suppressing the price does not manufacture the missing product. It can also reduce the incentive to build, renovate or rent additional units, leaving the original shortage festering underneath.
A government can declare what it thinks something should cost. It cannot legislate thousands of additional homes into existence.
Immigration Cannot Be Separated From Capacity
Canada also needs to stop pretending immigration targets exist in a separate universe from housing, health care, education and infrastructure. Canada’s population grew by more than 1.27 million people in 2023, with most of that growth coming from temporary immigration.
The Bank of Canada has stated plainly that housing construction failed to keep pace with population growth and that the increase in newcomers added pressure to rents and home prices.
This is a blunt criticism of government capacity planning. It says nothing hostile about the people arriving. Newcomers need homes too. Pretending they somehow do not create housing demand is deeply unfair to them, since they end up competing inside the same broken market.
Immigration levels need to be connected to our actual capacity to house and serve people. We blew past that capacity. Continuing unfettered population growth while hoping the construction industry will miraculously catch up is magical thinking. Magical thinking that has led to the mess we are currently in.
There is even evidence of the same mechanism operating in reverse. As population growth slows and housing supply increases, pressure on rents begins to moderate. Supply rises. Demand growth slows. Price pressure eases.
That is the model doing exactly what the model says.
Mathematics Does Not Have a Political Affiliation
People are free to dislike landlords, corporations, immigration policy, zoning, developers, investors or the entire economic system. I have criticisms of several of them myself. None of that changes the basic relationships involved.
The law of gravity remains true even when the person mentioning it is unpleasant. Supply and demand remains true even when someone accuses a person of being Ayn Rand with a meme GIF underneath it. By referring to basic economics does not mean I support monopolies, giant corporations, predatory landlords or every decision made by a developer.
It means that I would rather diagnose the actual mechanism than blame an ethereal concept called “affordability” and enact policies that make the underlying problem worse.
At the end of the day, this is basic fecking mathematics.