Does Government Policy Increase House Prices?

There has been a lot of news lately (and not-so-lately) about ever-rising house prices – particularly in the GTA. Hardly a day passes without a news story about how “crazy” prices have become. I sometimes put mortgages on the same house year after year – and in one illustrative case, the same Mississauga detached house appraised 20% higher in 2015 than it did in 2014, and then appraised another 20% higher 12 months later in 2016. Houses in my neighborhood are rising even faster – sometimes at 30% per year.

Many of my friends and relatives live outside the GTA, in more rural areas – and many like to approach me to discuss the “obvious real estate bubble” that purportedly exists here in the Toronto area. Some of my university classmates live and work in various places in Asia – and they consider it a truism that our real estate prices are similar to the Dutch “tulip mania” of the 1600s. Regardless of who is involved in the conversation, the comparison always leads to the same comment – that a price crash is inevitable, and the entire Canadian economy is doomed to crash with it.

Because it is accepted wisdom that nothing more than the irrational behaviour of crowds is causing our GTA housing prices to steadily appreciate – we see repeated interventions by various government agencies to try to stem the increases. Recently the Finance Department made changes (yet again) so that it is harder to qualify for common mortgage financing, and created rules so that financial institutions will shoulder more of the loss should mortgages go unpaid.

But is it simply irrational exuberance that is driving local house prices? Are the price increases of the last 10+ years brought about by nothing more than a price “bubble”?

I live in Mississauga, and this is the real estate market I know best. And what strikes me as interesting is how rare it is to see a detached house – combined with a decent lot – for sale. In my neighborhood, “Sherwood Forrest”, mature trees add to the rarity. There are few areas of Mississauga where your house can be surrounded by trees.

Yet our neighborhood – and others – have been specifically identified by the City of Mississauga as having housing density that is “too low” – and therefore developers are encouraged to buy our local houses, apply for permits to bulldoze them down, and erect perhaps four houses on a lot where there previously was one. Instead of a large backyard, now there is a tiny little green area for each of the new houses – perhaps with interlock brick so that it is “low maintenance”. Nearly all of the trees are gone, as is the grass. Often the new grouping of houses share a common front area that acts as their collective “driveway”.

When I drive through areas of Mississauga south of the QEW, I see large swaths of smaller detached houses being demolished, and row housing put in its place. Sometimes the house that was on the lot for the last hundred years is saved for historical reasons, surrounded with 10 or 20 new townhouses.

When you start to look for this “infill” pattern, it is amazing to see how prevalent it is all over the city – in particular considering that usually each of the houses being demolished would make an ideal starter home for a young family. And is it not in the name of the “young family” that the “affordable housing” chorus is constantly being sung?

I would suggest that not everyone wishes to live in a townhouse, or a row house. Some of us still desire to live in a detached house, perhaps with more than a 4-5 feet between us and the house next door. And we might wish to have some grass to cut, some flower beds to tend, and some trees to admire in the summer and fall. Young families might like a yard large enough to throw a football or a frisbee. And would it be beyond reason that rational, thoughtful people might choose to pay extra to live in the (increasingly-rare) detached house with a decent lot?

As the City of Mississauga seems determined to increase housing density within its city boundaries – even if that means tearing down very desirable, million-dollar houses, replacing them with row housing – does it seem possible that Government “Infill” Policy is at least partially responsible for the rising cost of detached homes?

Doesn’t rarity make nearly anything more expensive? Should we be surprised that destroying hundreds of detached houses should cause those remaining to cost more?

More on this in a future post.

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