A major challenge in creating effective housing affordability policies is the lack of consensus on the root causes or the solutions. In Canada, the policy response has largely focused on addressing the shortage of housing supply. However, a recent paper from the Federal Reserve Bank of San Francisco, Housing Affordability and Housing Demand, challenges the prevailing narrative that supply constraints, such as zoning restrictions, are the primary drivers of the affordability crisis. Instead, the paper argues that housing dynamics are better explained by the nature of demand, particularly the difference between income growth and population growth.
Key Findings
- Income vs. Prices: Between 1975 and 2024, house prices grew almost exactly in line with average income while far outpacing median income. This suggests rising prices are driven by demand from high-income earners for greater “housing quality” (larger or higher-end homes), rather than simply a shortage of units.
- The “Unit” Disconnect: Higher average incomes do not translate into more housing units. Instead, they increase the price and quality of the existing housing stock.
- Population Drives Supply: Growth in housing units is almost entirely tied to population growth. Across most U.S. metropolitan areas, including expensive markets like San Francisco, housing supply has actually grown faster than population.
- Labour Market Links: Cities with strong high-skill, high-wage job growth (like San Francisco) tend to see sharply rising home prices but relatively modest supply growth. Cities with broader-based middle-income job growth (like Houston) tend to see both higher prices and significantly higher housing supply growth.
Not surprisingly, the paper sparked a significant debate among housing economists because it directly challenges the “supply-side consensus” — the idea that zoning restrictions and regulation are the primary drivers of the affordability crisis. Critics have noted the following issues:
The Elasticity Measure Problem: Critics argue that the “supply elasticity” measures used by the authors, such as the Saiz index or Wharton Residential Land Use Regulatory Index, are imperfect or outdated. If the underlying measures used to assess how difficult it is to build are flawed, critics contend the conclusion that “constraints don’t matter” is also flawed.
Averaging Out Local Dynamics: Some critics argue that by analyzing broad Metropolitan Statistical Areas (MSAs), the paper overlooks the hyper-local dynamics of housing markets. A region may show strong supply growth in suburban areas while the urban core remains heavily constrained, contributing to the “soaring prices” the authors attribute only to income-driven demand.
Income vs. Wealth: Critics also note that “average income” can act as a proxy for wealth and capital flows. In international “superstar” cities such as Vancouver or San Francisco, house prices may be driven by global capital or intergenerational wealth transfers rather than solely by local labour market incomes.
The “Supply Shock” Counter-Argument: The authors acknowledge that an “exogenous supply shock,” such as a massive drop in construction costs, would lower housing prices. Critics argue that regulatory reform could represent such a shock. In their view, the paper’s retrospective data (2000–2020) shows only that constraints remained consistently high, not that they are irrelevant.
Although this may seem theoretical, it carries significant policy implications.
| Feature | Traditional Supply View | San Fran Cisco Fed Paper (Demand) View |
|---|---|---|
| Main Lever | Zoning & deregulation | Income & labour policy |
| Tax Policy | Reduce development charges | Tax high-end “quality” upgrades |
| Density | Mandatory minimum densities | Density as a tool for population, not price |
| Affordability Strategy | Increase units to induce “filtering” | Support middle-income wage growth |
| Market Philosophy | Supply is constrained by “gatekeepers” | Supply is a mirror of the labour market |
While the supply-side view remains relevant for Canada, it alone does not address the full range of housing challenges faced by different socio-economic groups. We have faced a productivity challenge which has resulted in lower income growth. Addressing this issue is fundamental to improving affordability for middle-income families over the medium term. For low-income families, the challenge is twofold: ensuring an adequate supply of low-income housing and creating a framework that provides targeted subsidies to help close the gap on rent.
Independent Opinion
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