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The Housing Market’s Matching Problem

17 June 2024

Economics is largely about creating the right incentive structures. However, housing policy often overlooks this principle, resulting in significant mismatches between households and the available housing stock. This issue is evident in policies around both rental and housing supply.

Average rents have been rising, and any efforts to increase supply will take years to have any substantial effect on alleviating pricing pressure. The typical political response to this situation is to impose rent control. While controlling rents may be politically expedient in the short term, the medium-to-long term effect is to make housing even less accessible.

In a recent study, Swedish economist Herman Donner examined how housing demand responds to rent control. He found that rent control leads to overconsumption of housing due to less-than-optimal household apartment matching. 

In Stockholm, regulated rents are, on average, 36.1% lower than market rents. As a result, the average household rents an apartment that is 15.9% larger than they would if they were paying market rent. This difference in rents results in increased demand that amplifies housing shortages and reduces access to housing – an outcome that is counter to the policy’s objectives. Donner’s study suggests that if market rents were allowed, the existing housing stock could accommodate 20.6% more renters.

While rent controls hinder the optimal matching between rental stock and renters, we face an even bigger matching problem: single-family homes. As baby boomers reach retirement age, they no longer need the extra space in their homes. The challenge lies in providing housing that meets the needs of seniors as they downsize.

There is much more that CMHC could do to create incentives for better matching between households and the housing stock. While this might require developing new types of housing that bundle services such as health care facilities, it would allow for the more efficient use of the existing housing stock and alleviate supply pressures, especially given the dearth of new single-family homes being built.


Independent Opinion

The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.

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