The pressing need to increase housing supply in cities has received sustained attention as policymakers search for solutions to the housing affordability crisis. CMHC recently updated its estimate on the number of housing starts “required” to alleviate the housing shortage. While the specific figures have changed, the core message remains the same: there isn’t enough housing, and we need to build more.
Although CMHC doesn’t share the details of its model, an essential component of addressing this challenge is determining how the own-price elasticity of housing supply varies over time and across regions. The problem is that measuring supply elasticity is far from simple.
While the concept of supply elasticity—the percentage change in quantity supplied in response to a change in price—is straightforward in theory, accurately estimating housing supply in practice remains notoriously difficult. Clear measures of the key components of the equation, such as the true quantity and price of housing services, are lacking.
For example, most analyses are based on the number of housing units, which likely understates changes in the actual supply of housing services over time. Over the last 50 years, the average home size has increased, and the quality of existing units has improved significantly.
Measuring prices presents similar challenges. Most models estimate the user cost of capital using rental rates, but reliable residential rent data is scarce.
There’s also the added complexity of measuring short-run versus long-run supply elasticities.
Many direct estimates of supply elasticity come from studies examining the impact of land use regulation on housing markets. CMHC has partially adopted the approach used by economists Gyourko and Molloy in assessing the relationship between regulation and housing supply. Unfortunately, this method provides only a relative ranking across participating cities, making it difficult to determine whether the data meaningfully supports the conclusions in CMHC’s housing supply report.
This is just one example of how a major policy discussion is being built on poor data. CMHC’s Market Analysis Centre was once focused on providing regional and national housing market insights. Since the financial crisis, its focus has shifted to a marketing role. The group is now often used to justify corporate opinions, such as claims that the housing market is overheated or that we have a supply problem.
Most of its reports are neither timely nor offer any clear policy guidance. For example, pointing out that there are productivity challenges in the housing market isn’t new. What’s actually useful is identifying concrete policies to improve housing productivity. It’s fine to say that improving interprovincial trade could help, but CMHC should be outlining the biggest barriers and highlighting where reforms would deliver the greatest impact. Without that kind of substantive analysis, their studies offer little value.
I suspect these economists prefer writing papers to developing better housing market data. However, improving data would provide significantly greater value in understanding the policy choices governments must make to solve our housing problem.
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.
