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Housing policy, tenure choice and the demand for housing in greater Vancouver Dale-Johnson, David Terrance 1975

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HOUSING POLICY, TENURE CHOICE AND THE DEMAND FOR HOUSING IN GREATER VANCOUVER by DAVID TERRANCE DALE-JOHNSON B.A., U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1969 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IH BUSINESS ADMINISTRATION i n the F a c u l t y o f Commerce and B u s i n e s s A d m i n i s t r a t i o n We a c c e p t thj^s 7 t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s ^ n c l a r d THE UNIVERSITY OF BRITISH COLUMBIA Jan u a r y , 1975 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Division of Urban Land Economics Faculty of Commerce and Business Administration The University of B r i t i s h Columbia Vancouver 8, Canada Date A p r i l 28, 1975 ABSTRACT I n e c o n o m i c h i s t o r y t h e s t u d y o f t h e e c o n o m i c s o f h o u s i n g i s a r e l a t i v e l y r e c e n t phenomena. C u r r e n t m a c r o - e c o n o m i c and m i c r o - e c o n o m i c t h e o r i e s d e p e n d t o a l a r g e e x t e n t o n r e s e a r c h u n d e r t a k e n w i t h i n t h e l a s t t w e n t y f i v e t o f i f t y y e a r s . F o r t h e m o s t p a r t much b a s i c e c o n o m i c t h e o r y h a s n o t b e e n a p p l i e d t o t h e a n a l y s i s o f h o u s i n g m a r k e t s a nd t h e i m p a c t o f h o u s i n g p o l i c i e s . I n v i e w o f t h e c u r r e n t e x t e n t o f c o n c e r n b y b u s i n e s s , g o v e r n -ment and t h e p u b l i c w i t h r e g a r d t o h o u s i n g p r o b l e m s , t h e l a c k o f r e s e a r c h w h i c h a p p l i e s s i m p l e e c o n o m i c p r i n c i p l e s t o t h e s t u d y o f h o u s i n g m a r k e t s i s u n f o r t u n a t e . I n g e n e r a l , r e s e a r c h h a s b e e n c o l o u r e d b y e m o t i o n a nd r h e t o r i c due t o t h e p r e v a l e n c e o f t h e c o n c e p t t h a t a d e q u a t e s h e l t e r a t a p r i c e t h e c o n s u m e r c a n a f f o r d s h o u l d be a b a s i c human r i g h t . A s p o p u l a r i s s u e s , h o u s i n g p r o b l e m s t h a t a r e p e r c e i v e d h a v e t e n d e d t o be c o n t r o v e r s i a l g e n e r a t i n g q u i c k b u t o f t e n i r r a -t i o n a l a t t e m p t s t o p r o v i d e s o l u t i o n s . I t i s b e c o m i n g more a n d more c l e a r t h a t w h a t e v e r p r o b l e m s a r e p e r c e i v e d t h e r e a r e no s i m p l e s o l u t i o n s . The r e a s o n b e i n g t h a t h o u s i n g p r o b l e m s a r e n o t s i m p l e p r o b l e m s . No one s e c t o r s h o u l d b e a r t h e b r u n t o f c r i t i c i s m n o r c a n a n y one s e c t o r p r o v i d e t h e s o l u t i o n t o s u c h a c o m p l e x p r o b l e m . ( i i ) In view of the complexity of the problem, i t i s e s s e n t i a l that some r a t i o n a l form of analysis be used i n order t o , f i r s t l y , i d e n t i f y the cause of the problem and secondly suggest a viable solution. Although t h i s study looks at housing markets and the impact of housing p o l i c i e s i n the context of the Greater Vancouver Regional D i s t r i c t the methodology and conclusions may generally be applied to other areas i n Canada. More-over the methodology of the analysis can be used for any housing market. This study f i r s t l y develops the methodology for analysis and secondly, summarizes the major factors influencing de-mand for housing and consumer choice within housing sub-markets. Some of these factors can be termed natural while some are better termed policy-induced. For example, the rate of immigration i s a natural factor influencing demand while preference for home ownership generated by subsidies to home-owners may be termed a policy-induced demand factor. Thirdly the study shows the impact of the various demand factors on the housing market and submarkets through an application of economic s t a t i c s . F i n a l l y , some conclusions are made i n the l i g h t of the results of the analysis. Im-p l i c i t throughout the entire analysis i s an evaluation of some of the major aspects of Canadian housing poli c y . TABLE OF CONTENTS PAGE Abstract L i s t of Tables L i s t of Figures Acknowledgement INTRODUCTION Chapter I CHARACTERISTICS OF HOUSING 1.1 A DESCRIPTION OF HOUSING 1.11 Stock 1.12 Flow 1.13 Form of Tenure 1.2 NATURE OF THE COMMODITY AND THE MARKET 1.21 Immobility 1.22 D u r a b i l i t y 1.23 Heterogeneity 1.24 High Cost 1.25 Poor Communication 1.26 Government Intervention Chapter II THEORY OF THE SUPPLY OF AND DEMAND FOR HOUSING 2.1 BASIC SUPPLY AND DEMAND 30 2.11 U t i l i t y and Consumer Choice 32 2.12 Tenure Choice 34 2.13 Supply and Demand Variables 34 2.14 Supply of Land 37 2.15 Supply of Housing 39 2.2 THE ECONOMIC MODEL OF THE HOUSING MARKET 40 2.3 THE HOUSING MODEL BY TENURE SUBMARKET 43 2.4 MANIPULATION OF THE MODEL 47 2.51 Changing Demand Variables 47 2.52 Changing Supply Variables 50 2.53 Price Controls 53 1 6 7 7 7 9 13 13 15 16 19 22 24 PAGE Chapter III EVALUATION OF THE HOUSING MARKET 59 3.1 DISTRIBUTION AND ALLOCATION 59 3.2 DISTRIBUTION AND ALLOCATION IN fi2 THE HOUSING MARKET 3.3 HOUSING STANDARDS, HOUSING NEEDS AND fir. HOUSING DEMAND 3.4 MARKET INDICATORS 68 - Vacancy Rates - U t i l i z a t i o n Rates - Price S t a b i l i t y 3.5 THE DEFINITION OF A HOUSING SHORTAGE 71 Chapter IV THE CHOICE BETWEEN RENTING AND OWNING 77 4.1 SUBSTITUTABILITY, CONSUMER CHOICE AND 79 UTILITY 4.2 THE REAL COSTS OF RENTING AND OWNING 84 4.21 Capital Costs 85 4.22 Ongoing Costs 86 4.3 THE INFLUENCE OF REALLOCATIVE POLICIES 90 4.31 Non-Taxation of the Imputed 90 Income of Owned Homes 4.32 Exemption from Capital Gains 93 Tax of Owned Homes 4.33 Other Federal P o l i c i e s 94 4.34 P o l i c i e s i n the Province of B r i t i s h Columbia 96 4.4 THE IMPLICATIONS 97 Appendix - Chapter IV 104 FURTHER COMMENTS on the COSTS OF RENTING AND OWNING APPENDIX 4.1 A CASE COMPARISON 104 APPENDIX 4.2 RHOSP: SUBSIDY TO RENTER OR OWNER? 107 (v) PAGE Chapter V OTHER DEMAND VARIABLES IN GREATER 110 VANCOUVER 5.1 HOUSEHOLD FORMATION AND HOUSING 110 DEMAND 5.11 The War Babies 113 5.12 Formation of One-Person 115 Households 5.13 Net Migrat ion 118 5.2 INCOME AND THE DISTRIBUTION OF 121 INCOME 5.3 PRICE AND PRICE EXPECTATIONS 125 5.4 CREDIT AVAILABILITY, COST AND 128 DEMAND Chapter VI CONCLUSIONS 139 6.1 THE APPARENT PROBLEM 139 6.2 THE INFLUENCE OF HOUSING POLICY ON 141 DEMAND AND ON THE HOUSING MARKET 6.3 THE IMPLICATIONS 146 BIBLIOGRAPHY (vi) LIST OF TABLES PAGE Chapter IV 4-1 TAX SUBSIDY TO HOME OWNERSHIP DUE TO NON- 91 TAXATION OF IMPUTED RENTAL INCOME Appendix - Chapter IV I CASE COMPARISON OF THE COSTS OF OWNING VERSUS 106 RENTING Chapter V 5-1 HOUSING SUPPLY AND DEMAND IN THE GVRD 111 1956-1981 5-II GROWTH OF ONE PERSON HOUSEHOLDS IN GREATER 116 VANCOUVER 5-III MIGRATION TO THE GVRD 119 5-IV AGE AND SEX DISTRIBUTION OF MIGRANTS TO THE 119 GVRD 1966-71 5-V APARTMENT RENTS IN GREATER VANCOUVER, 125 1964-74 5-VI AVERAGE SALES PRICE IN THE GREATER VANCOUVER 126 AREA: MULTIPLE LISTING SALES, 1964-74 5-VII NHA - INSURED MORTGAGE LOANS: CHANGES IN 131 SELECTED TERMS, 1954-1972 5-VIII NHA - INSURED MORTGAGE LOANS: MAXIMUM TERMS 132 AS OF OCTOBER, 1973 ( v i i ) LIST OF FIGURES PAGE Chapter II 2-1 OVERVIEW OF THE HOUSING MARKET 31 2-2 STOCK AND FLOW MODEL OF THE HOUSING MARKET 41 2-3 & 2-4 THE HOUSING MODEL BY TENURE SUBMARKET 44 2-5 & 2-6 SHIFT IN DEMAND FROM RENTAL TO OWNERSHIP 49 2-7 & 2-8 DEMAND AND CHANGING FACTOR COSTS 52 2-9 RENT CONTROLLED SUBMARKET 55 ( v i i i ) ACKNOWLEDGEMENT I would l i k e to thank my thesis advisors, Professors Stanley W. Hamilton and David Baxter, for t h e i r patience and guiding c r i t i c i s m , without which t h i s study could not have been completed. I would also l i k e to thank Professor Fred Pennance whose i n i t i a l guidance with respect to the economics of housing and housing p o l i c y generated my in t e r e s t and provided the framework es s e n t i a l to t h i s analysis. I would also l i k e to take t h i s opportunity to express my appreciation to Professor Hamilton for his s i g n i f i c a n t c o n t r i -bution toward making my p a r t i c i p a t i o n i n the graduate program i n Urban Land Economics a valuable and f r u i t f u l experience. ( i x ) INTRODUCTION There i s probably no topic the subject of more emotional debate than the cost and a v a i l a b i l i t y of housing. Despite t h i s concern and the increased diversion of human and c a p i t a l resources to the study of urban problems and the resultant policy decisions, the problems seem to remain unsolved and i n f a c t grow worse. It i s the intent of t h i s thesis to look s p e c i f i c a l l y at the housing market and more importantly the factors which i n -fluence change i n the housing market. It has not been sur-p r i s i n g that considerable pressure has been applied to the housing supply sector i n Greater Vancouver. Unlike most other major Canadian c i t i e s Vancouver i s faced with a re-l a t i v e l y limited amount of land suitable for housing. More-over growth i n Greater Vancouver has been rapid due to po-pulation growth generated by the r e l a t i v e l y strong economy in B r i t i s h Columbia and the mild climate on the West Coast. Moreover a strong trend toward urbanization and migration to large urban centres has had i t s impact.* Considerable research has already been directed toward spe-c i f i c problem areas which have resulted. For example, recent research has looked at the shortage of r e s i d e n t i a l r e n t a l accom-2 modation i n Greater Vancouver. Further research has explored the - 1 -shortage of building l o t s i n Greater Vancouver and more 3 generally the supply of new housing i n Greater Vancouver. However these problem areas are not the r e a l issues. These problem areas have been created by the responses of business and governments to a more deep-seated problem. The r e a l issues are the preferences of the Canadian consumer which have been molded by years of p o l i c i e s from various lev e l s of government. These p o l i c i e s either d i r e c t l y or i n d i r e c t l y have influenced the Canadian consumer and his choice i n housing. It i s the intent of t h i s thesis to demonstrate how these p o l i c i e s have generated s h i f t s i n consumer demand which have resulted i n a misallocation of the e x i s t i n g stock of dwelling units and given impetus to supply responses which have not been i n tune with the needs of the community. Coincidently these p o l i c i e s have excerbated shortages i n various housing submarkets, i n p a r t i c u l a r the market for r e n t a l units and the market for owned units. The methodology of the analysis w i l l be as follows. Chapter One w i l l look at the c h a r a c t e r i s t i c s of housing and the char-a c t e r i s t i c s of the market i n which i t trades to provide a background for those not acquainted with the unique q u a l i t i e s of the housing commodity. These unique q u a l i t i e s place l i m i t a t i o n s on the numerical measurement of demand, the ex-- 2 -i s t i n g s t o c k o f h o u s i n g a n d t h e f l o w o f new u n i t s . Hence r i g o u r o u s e c o n o m i c a n a l y s i s o f t e n d e p e n d s on t o o many assump-t i o n s t o be o f p r a c t i c a l v a l u e . D e s p i t e t h e s e l i m i t a t i o n s , C h a p t e r Two w i l l p r o v i d e t h e b a s i c s -f o r t h e e c o n o m i c a n a l y s i s o f t h e h o u s i n g m a r k e t . The m e t h o d -o l o g y w i l l e n t a i l t h e u s e o f e c o n o m i c s t a t i c s a n d a l t h o u g h t h e e x t e n t o f c h a n g e s g e n e r a t e d b y t h e v a r i a b l e s c a n n o t be m e a s u r e d c e r t a i n l y t h e d i r e c t i o n o f c h a n g e and p o t e n t i a l i m p a c t w i l l be c l e a r . A s w e l l t h e s t a t i c m o d e l w i l l be e x p a n d e d t o show t h e i n t e r d e p e n d e n c e o f t h e h o u s i n g s u b m a r k e t s b y t e n u r e . The p u r p o s e o f C h a p t e r T h r e e w i l l be t o d i s c u s s t h e means by w h i c h p o l i c i e s i n f l u e n c i n g t h e h o u s i n g m a r k e t a n d t h e h o u s i n g m a r k e t i t s e l f c a n be e v a l u a t e d . O f t e n i t i s c h a r g e d t h a t a h o u s i n g c r i s i s e x i s t s a n d t h i s c h a p t e r a t t e m p t s t o s t r i p away t h e r h e t o r i c a n d l o o k a t t h e means by w h i c h t h e e q u i t y o r e f f i c i e n c y o f t h e h o u s i n g m a r k e t c a n be j u d g e d . U s i n g t h e f i r s t t h r e e c h a p t e r s a s a b a s i s f o r a n a l y s i s , C h a p t e r F o u r l o o k s a t t h e c o n s u m e r ' s c h o i c e i n t e n u r e a n d t h e e c o n o m i c f a c t o r s a n d g o v e r n m e n t p o l i c i e s w h i c h i n f l u e n c e t h a t c h o i c e . I t d e m o n s t r a t e s t h e b i a s t o w a r d home o w n e r s h i p w h i c h i s c o n s i s t e n t t h r o u g h o u t much p o l i c y w h i c h , e i t h e r d i r e c t l y o r i n d i r e c t l y , h a s a n i n f l u e n c e o n t h e c o n s u m p t i o n o f h o u s i n g . - 3 -Clearly numerous other factors have considerable impact on the demand for housing. To look only at p o l i c i e s which have generated demand and influenced tenure choice would ignore the most obvious variables which influence demand for housing. Chapter Five provides a cursory analysis of some of the major demand factors i n Greater Vancouver but i n the context of the question of tenure choice. The conclusions contained i n Chapter Six w i l l draw together the t h e o r e t i c a l basis for analysis, the analysis of government p o l i c i e s influencing housing demand and tenure choice and the other demand variables. The conclusion w i l l summarize what has gone wrong and why and i n the process provide some sugges-tions for change. - 4 -FOOTNOTES - INTRODUCTION 1. N.H. Lithwick, Urban Canada: Problems and Prospects, (Ottawa: C.M.H.C., December, 1970), p. 33, p. 136, p. 181. 2. Robert C. Levine, The Economic Reasons for the Shortage  of Residential Rental Accommodation i n Greater Vancouver, Master's Thesis, University of B r i t i s h Columbia, 19 74. 3. Gary A. Young, The Municipal Subdivision Process i n Metropolitan Vancouver, Master's Thesis, University of B r i t i s h Columbia, A p r i l 1974; and Ian L. Beveridge, The  Land Development Process as i t Affects the Supply of  Housing within the Greater Vancouver Regional D i s t r i c t , (Vancouver: The Real Estate Board of Greater Vancouver, • May 1974). - 5 -CHAPTER I CHARACTERISTICS OF HOUSING Before the economics of the housing market can be an-alyzed the actual commodity which i s the subject of t h i s discussion and the market i n which i t trades must be ca r e f u l l y delineated. There have been attempts to define hous-ing and the market i n such a way as to make them quantifiable. The goal of such attempts being to establish some sort of standard and some system of measurement with a view to pre-cise forecasting. Although t h i s type of empirical research can be helpful i n describing the nature and d i r e c t i o n of human actions i t i s limited by the qual i t y of the data i n -put and by the fact that i s i s using past data to forecast future trends. The most serious c r i t i c i s m , however, i s that such analysis ignores economic variables such as consumer preferences, prices and incomes v/hen deriving standards and methods of measurement. This chapter w i l l provide some i n -sight into the housing commodity and the market in which i t trades i n order that l a t e r chapters can explore the role of the consumer and his preferences rather than evaluating and measuring the market using some vacuous standard. - 6 -1.1 A DESCRIPTION OF HOUSING Housing i s a physical object or flow of services for which there exists a consumer demand. It i s perhaps most simply defined as shelter but such a s i m p l i s t i c view of a commodity considered to be a r i g h t of a l l i s unacceptable. Disregarding for the time being the s o c i a l issues, housing can be best described i n any one or a l l of three ways.; 1.11 Stock F i r s t l y , t h e stock of housing or c a p i t a l assets i n the form of housing structures i s a quantifiable and more commonly used means of defining the amount of housing abailable to Canadians. S t a t i s t i c s provided monthly and summarized year-ly by the Central Mortgage and Housing Corporation record dwelling s t a r t s , completions and units under construction by dwelling type. These are measures of additions to the stock. Dwelling types are defined as single detached, semi-detached and duplex, row and apartment and others. In census years, S t a t i s t i c s Canada actually measures the exi s t i n g stock of occupied dwellings. For example, i n 1971 i n the Vancouver Me-t r o p o l i t a n area there were 345,870 occupied dwellings, 142,345 of which were tenant occupied with the remaining 59% of the stock being owner occupied. 1 1.12 Flow The stock approach, however, ignores the concepts of capacity and - 7 -quality. Capacity and quality of the housing stock are re-presentative of the flow of services which any given stock can provide and are not e a s i l y quantifiable unlike the notion of physical stock. The flow of services approach i s the second way of describing housing. This approach negates the analysis of housing as a commodity or good; i t now becomes a f l e x i b l e mix of c h a r a c t e r i s t i c s determined not only by the nature of the stock but also the way in which i t i s used. Why i s the concept of flow so d i f f i c u l t to quantify or define? The s t a t i s t i c s representing the ex i s t i n g stock or additions to i t do not account for size or quality of the units, the sizes of rooms, the age and condition of the unit or external factors such as location, neighborhood and amenities. A l l these factors are most important i n evaluating the flow of services provided by the housing unit. S t a t i s t i c s enumerat-ing the stock or additions to i t give no indica t i o n of the way i n which the stock and the flow of services i t provides are used. Variations i n demand which est a b l i s h the trading price also determine the degree to which the stock and flow are employed. Suffice to say that the existence of a single family dwelling implies nothing about the number or size of families which can consume i t s services, i t implies nothing about the number or size of families who may want to consume i t s services, and f i n a l l y i t makes no value judgement about the degree of usage which i s s o c i a l l y acceptable. - 8 -The stock of housing can be viewed as assets which have at any given time a certain c a p i t a l value and re n t a l value. The stock i s represented by the market c a p i t a l value and the flow of services by the market ren t a l value. Although contemporary r e a l estate practice often assumes a constant r a t i o between the c a p i t a l value and the rent a l value such an assumption i s undermined by opportunity costs unique to each buyer and inconsistent r i s k and operating costs between d i f f e r e n t dwelling units. Nonetheless as the c a p i t a l value i s a means of quantifying the stock of housing, the re n t a l value(which can be established even i f the unit i s owner-occupied) i s a means of quantifying the flow of services. The measurement of stock and flow by market c a p i t a l value and market rental value ensures that general trends i n prices w i l l e l i c i t appropriate responses from the pro-duction sector and that c a p i t a l or rent a l value w i l l i n -dicate the consumers preference for d i f f e r e n t types of housing and housing i t s e l f , r e l a t i v e to other goods and services. 1.13 Tenure The t h i r d means by which housing may be conceptualized i s by tenure. Here an understanding of the law of r e a l pro-perty i s esse n t i a l to dis t i n g u i s h between the rights of the owner or tenant (leaseholder). Contemporary land law i n - 9 -Canada i s derived from the feudal times i n England where over many years a s t r i c t set of le g a l rules grew up for recognizing a limited number of interests i n land. Medieval landlords and t h e i r lawyers defined ownership i n two main ways: (a) According to the length of time that the holder of the inte r e s t would have the ri g h t to exclusive possession of the land, c a l l e d estates i n time; (b) according to the kind of use permitted or r e s t r i c t e d on the land, c a l l e d 2 interests less than estates. Of i n t e r e s t i n t h i s analysis are the major categories of estates i n time c a l l e d freehold estates and leasehold estates. The greatest i n t e r e s t a man can hold i n land i s the fee simple estate, a type of freehold which allows him to hold the land i n f i n i t e l y subject only to i t s return to the government i n the event of his death without having r e l a t i v e s to i n h e r i t the property or a w i l l to designate i t s rec i p i a n t . A r e a l property owner i s said to hold the fee simple i n h i s property. Unlike the freehold estate, the leasehold estate i s an inte r e s t i n land for a d e f i n i t e period of time. The length of time may vary and leaseholds of ninety-nine years are not uncommon. In a leasehold estate the party to whom the inte r e s t i s granted i s c a l l e d the lessee or tenant while the grantor of the intere s t i s c a l l e d the lessor or landlord. - 10 -In other parts of Canada, r e s i d e n t i a l leaseholds of one year or more are common while i n B r i t i s h Columbia most r e s i d e n t i a l leaseholds are on a month to month basis and the r e l a t i o n -ship between landlord and tenant i s commonly c a l l e d renting. It should be noted that the law, when r e f e r r i n g to land., generally includes the land and a l l that i s permanently attached to i t , including buildings, trees and the l i k e . A fee simple or leasehold i n t e r e s t i n land are bundles of rights which are the commodity traded on the market. With more t y p i c a l commodities the commodity i t s e l f rather than the r i g h t to i t s use i s traded. The bundle of r i g h t s com-posing a fee simple or leasehold i n t e r e s t may be r e s t r i c t e d by any number of statutes, municipal by-laws, interests less than estates such as an easement or covenant, or a mortgage. There i s however a type of fee simple i n t e r e s t which, although a recent concept i n both Canada and B r i t i s h Columbia, has enjoyed considerable popularity. This concept i s that of the condominium corporation or strata corporation which i s most simply defined as "one o v e r a l l area having within i t s boundaries cer t a i n s p e c i f i e d parts owned i n fee simple by the i n d i v i d u a l owners and other areas owned by a l l the i n d i -vidual owners as tenants i n common". The condominium refers to a l e g a l form of tenancy and hence the physical structure - 11 -need not be a row house or apartment, although s t r a t a c o r p o r a t i o n s 4 o f t e n take t h i s form. The t y p i c a l condominium or s t r a t a t i t l e owner i s s i m i l a r i n many r e s p e c t s to the holder i n fee simple of a s i n g l e detached house but h i s i n t e r e s t or "bundle of r i g h t s " i s r e s t r i c t e d t o the extent t h a t he shares the common area and s i n c e he i s u s u a l l y i n c l o s e p r o x i m i t y t o h i s neighbors h i s freedom as an occupant i s l i m i t e d almost t o the same extent as the r e n t e r of an apartment u n i t . The concept of tenure should be extended t o i n c l u d e the n o t i o n of investment and consumption. The home owner a t the time of purchase i n v e s t s to the extent t h a t he commits t o pay the f u l l c a p i t a l market value of the u n i t e i t h e r immediately or over a p e r i o d of time. The r e n t e r normally commits to pay as he consumes hence the c a p i t a l investment must be made by another p a r t y , i n p a r t i c u l a r , the owner of the u n i t . Hence the home owner i s both i n v e s t o r and consumer while the r e n t e r i s simply a consumer. Housing can be d e s c r i b e d i n many ways. As a p h y s i c a l s t r u c t u r e or stock and as a consumption item or flow of s e r v i c e s . More-over i t can be d e l i n e a t e d a c c o r d i n g t o tenure or the bundle of l e g a l r i g h t s a t t a c h e d to the u n i t . Having e x p l o r e d the nature of housing by l o o k i n g a t the d i f f e r e n t ways i t i s viewed i t i s e s s e n t i a l now to look at the nature of the commodity and the market i n which i t t r a d e s . - 12 -1.2 THE NATURE OF THE COMMODITY AND THE MARKET A market i s perhaps best described as the context i n which the p r i c i n g mechanism works to all o c a t e goods and services among competing consumers. Chapter Two w i l l deal with the behaviour of the housing market but before i t i s necessary to discuss the unique c h a r a c t e r i s t i c s of the housing commo-dit y and the market i n which i t trades. T r a d i t i o n a l economic analysis builds from the concept of a market which has perfect competition. "....each economic agent i s so small r e l a t i v e to the market that i t can exert no perceptible influence on price; the product i s homogeneous; there i s free mobility of a l l resources, including free and easy entry and e x i t of business firms into and out of an industry; and a l l economic agents i n the market possess complete and perfect knowledge." 5 Such a market would ensure the e f f i c i e n t organization of the country's resources. Dwelling units are immobile, durable, heterogeneous and very expensive; there i s imperfect commu-nication i n the marketplace and government intervention i s common place. The combination of these c h a r a c t e r i s t i c s has considerable influence on the e f f i c i e n t organization or a l l o -cation process i n the housing market precluding the operation of a p e r f e c t l y competitive market. 1.21 Immobility of the Commodity A dwelling unit once constructed i s v i r t u a l l y immobile. This - 13 -ensures that the market w i l l be l o c a l with transportation costs a variable i n the consumers decision-making process. Unlike a commodity such as gasoline where the transportation cost of the commodity i t s e l f i s a factor, the housing commodity requires that the consumption of housing services take place where the service i s offered and hence the consumer must transport himself. Immobility has demanded and resulted in the development of complex transportation networks and, consequently, r e l a t i v e land value i s , to a large extent, de-pendent on the proximity, ease and cost of transportation. Obviously these implications apply not only to housing but also to industry and have been a key factor i n determining the nature, 7 the rate and the extent of urban growth. Not only i s each i n d i v i d u a l housing unit immobile but also the supporting i n f r a s t r u c t u r e . Roads, u t i l i t i e s and other services such as schools and community centres, once esta-blished, are immobile just as housing units are, and the perman-ence of t h i s infrastructure locks the market into a predetermined pattern. The permanent nature of these major c a p i t a l assets adds to the i n e r t i a of the housing sector. This i n e r t i a i s p a r t i c u l a r l y important when e x t e r n a l i t i e s are brought into the picture. Consider the influence on surrounding dwelling units of airport expansion, freeway and rapid t r a n s i t construction, factory noise and smoke p o l l u t i o n . - 14 -1.22 D u r a b i l i t y of the Commodity Housing i s a durable commodity. Hence at any one time the market may consist of dwelling units ranging i n age from new to over 100 years old i n Canada and perhaps centuries old i n the United Kingdom and on the Continent. Purchases of durables are characterized f i r s t l y by th e i r dependence on pr i o r purchase decisions and secondly by t h e i r sporadic nature. In other words, once a purchase i s made i t i s not l i k e l y to be repeated at least i n the short term due to the long l i f e of the commo-dit y . Due to the large economic commitment required purchases are made based on current and anticipated economic conditions and hence e f f e c t i v e demand can be v o l a t i l e . There may or may not exist substitutes for the physical asset but substitutes do exi s t through varying legal interests i n the commodity. For example, houses may be rented or owned, automobiles may be rented or owned and so on. By th e i r nature durables are not pur-chased to be consumed but for the flow of services they pro-vide. Both the pri o r c h a r a c t e r i s t i c of immobility and that of d u r a b i l i t y preclude f l e x i b i l i t y from being r e a d i l y present i n the housing market. New additions to the housing stock can only occur slowly, and growth and change i s incremental in nature. This s i t u a t i o n i s further aggravated by building 9 r e s t r i c t i o n s , zoning by-laws and by other p o l i c y measures such as rent c o n t r o l . 1 ^ Some f l e x i b i l i t y i s present i n the - 15 -existing stock and t h i s c h a r a c t e r i s t i c i s best represented by the conversion of ex i s t i n g single detached houses into duplexes or multiple-family apartments. In Vancouver some of the large older homes i n the Shaughnessy and K i t s i l a n o areas have been converted (where controls have permitted) and are t y p i c a l of the change which takes place i n the inner area of most major urban areas subsequent to suburban growth and coincident with r i s i n g land values in the central c i t y . To some degree f l e x i b i l i t y exists as a r e s u l t of the rate of u t i l i z a t i o n . Although rate of u t i l i z a t i o n i s most re a d i l y indicated by vacancy rates i t i s also important to consider u t i l i z a t i o n i n a less measurable and less apparent context. The phenomena of doubling or undoubling adds great f l e x i b i l i t y to the housing stock. S t a t i s t i c a l l y t h i s may be measured i n terms of the d i s t r i b u t i o n of households among the occupied dwelling units, the d i s t r i b u t i o n of persons per room and others."'""'" Vacancy and u t i l i z a t i o n are important indicators in the market as measures of f l e x i b i l i t y of an immobile and durable commodity. 1.23 Heterogeneity of the Commodity In a market where perfect competition e x i s t s i t i s a provision that the product of one s e l l e r be i d e n t i c a l to that of another - 16 -s e l l e r , or homogeneous. It i s argued that the producer who has a s l i g h t l y d i f f e r e n t i a t e d product has a degree of control over the price of his s p e c i f i c variety, a s i t u a t i o n which i s 12 at odds with requirements for perfect competition. Edgar 0. Olsen argues that i n fact perfect competition can exi s t i n the housing market because i t i s not the heterogeneous dwelling unit which i s the commodity but a homogeneous 13 "unobservable t h e o r e t i c a l e n t i t y c a l l e d housing service". This approach, though i t may be valuable for t h e o r e t i c a l analysis i s lacking i n practice because the homogeneous enti t y of housing service cannot be defined and, as Olsen admits, i t i s "unobservable". The complexity of the housing commodity due to variations i n age, tenure, space, rent, price, q u a l i t y , location, amenity, neighborhood, trans-portation and work opportunities guarantee that the d e f i n i t i o n of a standard unit which i s homogeneous can only be an i n t e l l e c t -ual exercise. A c h a r a c t e r i s t i c which i s hel p f u l i n dealing with a hetero-geneous commodity i s that of s u b s t i t u t a b i l i t y . In the housing market though the product i s heterogeneous most of the products are only s l i g h t l y d i f f e r e n t i a t e d and hence can be substitutes for one another. S u b s t i t u t a b i l i t y i s a c h a r a c t e r i s t i c common to any durable good and allows the type of market to exist where purchases are sporadic due to the a b i l i t y of the consumer to postpone purchase u n t i l his economic circumstances are - 17 -a p p r o p r i a t e . A r a n g e o f l e g a l i n t e r e s t s i n r e a l p r o p e r t y a l l o w t h e c o n s u m e r t o r e n t o r l e a s e r a t h e r t h a n own a d w e l l i n g u n i t , s u b s t i t u t i n g one i n t e r e s t i n l a n d f o r a n o t h e r . An e c o n o m i c d e f i n i t i o n o f s u b s t i t u t e c o m m o d i t i e s i s p r o v i d e d by t h e c o n c e p t o f c r o s s - e l a s t i c i t y . I f a r i s e i n p r i c e o f c o m m o d i t y "A" i n c r e a s e s t h e demand f o r c o m m o d i t y "B", t h e two c o m m o d i t i e s a r e s a i d t o be s u b s t i t u t e s . A l t h o u g h h o u s i n g i s a h e t e r o g e n e o u s c o m m o d i t y t h e p r o d u c t i s g r o u p e d i n t o c l u s t e r s o f s u b s t i t u t e s o r s u b m a r k e t s , e a c h p r o d u c t w i t h i n t h e s u b m a r k e t p r o v i d i n g a f l o w o f h o u s i n g s e r v i c e s o f e q u a l u t i l i t y t o t h e c o n s u m e r . The c o n s u m e r s u t i l i t y d e c i s i o n i s b a s e d o n t h e l i s t o f c h a r a c t e r i s t i c s m e n t i o n e d p r i o r - l o c a t i o n , a g e , t e n u r e , s p a c e , r e n t , p r i c e , q u a l i t y , a m e n i t y , n e i g h b o r h o o d , t r a n s p o r t a t i o n a n d w o r k o p p o r t u n i t i e s . P r o f e s s o r F.G. P e n n a n c e a r g u e s t h a t h o u s i n g s u b m a r k e t s " a r e h i g h l y a r t i f i c i a l c o n s t r u c t s s i n c e t h e y r e s t on p o s s i b i l i t i e s o f s u b s t i t u t i o n a c r o s s a number o f t h e s e ' f r o n t i e r s ' . The c l a s s i f i c a t i o n o f h o u s i n g by common p h y s i c a l o r p r i c e c h a r a c t e r i s t i c s may t h e r e f o r e n o t be v e r y h e l p f u l o r e v e n r e l e v a n t f o r e c o n o m i c c h o i c e , s i n c e some o f t h e c l o s e s t s u b s t i t u t i o n l i n k s may e x i s t b e t w e e n 14 h o u s i n g o f c o m p l e t e l y d i f f e r e n t l o c a t i o n , t y p e and v a l u e . " The G r e a t e r V a n c o u v e r h o u s i n g m a r k e t w i l l be d i v i d e d i n t o s u b -m a r k e t s by t e n u r e f o r t h e p u r p o s e s o f t h i s a n a l y s i s . The m o s t i m p o r t a n t ' f r o n t i e r ' i n v i e w o f t h e h y p o t h e s i s i s t h a t - 18 -of tenure, the choice between ren t a l and ownership. The r e s t r i c t i o n s on analysis based on such an a r t i f i c i a l c l a s s -i f i c a t i o n must be recognized at the outset as the customer does not view his choice so simply. 1.2 4 High Cost of the Commodity High ac q u i s i t i o n cost r e l a t i v e to other consumer goods i s a c h a r a c t e r i s t i c of most durable commodities. Since the cost of housing i s so high r e l a t i v e to a majority of durable commodities i n the household budget cost should be considered a separate c h a r a c t e r i s t i c . Location i s a major factor i n land value and the determination of land use but the value of structures i n existence dominates land use patterns. For example, the redevelopment decision i s deferred u n t i l the discounted value or 'net present value' of the expected flow of net income from a new building ex-ceeds that from the present building by more than the cost of demolition and rebuilding. Hence i t i s not the physical d u r a b i l i t y of the housing product but i t s economic value which determines what adjustments occur i n the marketplace. These two c h a r a c t e r i s t i c s are not to be confused because with fluctuations i n supply and demand dwelling units often o u t l i v e t h e i r economic value. At the same time, d u r a b i l i t y and immobility slows down the adjustment of supply to changes - 19 -i n demand so that "in the lay-out and building pattern of urban areas the market s i t u a t i o n always appears to be one of 14 disequilibrium." The high cost of housing causes consumer decision making to be dependent on the economy; the e f f e c t of substitution which allows massive s h i f t s of consumer preference from one form of tenure to another hence re s u l t s i n v o l a t i l e demand. This c h a r a c t e r i s t i c has implications for the housing construction industry. It must be f l e x i b l e hence Canadian home builders for the most part operate so that they can be here today and gone tomorrow. In B r i t i s h Columbia, the majority of builders are small, not heavily c a p i t a l i z e d and dependent on others to ensure an orderly and p r o f i t a b l e development p r o c e s s . ^ Mort-gage funds, land, construction materials and labour costs are a l l outside the control of the builder hence he i s a price taker. The development approval process i s a further constraint with-17 in which the developer-builder must operate. The character-i s t i c s which ensure that the housing market i s often i n d i s -equilibrium guarantee that the housing construction industry i s almost as f i c k l e as the consumer i n order that the industry survive. This i s a vicious c i r c l e . What exactly i s meant by high cost? There exists no agreement on what housing should cost but many housing authorities base - 20 -p o l i c y on a 2 0 - 2 5 % o f g r o s s i n c o m e o r t o t a l e x p e n d i t u r e r u l e o f thumb. F o r e x a m p l e t h e A s s i s t e d Home-Ownership P r o g r a m u n d e r t h e new s e c t i o n s 34.15 and 34.16 o f t h e N a t i o n a l H o u s i n g A c t l i m i t s t h e e x p e n d i t u r e o f e l i g i b l e f a m i l i e s t o no more t h a n 25% o f t h e i r g r o s s i n c o m e i n m e e t i n g t h e m o n t h l y c o s t s o f m o r t g a g e l o a n r e p a y m e n t s and m u n i c i p a l t a x e s b u t 18 e x c l u d i n g o p e r a t i n g c o s t s . I t m u s t be r e c o g n i z e d t h a t s u c h f i g u r e s a r e s i m p l y c o n v e n t i o n s a n d s h o u l d be r e g a r d e d as s u c h a l t h o u g h t h e r e i s some a g r e e m e n t among l a n d e c o n o m i s t s 19 a s t o t h e l e v e l t h a t c o n v e n t i o n h a s e s t a b l i s h e d . N e e d l e s s t o s a y 2 0 - 2 5 % o f i n c o m e i s a s i z e a b l e p r o p o r t i o n t o s p e n d on one c o m m o d i t y . The c o n c e p t o f s u b s t i t u t i o n o f one f o r m o f t e n u r e f o r a n o t h e r h a s a l r e a d y b e e n i n t r o d u c e d . A f u r t h e r r e a s o n f o r t h i s a c t i v i t y i s t h e h i g h c o s t o f t h e h o u s i n g p r o d u c t • w h i c h h a s r e s u l t e d i n d i f f e r e n t ways o f p a y i n g f o r b a s i c a l l y t h e same f l o w o f s e r v i c e s . A r e s i d e n t i a l l e a s e h o l d a l l o w s a m onth t o m o nth p a y m e n t w i t h m i n i m a l a d d i t i o n a l f i n a n c i a l l i a b i l i t y . L e a s e h o l d s c a n be p r e p a i d a n d p r e p a y m e n t o f a l o n g l e a s e c a n be v i r t u a l l y e q u i v a l e n t t o t h e m a r k e t v a l u e o f t h e f e e . I f a p r o p e r t y i n f e e s i m p l e i s n o t p u r c h a s e d o u t r i g h t a s i z e a b l e i n i t i a l c a s h o u t l a y i s demanded and t h e t i t l e t o t h e p r o p e r t y i s o f t e n h y p o t h e c a t e d by a m o r t g a g e a g r e e m e n t w h i c h o u t l i n e s a r e p a y m e n t s c h e d u l e f o r t h e b a l a n c e , e a c h p ayment a c o m b i n a t i o n - 21 -of i n t e r e s t on the p r i n c i p a l and a return of part of the p r i n c i p a l . The existence of r e s i d e n t i a l leaseholds and a mortgage market i s for the most part due to the high c a p i t a l cost of the housing commodity. Naturally the a v a i l a b i l i t y and cost of mortgage loans becomes a major factor i n consumer and developer decision making. 1.25 Imperfect Communication within the Market It i s a pre-requisite for perfect competition that " a l l economic agents i n the market possess complete and perfect knowledge." It i s possible to argue that the r e a l estate industry through m u l t i p l e - l i s t i n g services and private r e n t a l services along with newspaper advertising go a long way toward providing a workable communications process regarding the commodity being traded i n the market. Unfortunately, the complexity of the product i t s e l f and of l e g a l transactions ensures that the i n d i v i d u a l i n the marketplace cannot at one time be aware of a l l the factors which might come to play on his decision. It i s for t h i s reason that intermediaries such as r e a l estate agents and lawyers have become necessary. For most Vancouverites the purchase of a home i s seldom under-20 taken more than two or three times i n a l i f e t i m e . The pro-cedure i s complicated and the transactions costs are high. The information which the transactions costs represent i s available to any agent i n the market place but not without lengthy research, hence the existence of intermediaries i n - 22 -the marketplace. Ernest M. Fisher succintly describes the market for homes i n fee. In most cases both the buyer and s e l l e r are i n -experienced i n the r e a l estate market. The transactions however, involve such technical aspects as t i t l e search, t i t l e assurance and other d e t a i l s unfamiliar to the inexperienced, and, as a consequence, d i f f e r e n t s p e c i a l i s t s p a r t i c i p a t e i n the transaction at one stage or another. In t h i s s i t u a t i o n the buyer's or s e l l e r ' s decisions are frequently made more on the basis of a s p e c i a l i s t ' s advice than as a r e s u l t of his own analysis or understanding of the transaction, and the outcome may depend more on the persuasive-ness of the s p e c i a l i s t than on the merits of the terms. In such a market the prices of almost similar homes may vary widely. 21 The r e n t a l market i s less hampered by communication problems. In the apartment market a more standardized product exists and the turnover i s much more rapid. The lack of complexity of the r e n t a l commitment makes i t a t t r a c t i v e to the more mobile such as young families, singles and transients and hence the rapid turnover. Fisher nonetheless describes the r e n t a l market as one where information i s greatly r e s t r i c t e d . The rental market for single detached homes could not be described as being as e f f i c i e n t as the apartment rental market since the product i s as varied as the single detached homes i n the ownership market. Moreover houses for rent at 23 least i n the Vancouver area are not common. In a r e n t a l market where vacancies are extremely low such as currently exists i n Vancouver information on r e n t a l units comes at a premium and as a r e s u l t rental services free to the landlord - 23 -and charged to the prospective tenant have flourished. Suffice to say that despite the communications mechanisms which have evolved, the market for homes i n fee and homes for rent even at best does not consist of agents having perfect and complete knowledge. 1.26 Government Intervention The p r i o r c h a r a c t e r i s t i c s of housing and the market i n which i t trades might be termed i n t e r n a l forces. However any d i s -cussion of the subject i s incomplete without mention of the external forces created by government intervention. Govern-ment intervention i s so common that i t must be considered by i t s e l f a c h a r a c t e r i s t i c of housing markets. Intervention i s j u s t i f i e d by policymakers on the grounds that where the market mechanism does not provide for the needs of society the government must step i n . Government responses come from many d i r e c t i o n s . In Canada p o l i c i e s originate from three and sometimes four " l e v e l s " of government. Federal, P r o v i n c i a l , Regional rand Municipal governments are d i r e c t l y involved i n various aspects of the housing market. Strange as i t may seem there i s too often a lack of coordination or even communication between these sources of power i n the market. - 24 -Not only does housing policy originate from four le v e l s of government, but also p o l i c y directed toward other s o c i a l and economic areas, as d i s t i n c t from housing, may have a very r e a l influence on the housing market. Obvious examples include transportation policy and immigration p o l i c y . Even within the housing market, regulation comes from a l l d i r ections with d i f f e r e n t objectives i n mind and often l i t t l e concern for coordination. Prime examples include land use control and the r e a l property tax. So, even within various lev e l s of government, d i f f e r e n t departments with t h e i r own po l i c y goals have a very r e a l influence on the housing market at the expense of a cohesive general housing p o l i c y . If a cohesive policy existed there are two directions i t might take. The f i r s t might attempt to make the market mechanism work better while the second might replace the market mechanism e n t i r e l y . Often policymakers j u s t i f y the second approach using the argument that the market mechanism has already f a i l e d to solve the problem. Professor Pennance undertakes a discussion of t h i s p o l i c y decision concluding that the competitive market cannot be accused of f a i l i n g to solve the problem because a competitive market has never existed. Although he refers to the B r i t i s h market much of the com-mentary i s e a s i l y applicable to Canada. - 25 -.... Housing... has been shot through with price controls, f i s c a l incentives and subsidies, d i s -incentives to proper maintenance, planning res-t r i c t i o n s on new building, l e g i s l a t i v e and i n s t i t u t i o n a l obstacles to property transfers that have hindered mobility between regions and tenure groups, and state encouraged or imposed standards of housing and amenities fixed without regard to the preferences of consumers.24 He further argues If there are no r e s t r i c t i o n s on p r i c e , consu-mer choice, or the entry of new producers or s e l l e r s , a strongly competitive market w i l l ensure that the si z e , quantity and qu a l i t y of houses that are b u i l t , and the d i s t r i b u t i o n of the ex i s t i n g stock w i l l be dictated by the tastes, incomes, and preferences of households. The existence of r e a l or 'imagined 1 imperfections i n such a market i s no signal for the wholesale abandonment of these very substantial benefits.25 - 26 -FOOTNOTES - CHAPTER 1 1. Canadian Housing S t a t i s t i c s , (Ottawa: Economics & S t a t i s t i c s D i v i s i o n , C.M.H.C., March, 1974), p. 106 and 1971 Census  Population and Housing Characteristics by Census Tract, (Ottawa: S t a t i s t i c s Canada, August 1974). 2. A discussion of land law and i t s o r i g i n s suitable for the layman i s included i n J.E. Smith and D.A. Soberman, The  Law and Business Administration i n Canada , (Toronto: Prentice-Hall, 1964), p. 370-392. 3. S.W. Hamilton, I.Davis and J. Lowden, Condominium Development  i n Metropolitan Vancouver , (The Real Estate Council of Greater Vancouver, December 1971), p.2. 4. A comprehensive discussion of the condominium concept and the Greater Vancouver experience i s presented i n S.W. Hamilton and Ronald Roberts, Condominium Development and  Ownership, (Real Estate Board of Greater Vancouver, October 1973) . 5. C.E. Ferguson, MicroEconomic Theory, (Homewood, I l l i n o i s : Richard D. Irwin^ 1966), p. 194. 6. The negative nature of the term 'imperfect market' does not necessarily imply that no hope exists for the housing market. In fact, few, i f any goods trade i n a market which could be defined as p e r f e c t l y competitive. What i s more important i s that unless the market economy i s to be rejected e n t i r e l y , p o l i c i e s must be directed towards allowing the housing market to respond e f f e c t i v e l y . The concept of e f f i c i e n c y and a l l o c a t i o n i s discussed i n depth i n Chapter 3 of t h i s thesis. 7. A short summary of early theories about patterns of land use and some contemporary concepts i s included i n Wallace F. Smith, Housing: The Social and Economic  Elements , (Berkeley and Los Angeles: University of C a l i f o r n i a Press, 1970), pp. 325-55. 8. A discussion of the unique c h a r a c t e r i s t i c s of consumer durables i s presented by Michael K. Evans i n Macro-Economic A c t i v i t y : Theory Forecasting and Control , (New York: Harper & Row, 1969), p.150-183. Also by Arnold C. Harberger (ed.) i n his introduction to The  Demand For Durable Goods , (Chicago: University of Chicago Press, 1960), p. 3^9. - 27 -9. F.G. Pennance & Hamish Gray, Choice i n Housing , (London: The Inst i t u t e of Economic A f f a i r s , 1968), p. 8. 10. The ' f o s s i l i z a t i o n ' of the housing market because of rent control i s described by F.A. Hayek, 'the reper-cussions of rent r e s t r i c t i o n ' i n Verdict on Rent  Control , (London: The Institute of Economic A f f a i r s , 1972), pp. 6-7. 11. Chester Rapkin, Louis Winnick and David M. Blank, Housing Market Analysis , (Washington, D.C.: Housing Market and Home Finance Agency, 1953) , Chapter 4. 12. C.E. Ferguson, Micro-Economic Theory, p. 193 and pp. 252-3. 13. Edgar 0. Olsen, "A Competitive Theory of the Housing Market", American Economic Review, Volume 59 (September 1969), P. 6113. 14. F.G. Pennance, Housing Market Analysis and Policy „ (London: The Institute of Economic A f f a i r s , 1969), pp. 17-18. 15. Pennance, Housing Market Analysis and Policy, p. 14. 16. Edmund V. Price, The Housebuilding Industry i n Metro-p o l i t a n Vancouver, Master's Thesis, University of B r i t i s h Columbia, A p r i l 197 0. 17. Gary A. Young, The Municipal Subdivision Process i n  Metropolitan Vancouver,, Master's Thesis, University of B r i t i s h Columbia, A p r i l 1974. 18. Canada Statute, National Housing Act, 1973, Sections 34.15 and 34.16. 19. Adela Nevitt, Housing Taxation & Subsidies r(London: Nelson 1966) p. 135 and Lionel Needleman, The Economics of  Housing , (London: Staples Press, 1965), p. 160. 20. A survey of census t r a c t data i n Greater Vancouver i n d i -cates that where a high proportion of the homes are owner-occupied and where the t r a c t has not been recently developed a s i g n i f i c a n t proportion of the homes have been occupied by the current owner for more than ten years. 1971 Census, Population and Housing Charact e r i s t i c s  by Census Tract, (Ottawa: S t a t i s t i c s Canada, August 1974). - 28 -21. Ernest M. Fisher, Urban Real Estate Markets; Character- i s t i c s and Financing 7 (New York: National Bureau of Economic Research, 1951), p. 45. 22. Ibid, p. 92. 23. The 1971 census data indicates that areas which are predominantly single family are also predominantly owner-occupied. 1971 Census Population and Housing  Characteristics , (Ottawa: S t a t i s t i c s Canada, August 1974) . 24. F.G. Pennance, Choice i n Housing, (London: I n s t i t u t e of Economic A f f a i r s ^ 1968) , p. 8~. 25. Pennance, Choice i n Housing, pp. 9-10. - 29 -CHAPTER II THEORY OF THE SUPPLY OF AND DEMAND FOR HOUSING While describing the ch a r a c t e r i s t i c s of housing and of the market i t has been d i f f i c u l t to avoid infringement upon the dynamics of housing market behaviour. This chapter w i l l deal s p e c i f i c a l l y with the int e r a c t i o n of supply and demand in the housing market; the purpose at th i s stage w i l l simply be to provide an overview of market a c t i v i t y and to b u i l d an economic model as a basis for l a t e r analysis. 2 . 1 BASIC SUPPLY AND DEMAND A highly s i m p l i f i e d representation of the housing market i s shown i n Figure 2 . 1 . It represents the market process of balancing, through the use of the price mechanism, the de-mands of consumers with the quantity of goods being produced. Numerous factors influence the forces of supply and demand as they come together i n the market. This paper w i l l deal primarily with the demand side and the demographic, income, price, c r e d i t and po l i c y variables which influence that demand in Greater Vancouver. The supply side i s influenced by another set of variables which w i l l be discussed b r i e f l y but detailed study of these factors i s not within the scope of thi s paper. - 30 -Figure 2.1 Overview of the Housing Market Housing Supply Housing: Demand > (Consumer) - Public Ownership i.-marsniri of inputs > Market for dwelling units \ ( P r i c i n g mechanism) E x i s t i n g Stock Factor Markets - Labour - Land - C a p i t a l < Flow <G Individual Business Government (Investor) A c q u i s i t i o n !of inputs - 31 -The bare elements of supply and demand are as follows: 1) When the price of a good i s raised (with a l l other things held constant) less of i t w i l l be demanded. 2) S i m i l a r l y the supply schedule shows that as the price of a good i s raised (with a l l other things held constant) more of i t w i l l be supplied. The endogenous variables are price and quantity and the exogenous variables are held constant. The e q u i l i -brium price i s that at which the amount w i l l i n g l y supplied and w i l l i n g l y demanded are equal. This i s the price mechanism at work and t h i s notion combined with that of marginal u t i l i t y w i l l ensure that scarce resources are not misallocated provi-ded that income and v/ealth are d i s t r i b u t e d equitably and that there are no e x t e r n a l i t i e s . Shif t s in supply and demand r e s u l t from changes i n exogenous variables. For example, the flow of new units would increase and ultimately the supply would s h i f t (increase) as a r e s u l t of reduced production costs. Increased demand for housing can re s u l t from an increase i n the number of consumers demanding the same housing services, a constant number of consumers de-manding more housing services per consumer or a combination of both. Any changes in demand induced by exogenous variables (not price) w i l l r e s u l t i n a s h i f t of the curve. 2.11 U t i l i t y and Consumer Choice Demand for housing i s also related to the r e l a t i v e demand for - 32 -other goods. The concept of u t i l i t y and marginal u t i l i t y i s useful to understand budget constrained consumer decision making. U t i l i t y i s the s a t i s f a c t i o n derived from the con-sumption of a good or service during a given time period. The more an i n d i v i d u a l consumes the more his u t i l i t y increases, however, the marginal or extra u t i l i t y added by the l a s t unit consumed decreases with the consumption of successive new units. Considering the consumers demand for a range of goods and services, indifference curve analysis suggests that the consumer w i l l maximize his s a t i s f a c t i o n with the combination of housing and other goods at a point where the l i n e of attainable combinations or the budget l i n e meets the con-sumers indifference curve between housing and other goods. Here the marginal rate of substitution between housing and other goods i s equal to the r a t i o of the price of other goods over the p r i c e of housing. The consumer maximizes his u t i -l i t y by consuming quantities of housing and other goods such that the marginal u t i l i t y per d o l l a r of each alt e r n a t i v e i s equal. 1 That i s : MU„ MU_„ n _ OG P ~ ~~P H OG Where MU H = Marginal u t i l i t y of housing P H = Price of Housing - 33 -MU^ _ = Marginal u t i l i t y of other goods P_,, = Price of other goods Hence any factors which influence price or marginal u t i l i t y on either side of the equation w i l l change the mix of goods consumed. 2.12 Tenure Choice As has been discussed housing i s a heterogeneous commodity and demand i s d i f f i c u l t to c l a s s i f y . For the purposes of t h i s analysis two c l a s s i f i c a t i o n s by tenure w i l l be considered. There exists a demand for homes i n fee or home-ownership and for r e s i d e n t i a l leaseholds or rent a l u n i t s . Hence i n the context of u t i l i t y and indifference analysis the consumer w i l l make his decision based on the u t i l i t y to be derived from either home ownership or rent a l and t h e i r r e l a t i v e price and the u t i l i t y to be derived from other goods and the i r r e l a t i v e p r i c e . The c l a s s i f i c a t i o n of demand according to tenure i s highly a r t i f i c i a l as consumer preferences are based not only on tenure and st r u c t u r a l form but also location, age, and work opportunities. Demand i s the summation of every consumers u t i l i t y based decision based on how much housing and what ch a r a c t e r i s t i c s w i l l maximize his u t i l i t y given his prefe-rences and resources. 2.13 Supply and Demand Variables Before going on i t would be valuable simply to l i s t those - 34 -v a r i a b l e s which have an i n f l u e n c e on the supply of and demarid f o r housing. Supply and demand are c l o s e l y i n t e r -r e l a t e d i n the housing market and a number of v a r i a b l e s are common to both supply and demand. Those f a c t o r s which can i n f l u e n c e supply i n c l u d e : 1. Housing p r i c e s and r e n t s 2. Development c o s t v a r i a b l e s a) C o n s t r u c t i o n c o s t s b) Land c o s t s c) I n t e r i m f i n a n c i n g c o s t s 3 . N o n - f i n a n c i a l o p e r a t i n g c o s t s a) Real e s t a t e taxes and o p e r a t i n g expenses b) C a p i t a l c o s t allowance and income tax 4. F i n a n c i a l v a r i a b l e s a) Mortgage r a t e s b) Non-price mortgage terms and mortgage a v a i l a b i l i t y i n c l u d i n g l o a n t o v a l u e r a t i o s , a m o r t i z a t i o n p e r i o d , term t o m a t u r i t y and q u a l i t y c o n s t r a i n t s 5. B u i l d e r , developer and lender o r g a n i z a t i o n , s t r u c t u r e and e x p e c t a t i o n s . Those v a r i a b l e s which i n f l u e n c e demand i n c l u d e : 1. Demographic v a r i a b l e s a) P o p u l a t i o n s i z e b) Age-sex composition of the p o p u l a t i o n c) Number and s i z e of f a m i l y and non-family households d) I n t e r n a l m i g r a t i o n and immigration 2. Income and employment v a r i a b l e s a) P e r s o n a l d i s p o s a b l e income, pas t , present and expected b) Income d i s t r i b u t i o n c) Employment and unemployment - 35 -3. Consumer asset holdings, size and l i q u i d i t y 4. Price variables a) Housing prices and rents, taxes and operating expenses b) Alternative consumer good prices 5. F i n a n c i a l variables a) Mortgage rates b) Non price mortgage terms and mortgage a v a i l a b i l i t y loan to value r a t i o amortization period term to maturity qua l i t y constraint c) Imputed cost of equity funds 6. Amenities, Transportation and services 2 7. Consumer tastes and preferences and expectations. Even though some of the variables such as prices and rents and the f i n a n c i a l variables are shared by both the supply and the demand sides those factors which influence demand combine along with s h i f t i n g consumer tastes, preferences and expectations to make the pressures of demand fluctuate quite dramatically i n the housing market. Perhaps the best way to demonstrate the dramatic fluctuations i n demand for housing i s to look h i s t o r i c a l l y at consumer preferences. For the purposes of t h i s paper the preference for rented or owned dwelling units must be explored and both cross sectional and longtidudinal observation of consumer preference w i l l be h e l p f u l i n giving some in s i g h t into demand v o l a t i l i t y . - 3 6 -Using a l o n g t i t u d i n a l approach i t i s possible to see how changing needs, resources and preferences over the l i f e cycle r e s u l t i n changes i n demand. These l i f e cycle changes combined with changes i n incomes, subsidies, mortgage a v a i l a b i l i t y and so on require that t h e i r influence on the market be considered c a r e f u l l y as they are far from constant. Much contemporary analysis assumes that demand i s simply a force which must be met; otherwise;^ the processes on the supply side must be improved. A more r a t i o n a l approach would be to recognize that the combination of v o l a t i l e demand and a r e l a t i v e l y fixed supply must r e s u l t i n an imbalance i n the market place. So f a r , the dominance of demand factors i n housing market analysis has been assumed. The dominance of demand i s es s e n t i a l to the thrust of th i s paper,hence,a main purpose of t h i s chapter i s to j u s t i f y such a concept. 2.14 Supply of Land It i s surprising that there could be so much disagreement with the idea that demand dominates the price determination process i n the housing market. The very basics of urban economic theory support t h i s concept. Unimproved land i s i n fixed 3 supply. Hence the value paid for land to put i t to use de-pends on the demand for i t . In economic terms the supply of unimproved land i s pe r f e c t l y i n e l a s t i c . Hence for a given stock, the greater the demand the higher the price and the - 37 -smaller the demand the lower the p r i c e . The price for land either improved or unimproved depends on the demand which i n turn depends on the use to which the land can be put. Of course,all land i s not unimproved but i n urban areas land use controls ensure that at least i n the short run the supply of urban land for p a r t i c u l a r uses i s fixed while i n r u r a l areas the length of time required to bring unimproved land into production ensures that the supply i s again nearly, i n -e l a s t i c i n the short run. Hence demand i s the only variable and p r i c e changes are the r e s u l t of changes i n demand. Land can be used more intensely but as a rule the s h i f t to more intensive use i s not a short run phenomena. The value of land i s determined i n the f i r s t instance by location. Although t h i s basic notion i s complicated i n an urban setting by the existence of land use controls, trans-portation f a c i l i t i e s and other services the p r i n c i p l e as described by Hurd s t i l l holds true. "Since value depends on economic rent and rent on location, and location on conve-nience, and convenience on nearness, we may eliminate the 4 intermediate steps and say that value depends on nearness." Location and use are those c h a r a c t e r i s t i c s of land which generate demand and the possible use of the land determines the p r i c e that w i l l be bid. Hence i t i s not the demand for land i t s e l f but the demand for the services produced by the 5 "highest and best use" of the land which determines p r i c e . - 38 -Ricardo c o r r e c t l y viewed rents (land values) as transfers rather than costs and he argued, "corn i s not high because rent i s paid, but rent i s paid because corn i s high..."^ The argument regarding housing i s p a r a l l e l . 2.15 Supply of Housing Supply at any point i n time i s a large stock of immobile, durable and r e l a t i v e l y i n f l e x i b l e units. Increments i n supply are provided by new construction which at best i s a 7 slow process. Actors on the supply side, generally business or government provide increments to the standing stock either by new construction or conversion of the e x i s t i n g stock. The immobility, d u r a b i l i t y and high cost of new units ensures that investors must not only be assured of an e x i s t i n g demand but also a continuing demand for the services provided by the units. Here the d i s t i n c t i o n must be made between investors and builders. The builder simply constructs the unit while the investor provides the c a p i t a l with the expectation that over a period of time the returns generated w i l l j u s t i f y his opportunity cost. In the case of single family homes or strata t i t l e units the return to the investor i s generated immediately that the unit i s sold. In the case of r e n t a l units the return accrues to the investor over a period of time. The large amount of c a p i t a l required to produce housing units either for ownership or for r e n t a l force the investor to be - 3 9 -c e r t a i n of h i s market. The im m o b i l i t y and d u r a b i l i t y of the commodity ensure t h a t the i n v e s t o r cannot take h i s product to. the consumer r e i n f o r c i n g the i n v e s t o r ' s need f o r c e r t a i n t y of demand i n the marketplace. Housing i s a complex commodity which r e s u l t s i n a lengthy and complicated p r o d u c t i o n process i n v o l v i n g numerous tradesmen, p l a n n e r s , a r c h i t e c t s , e n t r e -g preneurs and r e g u l a t o r y bodies. Because of these v a r i o u s f a c t o r s the supply of housing i s v i r t u a l l y i n e l a s t i c . Only over a long p e r i o d of time can new c o n s t r u c t i o n or co n v e r s i o n be s i g n i f i c a n t r e l a t i v e to the e x i s t i n g stock. 2.2 THE ECONOMIC MODEL OF THE HOUSING MARKET The key to the qu e s t i o n of supply i n the housing market i s the d e t e r m i n a t i o n of p r i c e l e v e l s and the consequent r a t e of new c o n s t r u c t i o n . The p r i c e f o r newly c o n s t r u c t e d u n i t s , which i n a p a r t i c u l a r year can amount a t most to 3-4% of the e x i s t i n g stock, i s determined by the p r i c e of the a v a i l a b l e stock. As a r e s u l t the f a c t o r s of p r o d u c t i o n i n the new c o n s t r u c t i o n process only i n f l u e n c e p r i c e i n the long run. The average market p r i c e of housing at a giv e n time i s determined by the demand f o r the e x i s t i n g stock as i s shown i n F i g u r e 2.2A. Housing i s not homogeneous hence p a r t i c u l a r u n i t s w i l l d i f f e r i n p r i c e . The g e n e r a l l e v e l of p r i c e s , however, determines the p r o f i t a b i l i t y of b u i l d i n g new u n i t s . I n d i v i d u a l i n v e s t o r s c a l c u l a t e the c o s t s of the f a c t o r s of p r o d u c t i o n , labour, m a t e r i a l s , f i n a n c i n g , overhead and land i n order to a r r i v e at - 40 -Figure 2.2 Stock and Flow Model of the Housing Market Pr i c e Quantity (units= 10,000's) PROFIT LABOUR MATERIALS FINANCING OVERHEAD LAND Flow (New supply) Quantity Xunits= 100's) 2.2 A 2.2 B 2.2 C Source: - David Baxter, Speculation i n Land, Urban Land Economics Report no. 7, Faculty of Commerce and Business Administration, Un i v e r s i t y of B r i t i s h Columbia, p. 5. - 41 -an estimated p r o f i t . This procedure i s diagrammed i n Figure 2 . 2 B . Depending on the margin of p r o f i t , developers respond 9 by adding the appropriate number of new units i n Figure 2 . 2 C . Clearly lower factor costs increase the p r o f i t at the margin for the investor. However i t should be noted that factor costs are not a once only c a l c u l a t i o n . Financing costs and materials and labour costs can change rapidly enough to render an i n i t i a l investment decision i n v a l i d . For the investor i n rental units ongoing costs such as financing and operating costs can squeeze the o r i g i n a l p r o f i t margin. Investors must compete , i n e x i s t i n g markets for the factors of production hence they act as price takers i n the markets for labour, materials, financing, overhead and land. Moreover as the price of housing increases the higher margin of p r o f i t w i l l a t t r a c t more entrepreneur-investors with the r e s u l t that fac-tor costs w i l l be bid up. I t must be recognized that c a p i t a l i s mobile. For entrepre-neurs to invest i n the production of new housing units either for immediate sale or for re n t a l the projected rate of return must be higher or at l e a s t as great as the entrepreneur's opportunity cost. If the anticipated p r o f i t s from the pro-duction of new units does not exceed the investor's opportunity cost investment i n new production w i l l not take place. Hence there w i l l be no flow of new units. The opportunity cost of - 42 -investing i n a new alternative i s defined as the y i e l d on the best investment a l t e r n a t i v e . 1 ^ 2.3 THE HOUSING MODEL BY TENURE SUBMARKET Having introduced the basic economic model for the housing market t h i s model should now be considered i n the context of the two tenure c l a s s i f i c a t i o n s . Because of the d i f f e r i n g u t i l i t y to be derived according to tenure,demand i n the rent a l submarket may be quite d i f f e r e n t from demand i n the ownership submarket. Consequently the general model should be extended into a model with two submarkets defined according to tenure. The two sub-market model i s diagrammed i n Figure 2.3 and Figure 2.4. In each submarket there exists a stock sector (2.3A and 2.4A) and a flow sector (2.3B and 2.4B). The stock sector indicates the demand for and the exis t i n g stock of housing units,either owned or rented. The flow sector i n d i - . cates the in t e r s e c t i o n of the price (determined i n the stock sector) with the marginal cost curve of new construction. That point of int e r s e c t i o n i n each submarket indicates the l e v e l of new construction which w i l l take place according to tenure type. Figure 2.3A shows the process of price determination i n the ownership submarket. Supply i s represented by S^, the stock - 43 -Figure 2.3 and 2.4 The Housing Model by Tenure Submarket Figure 2.3 Ownership Submarket (units= 10,000's) Q „ Q' ^ o ^o (units= 100's) 2."3. A 2 $3 B Figure 2.4 Rental Submarket . D (units= 10,000's) 2.4\ A P r o f i t Labour Materials Financing Overhead Land - 44 -o f d w e l l i n g s c u r r e n t l y owned o r f o r s a l e . O b v i o u s l y t h e s t o c k i n t h e s h o r t r u n i s f i x e d a s SQSQ i s p e r f e c t l y p r i c e i n e l a s t i c , t h a t i s , t h e s t o c k i s f i x e d a n d a c h a n g e i n p r i c e w i l l n o t i m m e d i a t e l y r e s u l t i n new u n i t s on t h e m a r k e t p l a c e . D D i s t h e demand f o r owned u n i t s w h i c h i s downward s l o p i n g o o t o t h e r i g h t s i m p l y b e c a u s e demand i n c r e a s e s a s p r i c e f a l l s , i n t h i s r e s p e c t demand i s r e l a t i v e l y p r i c e - e l a s t i c . 1 " ' " The e q u i l i b r i u m p r i c e i s P . F i g u r e 2.3B shows t h e d e t e r m i n a t i o n o f new c o n s t r u c t i o n i n t h e o w n e r s h i p s u b m a r k e t , i n o t h e r w o r d s t h e f l o w s e c t o r o f t h e o w n e r s h i p s u b m a r k e t . MC QMC o i s t h e m a r g i n a l c o s t o f new c o n s t r u c t i o n t o t h e d e v e l o p e r - b u i l d e r a n d t h e l e v e l o f new c o n s t r u c t i o n o r Q q i s d e t e r m i n e d b y t h e i n t e r s e c t i o n o f MC MC w i t h t h e p r i c e ' l e v e l P , d e t e r m i n e d i n t h e s t o c k s e c -o o c o 12 t o r o f t h e o w n e r s h i p s u b m a r k e t . To r e l a t e t h e s e f i g u r e s t o t h e p r e v i o u s d i s c u s s i o n no new c o n s t r u c t i o n w o u l d t a k e p l a c e i f t h e c u r v e MC MC f e l l i n i t s e n t i r e t y a b o v e t h e p r i c e l e v e l o O 2 f P . No new c o n s t r u c t i o n w o u l d t a k e p l a c e u n t i l demand D D o ^ o o s h i f t e d up t o c r e a t e a p r i c e e q u i l i b r i u m w h i c h w o u l d i n t e r s e c t w i t h MC MC o r u n t i l f a c t o r p r i c e s :,f e l l s u c h t h a t . M C MC- s h i f t e d O O t; . ',. * : -'. • O O down w h e r e i t w o u l d i n t e r s e c t t h e e x i s t i n g P . F i g u r e s 2,. 4A and 2.4B a r e i d e n t i c a l t o f i g u r e s 2.3A a n d 2.3B r e s p e c t i v e l y a l t h o u g h t h e y r e p r e s e n t t h e s t o c k a n d f l o w s e c t o r s o f t h e r e n t a l su^bmarketut i" •'- 4 5 -In a s i m i l a r model L.B. Smith suggests that the flow sector of the ownership submarket represents the production of one quarter, arguing that i n a period of three months new cons-13 t r u c t i o n cannot have any e f f e c t on p r i c e . Since new cons-t r u c t i o n contributes at a maximum 3-4% of the e x i s t i n g stock i n a given twelve month period, the ex i s t i n g stock as repre-sented by S S_ i n the price determination sector w i l l s h i f t o o • c only marginally to the r i g h t even over a one year period r e s u l t i n g i n a minimal change i n price l e v e l . Figure 2.3A has been altered to show the influence of the addition of Q Q units i n the price determination sector given that other aspects of the model remain s t a t i c for the length of time required to produce Q Q . The model appears to assume that the entire dwelling stock both i n the ownership submarket and the r e n t a l submarket i s u t i l i z e d . Since dwelling units for sale or for rent often remain vacant there should be some way of taking t h i s into account. Smith suggests that vacancies can be b u i l t into the model by l e t t i n g the stock of dwelling units and t h e i r demand j o i n t l y determine price and vacancy l e v e l s , and by in s e r t i n g the c a p i t a l i z e d expected cost of vacancies as an 19 argument i n the cost function MC MC or MC MC . This i s o o r r a reasonable approach as the developer w i l l b u i l d into his cost function the holding costs of a new dwelling before i t i s sold or the expected vacancy rate of a rented unit . As - 46 -demand increases the holding period or the vacancy rate w i l l f a l l s h i f t i n g the developer's cost curve downward and trig g e r i n g new construction provided again that the equilibrium p r i c e intersects the marginal cost curve at some point. 2.4 MANIPULATION OF THE MODEL Having constructed a model which w i l l be the basis of t h i s study changes i n the variables which influence the various aspects of the model can be shown and the repercussions traced through the sectors of each submarket. The aspects of the model which would most often be subject to s h i f t s because of changing variables are the demand curves. The marginal cost curves as well could be subject to s h i f t by the supply variables but usually only i n the long run. The stock i n both submarkets w i l l s h i f t only i n the long run and since marginal revenue or price i s an equilibrium condition i t w i l l not change independently unless controls are instigated. 2.41 Changing Demand Variables There are two types of s h i f t i n demand which may be observed. F i r s t l y demand i n both submarkets may s h i f t up or down due to demographic changes. Varying migration rates, headship or family formation rates may r e s u l t i n changes i n the number of households i n the market place bidding for both owned and rented accommodation. If for example in-migration takes place - 47 -there w i l l be more households bidding for the exis t i n g stock of owned or rented u n i t s . Vacancies w i l l drop and eventually prices w i l l r i s e . A price r i s e i s e s s e n t i a l l y an upward s h i f t i n marginal revenue hence i n the flow sector of each submarket the interse c t i o n of the marginal revenue and marginal cost curves w i l l r e s u l t in- a higher l e v e l of new construction. However, i m p l i c i t to such a change i n product-ion are higher factor costs due to increased demand for i n -puts of the construction process. As new construction, i s completed and sold or rented the stock curve as represented by S Q S o or S rS r w i l l s h i f t out very s l i g h t l y but not far enough i n the short run for prices to be influenced to any degree. In fact i t i s more l i k e l y that ongoing changes i n demand w i l l have more than negated the marginal benefits of new construction i n such a short time period. Secondly, demand may s h i f t between submarkets rather than a o v e r a l l growth i n demand i n both submarkets. Due to demographic changes or variations i n homeowner subsidies i t i s possible for demand to s h i f t between submarkets with demand s h i f t i n g up i n one submarket and down i n the other. I f , f o r example, a home-ownership subsidy was increased, demand i n the owner-ship submarket would s h i f t up as many households who previously were not i n that submarket would s h i f t over from the r e n t a l submarket. Such a s h i f t i n demand i s indicated i n figures 2.5 and 2.6. The r e s u l t would be increasing vacancies i n the rental market along with f a l l i n g prices and a decreasing number - 48 -Figure 2.5 and 2.6 S h i f t i n Demand from Rental;-tor Ownership 2.5 Ownership Submarket i o P ,D" D \ ° o \ D o S o (units= 10,000's) 2.5 A Figure 2.6 Rental Submarket (units= 10,000's) 2.6 A (iinits= IOC's). 2.6 B - 49 -of vacant dwellings for sale along with r i s i n g prices. In the flow sector the production of dwellings for sale would increase as marginal revenue or price shifted up and at the same time factor costs would r i s e . In the re n t a l sector the volume of new construction would f a l l as prices f a l l . One important point must be noted, prices i n the re n t a l sector are not p e r f e c t l y f l e x i b l e as i n B r i t i s h Columbia where rents are now fixed for a period of one year. 1^ As a r e s u l t changes in market equilibrium of the rental submarket take much longer than in the ownership submarket where i n most cases prices are completely free. Even without landlord tenant l e g i s l a t i o n rents generally tend to be sticky. Despite declining vacancy rates i n B r i t i s h Columbia rents did not tend to change except on a yearly basis or when tenants had vacated. Evidence on the matter i s not clear but the r e l a t i v e l y stable rate of increase of average rents p r i o r to 1974 would seem to bear out t h i s statement.*^ 2.46 Changing Supply Variables A s h i f t i n the marginal cost curves as a r e s u l t of changing supply variables should be explored. In order for the marginal cost curve to s h i f t i t i s necessary that resource prices change as a r e s u l t of changing supplies of those resources or for technological change to take place. This i s quite d i f f e r e n t from movement along the cost curve i n response to increased 17 resource demand because of higher product price s . I f , for example, the a v a i l a b i l i t y of interim financing was increased development costs would f a l l and the marginal cost curve would s h i f t downward - 50 -a n d t o t h e r i g h t w i t h t h e r e s u l t t h a t t h e i n t e r s e c t i o n o f t h e m a r g i n a l c o s t c u r v e s a n d m a r g i n a l r e v e n u e c u r v e s w o u l d i n d i c a t e a h i g h e r l e v e l o f c o n s t r u c t i o n . T h i s same p r o c e s s w o u l d t a k e p l a c e i f a m u n i c i p a l i t y a l l o w e d a l a r g e number o f r e s i d e n t i a l l o t s t o be p l a c e d o n t h e m a r k e t o r made a v a i l a b l e l a n d f o r a p a r t m e n t c o n s t r u c t i o n t h r o u g h r e z o n i n g . However i t m u s t be n o t e d t h a t t h e s h i f t i n t h e c o s t c u r v e h a s no e f f e c t on t h e m a r k e t p r i c e o f t h e d w e l l i n g u n i t . The c h a n g e i n c o s t o n l y i n f l u e n c e s t h e l e v e l o f c o n s t r u c t i o n w h i c h u l t i m a t e l y may s h i f t t h e s t o c k s u p p l y c u r v e -to t h e r i g h t b u t o n l y i n t h e l o n g t e r m c o u l d t h e S S- c u r v e o r t h e S S J o o r r c u r v e be s h i f t e d f a r e n o u g h t o e f f e c t i v e l y r e d u c e p r i c e s o f a d w e l l i n g u n i t . The. i n t e r a c t i o n o f t h e two s u b m a r k e t s i s c o m p l i c a t e d b y f a c t o r c o s t s w h i c h a r e common t o b o t h . F i g u r e s 2.7 and 2.8 a r e u s e d t o d e m o n s t r a t e an e x a m p l e o f t h i s phenomena. I n c r e a s i n g demand f o r home o w n e r s h i p r e s u l t s i n i n c r e a s e d c o n s t r u c t i o n w h i c h i n t u r n c r e a t e s h i g h e r demand f o r t h e f a c t o r s o f p r o d u c t i o n . T h i s i s i n d i c a t e d b y t h e i n t e r s e c t i o n o f t h e new p r i c e (P ) w i t h t h e m a r g i n a l c o s t (MC MC ) c u r v e i n f i g u r e o O o 2.7C. I f t h e i n c r e a s e d f a c t o r c o s t i s due p r i m a r i l y t o h i g h e r demand f o r b u i l d i n g s i t e s , t h e l a n d c o m p o nent w i l l be t h e c o s t w h i c h i n c r e a s e s m o s t d r a m a t i c a l l y (See F i g u r e 2 . 7 B ) . The l a n d c o m p o n e n t i s common t o b o t h s u b m a r k e t s a nd h e n c e t h e - 51 -Figures 2.7 and 2.8 Demand and ©hanging Eactor Costs Figure 2.7 Ownership Submarket D' P.. o PROFIT PROFIT LABOUR LABOUR MAT. FIN. MTMT..,-:. OHD. FIN. OED. LAND LAND (units= 10,000's) (units= 100's) 2.7 A Figure 2.8 Rental Submarket 2.7 B 2.7 \ r p r - D r PROFIT ' : LABOUR LABOUR MAT. • MAT. FIN. FIN. OHD. OHD. LAND LAND 2.8 A KEY: Pro f i t = P r o f i t Labour= Labour Mat.= Materials 2.8 B 2.8 C Fin.= Financing Ohd.= Overhead Land= Land - 52 -i n c r e a s e d c o s t o f l a n d due t o i n c r e a s e d c o n s t r u c t i o n i n t h e o w n e r s h i p s e c t o r w i l l i n f a c t s h i f t t h e m a r g i n a l c o s t (MG MC ) c u r v e i n t h e r e n t a l s e c t o r , r r C l e a r l y t h i s i s a u n i q u e e x a m p l e a s c u r r e n t z o n i n g d e s i g n a t e s t h a t l a n d w h i c h i s s u i t a b l e f o r m u l t i p l e f a m i l y u s e a n d t h a t w h i c h i s s u i t a b l e f o r s i n g l e f a m i l y u s e . However l a n d s u i t a b l e f o r m u l t i p l e f a m i l y u s e i s s u i t a b l e f o r b o t h c o n d o m i n i u m c o n s -t r u c t i o n a n d r e n t a l a p a r t m e n t c o n s t r u c t i o n . When i n c r e a s e d c o n s t r u c t i o n i n t h e f o r m o f s t r a t a - t i t l e u n i t s t a k e s p l a c e due t o a n i n c r e a s e d demand f o r o w n e r s h i p t h e f o l l o w i n g s i t u a t i o n i s l i k e l y t o o c c u r . The movement a l o n g t h e m a r g i n a l c o s t c u r v e f o r c o n d o m i n i u m c o n s t r u c t i o n ( r e p r e s e n t e d by t h e i n t e r s e c t i o n o f P ' o and MC MC i n F i g u r e 2.7C) r e s u l t s i n a s h i f t i n t h e o o ^ m a r g i n a l c o s t c u r v e i n t h e r e n t a l c o n s t r u c t i o n s e c t o r ( r e p r e -s e n t e d b y t h e movement o f MC MC t o MC 'MC ' i n F i g u r e 2 . 8 C ) . J r r r r The i n c r e a s e d c o s t o f l a n d w o u l d e r o d e t h e p r o f i t n e c e s s a r y t o g e n e r a t e new c o n s t r u c t i o n i n t h e r e n t a l s e c t o r ( s e e F i g u r e 2 . 8 B ) . I n t h e e x t r e m e c a s e t h e new c o s t o f c o n s t r u c t i o n i n t h e r e n t a l s e c t o r a s r e p r e s e n t e d b y MC r'MC t' i n F i g u r e 2.8C w o u l d f a l l a b o v e t h e m a r g i n a l r e v e n u e c u r v e ( P r ) a n ( i no new c o n s t r u c t i o n w o u l d be g e n e r a t e d . 2.43 P r i c e C o n t r o l I n v i e w o f t h e r e c u r r i n g p o p u l a r i t y o f p r i c e c o n t r o l s i t w o u l d - 5 3 -be valuable to consider t h e i r impact on the model. Since the ownership market i s not normally hindered by p r i c e controls t h i s analysis w i l l only consider the impact of controls on the ren t a l submarket. Controls are not usually i n s t i t u t e d except during periods of rapid-rent escalation due to increasing demand. Consequently i n the rental submarket i t i s l i k e l y that prices w i l l ultimately be held at a l e v e l below equilibrium i f controls are i n s t i t u t e d with the r e s u l t that price or marginal revenue i n the flow sector i s below what i t might have been without controls. As previously described an upward s h i f t i n marginal revenue implies an increase i n the rate of construction as the marginal revenue curve w i l l i n tersect further along the marginal cost curve. With price below i t s equilibrium l e v e l the rate of construction w i l l be less than i t might have been and i n the extreme may be c u r t a i l e d altogether i f the marginal cost curve i n i t s entir e t y l i e s above the controlled p r i c e . Figure 2.9 represents a rent controlled s i t u a t i o n . The market rent where demand ( D r D r ) intersects the stock (S r) i s P . The controlled rent i s P '. Two re s u l t s are clear r r f i r s t l y i n Figure 2. 9A at the lower p r i c e (P^ ,') the quantity demanded increases; since the stock (S.r) i s fixed there exists an un s a t i s f i e d demand (S '-S ). This u n s a t i s f i e d demand must either double-up with e x i s t i n g tenants or look i n other markets for housing. Figure 2.9B and 2.9C indicate - 54 -Figure 2.9 Rent!, Controlled Submarket MC (units= 10000's) 2.9 A PROFIT LABOUR LABOUR MAT. MAT. FIN. FIN. OHD. OHD. LAND LAND P* r P > v MC r 2.9 B r ^ (units= 100's) 2.9 C - 55 -that the incentive for providing new units i s eliminated by the controlled price (P 1) . As the return generated by investment i n rental property i s eliminated the number of new units constructed w i l l decline to Q or zero i f better alternate investments e x i s t s . Moreover i f ren t a l units can be sold as s t r a t a - t i t l e units to y i e l d a better return con-version may take place reducing the stock (S-) by s h i f t i n g i t to the l e f t . This chapter has provided an overview of the housing market. A basic discussion of supply and demand provided the ground-work for the construction of a model of the housing market. With t h i s model extended to include the ren t a l and ownership submarkets i t could be manipulated i n order to show the influence of changing variables. It i s now important to look at ways of evaluating the housing market. - 5 6 -FOOTNOTES - CHAPTER I I 1. P a u l A. Samuelson and Anthony S c o t t , Economics, An  I n t r o d u c t o r y A n a l y s i s , ( Toronto: M c G r a w - H i l l , 1966), C h a p t e r 22; and Douglas A. S t e w a r t , Land V a l u e T a x a t i o n : Some E f f e c t s on Land S p e c u l a t i o n and t h e B u r d e n t o f Muni- c i p a l T a x a t i o n , M a s t e r ' s T h e s i s , U n i v e r s i t y o f B r i t i s h C o l u m b i a , May 197 4, pp. 52-3. 2. T h i s l i s t of v a r i a b l e s i s p r o v i d e d by Lawrence B. Smith i n The Postwar Canadian Housing and R e s i d e n t i a l Mortgage  M a r k e t s and t h e R o l e o f Government, (Toronto: U n i v e r s i t y o f T o r o n t o P r e s s , 1974), pp. 17-18. 3. Unimproved l a n d i s g e n e r a l l y assumed t o be i n f i x e d s u p p l y . E x c e p t f o r c a s e s o f r e c l a m a t i o n t h r o u g h l a n d f i l l o r t h e use o f dykes o r perhaps t h e use o f a i r s p a c e o ver freeways o r r a i l w a y s , f i x i t y o f s u p p l y i s a v a l i d a s s u m p t i o n . 4. R i c h a r d M. Hurd, P r i n c i p l e s o f C i t y Land V a l u e s , 3 r d e d i t i o n , The Record and Guide, (New Yo r k , 1911) , p. 13.. 5. R i c h a r d U . R a t c l i f f , V a l u a t i o n f o r R e a l E s t a t e D e c i s i o n s , (Santa C r u z : Democrat P r e s s , 1972), p. 308. 6. D a v i d R i c a r d o , "On t h e P r i n c i p l e s o f P o l i t i c a l Economy and T a x a t i o n " , T h i r d e d i t i o n , 1821, i n P i e r o S r a f f ( e d . ) , The Works and Correspondence of' D a v i d R i c a r d o , (Cambridge: Cambridge U n i v e r s i t y P r e s s , 1951), V o l . 1, p. 74. 7. A c c o r d i n g t o S t a t i s t i c s Canada, 1971 Census, t h e r e were 345,870 o c c u p i e d d w e l l i n g s i n G r e a t e r Vancouver i n 1971.. C e n t r a l Mortgage and Housing S t a t i s t i c s i n d i c a t e 15,553 d w e l l i n g s t a r t s o r 4.5% o f t h e e x i s t i n g s t o c k . T h i s ! s t a t i s t i c does n o t account f o r d e m o l i t i o n . See 1971  Census, P o p u l a t i o n and Housing C h a r a c t e r i s t i c s , (Ottawa: S t a t i s t i c s Canada, August 1974) and C e n t r a l Mortgage and Housing C o r p o r a t i o n , Canadian Housing S t a t i s t i c s , 1971, (Ottawa: C.M.H.C., March 1972). 8. A d i s c u s s i o n o f t h e l o c a l development p r o c e s s i s a v a i l a b l e i n more d e t a i l . See Edmond V. P r i c e , The House B u i l d i n g  I n d u s t r y i n M e t r o p o l i t a n Vancouver, M a s t e r ' s T h e s i s , U n i v e r s i t y o f B r i t i s h C o lumbia, A p r i l 1970; Gary A. Young, The M u n i c i p a l S u b d i v i s i o n P r o c e s s i n M e t r o p o l i t a n Vancouver, M a s t e r ' s T h e s i s , U n i v e r s i t y o f B r i t i s h C o l u m b i a , A p r i l 1974; and I a n L. B e v e r i d g e , The Land Development P r o c e s s as i t a f f e c t s t h e s u p p l y o f new h o u s i n g w i t h i n The G r e a t e r  Vancouver R e g i o n a l D i s t r i c t ^ (Vancouver: R e p o r t f o r t h e R e a l E s t a t e Board o f G r e a t e r Vancouver, May 1974). - 57 -9. D a v i d B a x t e r , S p e c u l a t i o n i n L a n d , U r b a n L a n d E c o n o m i c s R e p o r t No. 7, ( V a n c o u v e r : F a c u l t y o f Commerce a n d B u s i n e s s A d m i n i s t r a t i o n , U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1 9 7 4 ) , .p. 125. pp. 4T6. 1 0 . J . F r e d W e s t o n a n d E u gene F. B r i g h a m , M a n a g e r i a l F i n a n c e , 4 t h E d i t i o n , (New Y o r k : H o l t R i n e h a r t a n d W i n s t o n , 1 9 7 2 ) , P. 125. 1 1 . The number o f a s s u m p t i o n s r e q u i r e d t o u n d e r t a k e e c o n o m e t r i c s t u d i e s o f t h e h o u s i n g m a r k e t h a v e r e s u l t e d i n c o n s i d e r a b l e v a r i a t i o n i n t h e e s t i m a t i o n o f p r i c e e l a s t i c i t y . F o r a summary o f t h e s e s t u d i e s s e e L a w r e n c e B. S m i t h , The P o s t -war C a n a d i a n H o u s i n g and M o r t g a g e M a r k e t s . . . , p. 3 1 . He c o n c l u d e s t h a t a n o v e r a l l ( q u a l i t y a n d q u a n t i t y ) p r i c e e l a s t i c i t y f o r t h e demand f o r h o u s i n g s e r v i c e s w o u l d be 0.8 t o 1.0. 12. The m o d e l shows o n l y t h e m a r g i n a l c o s t c u r v e s a s r e p r e -s e n t e d by MC MC a n d MC MC a n d m a r g i n a l r e v e n u e a s r e -2 o o r r ^ p r e s e n t e d by P q and P . A more d e t a i l e d e x p l a n a t i o n o f o f t h e e q u i l i b r i u m o f t h e f i r m i s i n c l u d e d i n M i c h a e l J . B r e n n a n , T h e o r y o f E c o n o m i c S t a t i c s , ( E n g l e w o o d C l i f f s : P r e n t i c e - H a l l , 1 9 7 0 ) , pp. 1 7 8 -86. 13. L a w r e n c e B. S m i t h , p. 18 14. I b i d , p. 19. 15. P r o v i n c e o f B r i t i s h C o l u m b i a , L a n d l o r d a n d T e n a n t A c t , 1974. 16. A y e a r l y s u r v e y o f a p a r t m e n t r e n t s i n t h e V a n c o u v e r a r e a shows r e l a t i v e l y s t a b l e i n c r e a s e s i n r e n t s i n 1 9 7 3 . D es-p i t e a v a c a n c y r a t e o f 0.6% i n J u n e o f 1973 ( i n d i c a t i n g v i r t u a l c o m p l e t e o c c u p a n c y ) c o m p a r e d w i t h 1.9% i n J u n e o f 1972 r e n t s d i d n o t i n c r e a s e on a v e r a g e any more t h a n 5%. F o r d o c u m e n t a t i o n s e e R e a l E s t a t e B o a r d o f G r e a t e r V a n c o u v e r , R e a l E s t a t e T r e n d s i n G r e a t e r V a n c o u v e r , 1 9 7 3 -74, ( V a n c o u v e r : R.E.B. o f G.V., O c t o b e r 1973) a n d e a r l i e r i s s u e s . 17. See M.J. B r e n n a n , pp. 193-195 f o r a d i g r e s s i o n on t h e mo-d i f i c a t i o n o f a f i r m s s u p p l y c u r v e . I t s h o u l d be n o t e d t h a t t h e p o r t i o n o f a f i r m ' s m a r g i n a l c o s t c u r v e w h i c h l i e s a b o v e t h e f i r m ' s a v e r a g e v a r i a b l e c o s t c u r v e i n t h e s h o r t r u n i s t h e f i r m s s h o r t r u n s u p p l y c u r v e . O b v i o u s l y i n h o u s i n g m a r k e t a n a l y s i s e v e n t h e s h o r t r u n may b e a y e a r o r more d e p e n d i n g on t h e l e n g t h o f t i m e t o c o n s t r u c t a new u n i t . T h i s p o i n t i s made by R i c h a r d P o l l o c k i n " S u p p l y o f R e s i d e n t i a l C o n s t r u c t i o n : A c r o s s - s e c t i o n e x a m i n a t i o n o f r e c e n t h o u s i n g m a r k e t b e h a v i o u r " , L a n d  E c o n o m i c s , F e b r u a r y , 1 9 7 3 , V o l u m e X L I X , No. 1, p. 58. - 58 -CHAPTER III EVALUATION OF.THE HOUSING MARKET The intention of this chapter i s to provide some basis for evaluation of the housing market. Housing has i n many res-pects become a p o l i t i c a l f o o t b a l l . Few electioneering platforms ignore housing as an issue. Federal, P r o v i n c i a l , Regional, Municipal and even campus p o l i t i c i a n s beat the drum of the housing c r i s i s but few manage to define what the problem i s or how i t came to be. It i s questionable i f any have suggested a r a t i o n a l solution. 3.1 DISTRIBUTION AND ALLOCATION An evaluation of any economic system requires an understanding of the concepts of d i s t r i b u t i o n and a l l o c a t i o n . Most simply the term d i s t r i b u t i o n refers to the equity of the sharing of society's income and wealth while the term a l l o c a t i o n refers to the e f f i c i e n c y of markets i n a l l o c a t i n g the product. I t i s the d i s t r i b u t i o n of wealth and income which when exercised by individuals i n the marketplace allows the p r i c i n g system to allocate goods i n an e f f i c i e n t manner.. Although the inequities - 59 -of distribution-and the i n e f f i c i e n c i e s of a l l o c a t i o n are d i s t i n c t problems governments have generally found i t d i f f i -c u l t to deal with each problem seperately with the r e s u l t that p o l i c i e s have been blunt creating unanticipated side e f f e c t s . Rawls argues that "the agenda of economics and p o l i t i c s have always featured p o l i c i e s whose effects~on economic inequality and on e f f i c i e n c y of resource a l l o c a t i o n are hopelessly i n t e r t -wined. Increased government a c t i v i t y i n the Western world -isn generally be? attributed to the inadequacy of the market mechanism i n meeting the preferences of society. While some of the blame for this deficiency i s the re s u l t of imperfect competition which i n turn results i n a l l o c a t i o n a l i n e f f i c i e n c y i t , i s clear that the greater cause of this deficiency i s the i n a b i l i t y of society to re d i s t r i b u t e incomes and wealth such that the less fortunate can l i v e above a standard which would be considered adequate. To demonstrate the need for considering d i s t r i b u t i o n a l and a l l o c a t i o n a l processes i t would be he l p f u l to trace through the role of governments i n these areas of the economic system. Go-vernment a c t i v i t i e s of a d i r e c t r e d i s t r i b u t i o n a l nature are primarily welfare programs such as old age assistance, family allowances and d i r e c t r e l i e f , a n d progressive income t a x e s , a l l of which have the intent of increasing the r e a l incomes of the - 60 -recipients. These should be the major areas where p o l i c i e s are directed toward d i s t r i b u t i n g income and wealth optimally such that group welfare i s maximized. The knotty problem of maximizing group welfare i n a system where the i n d i v i d u a l i s not i n d i f f e r e n t to the benefits he receives has no simple so-luti o n and i s the prime concern of welfare economists. Their concern i s to move toward an optimum where i n addition to ma-ximizing group welfare or " e f f i c i e n c y 1 of the economic system an equitable d i s t r i b u t i o n among individuals i s incorporated 2 into the objective. I t i s not the concern of thi s paper to suggest what should be an i d e a l d i s t r i b u t i o n . However i t i s the concern of this paper to discuss the implications of aug-menting d i r e c t r e d i s t r i b u t i o n (welfare programs and progressive income tax) with i n d i r e c t r e d i s t r i b u t i o n which may a l t e r the processes of a l l o c a t i o n . For the purposes of this analysis i n d i r e c t r e d i s t r i b u t i o n i s any process which through tax or subsidy a l t e r s the r e l a t i v e prices of various goods. This process i s r e d i s t r i b u t i o n a l i n that r e a l income of consumers of taxed commodities i s decreased while the r e a l income of consumers of non-taxed or subsidized 3 commodities i s increased. However the uses of such means to red i s t r i b u t e income has a l l o c a t i o n a l effects i n that the re-d i s t r i b u t i o n affects not only the i n d i v i d u a l but the r e l a t i v e production processes of d i f f e r e n t commodities. - 61 -Before proceeding with the interdependence of i n d i r e c t r e d i s t r i b u t i o n and a l l o c a t i o n the nature of a l l o c a t i o n a l a c t i v i t i e s should be explored. Reallocational p o l i c i e s adjust the output of various goods. Such p o l i c i e s are used to esta-b l i s h an optimum l e v e l of production of various goods given the d i s t r i b u t i o n of income. The c h a r a c t e r i s t i c s of an optimum adjustment are: 1) There are no e x t e r n a l i t i e s i n production or consumption, that i s , a l l costs and benefits of production and consumption accrue i n d i v i d u a l l y to producers and consumers; and 2) prices of a l l commodities r e f l e c t the r e a l costs of production hence prices equal marginal costs and factor prices equate supply and demand. Clearly such an optimum i s i n a t t a i n -able where pure competition does not e x i s t because of the ex-4 istence of e x t e r n a l i t i e s and of public goods. Hence r e a l l o c a -t i o n a l processes are used to account for the r e a l costs or benefits of e x t e r n a l i t i e s and the provision of public goods. For example the consumption of gasoline i s taxed to provide for the construction of roads which are a public good. Automobilies with large displacement engines may be taxed to a greater extent than those with small displacement engines i n order to o f f s e t the e x t e r n a l i t i e s of p o l l u t i o n and excessive f u e l consumption. The advantage of such r e a l l o c a t i o n a l p o l i c i e s are clear', costs and benefits not measured i n the marketplace are accounted for. 3.2 DISTRIBUTION AND ALLOCATION IN THE HOUSING MARKETS - 62 -Returning again to the interdependence of i n d i r e c t r e d i s -t r i b u t i o n and a l l o c a t i o n i t should be clear that r e a l l o c a t i o n a l p o l i c i e s which extend ..beyond the r e a l costs and benefits of production and consumption become r e d i s t r i b u t i o n a l i n nature. Why i s there a need to explore- d i s t r i b u t i o n a l and a l l o c a t i o n a l p o l i c i e s with respect to the analysis of. the housing market? Housing markets throughout the world are subject to innumerable forms of taxation and subsidy and the intent of the paper w i l l be to demonstrate that i n Canada many of these infringements are without regard to the d i s t r i b u t i o n a l and a l l o c a t i o n a l con-sequences . The r e s u l t i n g r e d i s t r i b u t i o n and r e a l l o c a t i o n i n -fluences consumer preference and expenditure since consumers have lim i t e d incomes, seek to maximize s a t i s f a c t i o n and have preference schedules such that commodities are substitutable. When taxes or subsidies a l t e r the price of one commodity with respect to that-of another the consumer w i l l a l t e r his purchase pattern. Accordingly the pattern of production w i l l change increasing the output of the product which has increased i n price and decreasing the output-of the product which has f a l l e n i n p r i c e . ^ Within the housing market and p a r t i c u l a r l y within the tenure submarkets i n d i r e c t r e d i s t r i b u t i o n through re-all o c a t i v e p o l i c i e s , the re s u l t i n g changes i n consumer expen-diture and the ultimate change i n production patterns have f a r reaching implications. With respect to the housing market the most important difference - 63 -between r e d i s t r i b u t i o n a l p o l i c i e s and r e a l l o c a t i o n a l p o l i c i e s should be noted. R e d i s t r i b u t i o n of income and wealth i s i d e a l l y not a s s o c i a t e d w i t h the consumption of a p a r t i c u l a r commodity. In other words the freedom of c h o i c e of the i n d i v i d u a l consumer i s p r e s e r v e d . R e a l l o c a t i v e p o l i c i e s , on the other hand, are more s e l e c t i v e i n t h e i r impact. Since t h e i r purpose i s to account f o r the e x t e r n a l i t i e s of p r o d u c t i o n and consumption of a s p e c i f i c good or f o r the c o s t of p u b l i c good which i s consumed by a s p e c i f i c consumers or producers. Hence rwhere a r e -a l l o c a t i o n a l p o l i c y has become r e d i s t r i b u t i o n a l i n nature but i s s t i l l d i r e c t e d toward s p e c i f i c i n d i v i d u a l s or goods the f r e e -dom of consumer c h o i c e i s undermined. In order to b e n e f i t from the r e d i s t r i b u t i o n , consumption p a t t e r n s must be a l t e r e d . T h i s d i s c u s s i o n may be g i v e n some c l a r i t y by a h y p o t h e t i c a l example from the housing market. I f home owners are s u b s i d i z e d while r e n t e r s are not the e f f e c t of such a p o l i c y would be to r e a l l o c a t e consumer expenditure away/from r e n t a l housing and toward owned housing. In l i n e w i t h the theory d e s c r i b e d p r e -v i o u s l y such a s h i f t i n expenditure w i l l have a cor r e s p o n d i n g i n f l u e n c e on p r i c e s . The p r i c e of owned housing would r i s e and the p r i c e of r e n t e d housing would f a l l . Such a p r i c e d i f f e r e n -t i a l would a l t e r the p r o d u c t i o n process i n t h a t more u n i t s f o r s a l e than u n i t s f o r r e n t would be produced. Moreover p r i c e s of owned housing would r e f l e c t more than the r e a l c o s t of p r o d u c t i o n - 64 -while prices of rented housing would r e f l e c t less than the re a l cost of production had the subsidy not been implemented. The v a l i d i t y of a l t e r i n g consumer preferences and production processes with such a policy i s questionable and c l e a r l y de-monstrates a r e a l l o c a t i o n a l p o l i c y which does not serve to account for e x t e r n a l i t i e s or the provision of public goods but i t i s i n fact a form of i n d i r e c t r e d i s t r i b u t i o n . 3 . 3 HOUSING STANDARDS, HOUSING NEEDS AND HOUSING DEMAND An attempt i s often made to define problems i n the housing market with respect to a standard. The question of what standard can be c a l l e d acceptable i s as d i f f i c u l t to answer as the housing problem i s to define. Professor Donnison considers this a problem of perception. "The (housing) problem cannot be explained or measured by an objective summary of housing conditions, i t i s a problem as perceived by someone, and thus i t ' s meaning depends on the understanding, the inter p r e t a t i o n and the perceived implications of housing conditions to be 7 found i n the minds of those concerned." In other words, because households have unique tastes and preferences not only for housing but also' for other <g.o©jdss any attempt."to define a standard i s l i k e l y to be at odds i n many cases with what the in d i v i d u a l consumer wants. Secondly though most government housing agencies refer to such ideals as "adequate" housing or housing which meets "s p e c i f i e d - 65 -minimum standards" at a price ;everyone can afford, this should be no assurance that the problem i s about to be solved. I t has already been pointed out that adequate housing i s a subjective evaluation and hence immeasurable. As well Professor Donnison points out the f o l l y of be l i e v i n g that the problem can be solved even i f i t can be defined. It i s tec h n i c a l l y f e a s i b l e to produce about as much bread, bedding, or b a l l p o i n t pens as a nation can use. But-even the best housed countries have found no l i m i t to the quantity or q u a l i t y of housing they want. . Such a l i m i t could only be found i n an e n t i r e l y s t a t i c society in' which people's consumption patterns, g aspirations and relationships have been frozen forever. So even the most ambitious of housing programs could be set aside by the public as overly ambitious or t o t a l l y inadequate before any goal i s reached. Such i s the behaviour of the consumer i n the housing market. Hence there i s no such thing^as 'perfection' i n the housing market just as there i s no such thing as a perfect environment. There i s only better housing and a better environment and i n -cremental changes are the only means of handling such goals so d i f f i c u l t to define. To demand massive changes requiring the redi r e c t i o n of the economic inputs of resources, c a p i t a l and labour at the expense of other sectors of the economy i s to run the r i s k of a supply t o t a l l y at odds with changing consumer tastes and preferences. If the goal i s to provide maximum freedom of choice and equal opportunity for consumers, t h e i r - 6 6 -preferences cannot be ignored. Moreover constraints i n the marketplace must not r e s t r i c t those preferences from being expressed. An important d i s t i n c t i o n must be made at this time.. That i s , the d i s t i n c t i o n between needs and wants or between housing need and housing demand. Housing need i s described as what ought to happen i n the marketplace based on some standard or judgement independent of the marketplace. Hence the q u a n t i f i c a t i o n of housing need l i k e the d e f i n i t i o n of a minimum standard i s l i k e l y to ignore r e a l preferences at a given time and any changes i n preference which occur over time. However attempts have been made to define need i n terms of the following: 1) The physical condition of the unit 2) The provision of basic u t i l i t i e s 3 ) The size of the unit and the number of rooms i t contains 4) Amenities - neighborhood, transportation, services, etc. Where such standards are valuable i s i n accounting for ex-t e r n a l i t i e s or i n the provision of public goods. Society defines a standard which must be met or a service which must be offered, both of which would not be provided by the private sector. The provision of basic u t i l i t i e s and amenities such as public transportation and parks can be subject to such standards. In addition safety factors for construction are standards which can be set. Past such general guidelines rany - 67 -standards defining housing need simply avoid the problem of poverty or income d i s t r i b u t i o n . Sufeh a statement does not imply that i f income d i s t r i b u t i o n i s equitable housing demand w i l l be met. As Professor Donnison pointed out,such a s i t u a t i o n would only be found i n a " s t a t i c society i n which people's con-sumption patterns , aspirations and relationships have been frozen 9 forever." Housing demand or e f f e c t i v e housing demand i s the concept which i s most closely studied by economists. "Effective demand i s market-place demand, purchases which consumers have both the desire and the economic means to make. "'''^  E f f e c t i v e demand i s a function of consumer preferences based on t h e i r income and the fact that they w i l l spend that income so as to increase t h e i r s a t i s f a c t i o n . 3.4 MARKET INDICATORS There are three market indicators which can be useful i n de-termining the' d i r e c t i o n and rate of change i n the housing market. The three indicators are vacancy rates, u t i l i z a t i o n rates, and the s t a b i l i t y of rents and prices. The three are very much interrelated-and- together they can provide valuable i n s i g h t into the marketplace. Generally the analysis of vacancy rates has been lim i t e d to the proposition that high or r i s i n g vacancy rates indicate over - 68 -production, a decline in demand or perhaps a s h i f t i n demand to another housing submarket. Low or f a l l i n g vacancy rates imply the opposite. . "There i s considered to be a normal stock of vacant units i f a vacancy r a t e 1 1 of 3.5 to 4% e x i s t s . Such a rate would provide f l e x i b i l i t y i n the housing market. Such f l e x i b i l i t y i s to provide for mobility and changing preferences of the consumer fjust as a c e r t a i n l e v e l of unemployment provides for worker mobility. In an unregulated marketfmovement of the vacancy rate below normal serves as an indicator to the builder or investor that there i s a demand for new units. Clearly, i n a regulated market the vacancy rate loses any meaning because, usually few vacancies ex i s t and excessive demand created by below market prices r e s u l t s i n queuing or "key money". However i n the unregulated market movements i n vacancy rates can generate new building to .meet the indicated demand. A normal vacancy rate may vary from c i t y to c i t y . A c i t y characterized by rapid growth, seasonal employment or perhaps even a university town w i l l l i k e l y have large fluctuations i n the vacancy rate. On the other hand a stable slow growth community would probably have a steady and generally lower vacancy rate. The nature of the community, the composition of i t s housing inventory and the state of the l o c a l economy are e s s e n t i a l to any analysis of vacancy rates. - 69 -U t i l i z a t i o n rate i s a c o l l e c t i v e term r e f e r i n g to the d i s -t r i b u t i o n of families or households among the occupied dwelling units, the d i s t r i b u t i o n of persons per room or of children per bedroom. Perhaps the most common form of this i n d i c a t o r i s the h'fami'fliyld- per dwelling r a t i o and while unity i s perported to be the i d e a l of such a s t a t i s t i c i t gives no i n d i c a t i o n of the q u a l i t y of housing or the e f f i c i e n c y of usage. Such a c r i t i c i s m could also be leveled at vacancy rates. The s t a b i l i t y of prices and rents i s another elusive goal i n the housing market. I t has been argued that with demand the predominate factor i n price determination, i t i s impossible to 12 expect stable prices when large changes i n demand take place. Unstable housing prices and rents, j u s t one aspect of i n f l a t i o n / causes those on fixed incomes su f f e r . If incomes were to r i s e at the same rate as prices and i f changes were regular and could be forecast r i s i n g prices would not be a problem. However changes are not stable and hence the s i t u a t i o n arises which most housing authorities would rather not l i v e with, a market cha-racterized by i n s t a b i l i t y where expectations play a greater role i n price determination than the normal demand variables. As i n the case of vacancy rates, the movement of prices i s a valuable indicator to the production sector. When prices are regulated or even when periods between price adjustment are r e s t r i c t e d the production sector does not receive indicators of true demand. - 70 -S t a b i l i t y of prices and rents i s an indicator closely t i e d to vacancy and u t i l i z a t i o n rates. For example a low vacancy . rate and high u t i l i z a t i o n rate implies pressure on supply and prices should tend to r i s e . However a high vacancy rate and a high u t i l i z a t i o n rate implies- a reduction of pressure on supply which should r e s u l t i n f a l l i n g p r i c e s . As these two cases demonstrate, the three market indicators when used to-gether and when the s t a t i s t i c s are considered r e l a t i v e to past data, are the best measure of the markets incremental response to changes i n demand. The s t a t i s t i c s however must be defined by submarket i n order that results indicate trends i n s p e c i f i c submarkets as opposed to summations over the whole market. 3 . 5 THE DEFINITION OF A HOUSING SHORTAGE Perhaps i t i s possible at this-time' to conclude whether or not a housing c r i s i s can ex i s t and i f the present circumstances warrant such a doomsday t i t l e . It i s common today for every problem to be described i n c r i s i s proportions. The environmental c r i s i s , the energy c r i s i s , the population explosion and of course the housing c r i s i s . Anyone who chooses to describe the current housing market i n c r i s i s proportions probably does so because he feels that a shortage e x i s t s . So perhaps the best approach to reaching a conclusion regarding the existence of a c r i s i s i s to determine i f a shortgage e x i s t s . Professor.nal Pennance and Professor Gray describe three ways - 71 -of defining a housing shortage. The f i r s t refers to a 'technical' shortgage, a s i t u a t i o n i n which the alternatives which would have to be s a c r i f i c e d i n order to a l l e v i a t e the shortagee are deemed too high by the consumer. Here the p r i c e rationing mechanism i s at work a l l o c a t i n g the housing product but the a l l o c a t i o n depends for i t s equity upon the d i s t r i b u t i o n of income and wealth. The e x i s t i n g d i s t r i b u t i o n may have determined that not everyone can have a v i l l a on the French Riviera hence there i s a 'technical' shortage of v i l l a s but c e r t a i n l y no housing c r i s i s . If however the poor do not have adequate income to bargain t h e i r way into housing to meet thei r need there i s a problem but the problem i s not a housing shortagee but an inequitable d i s t r i b u t i o n of wealth. There i s nothing wrong with the housing market-, the p o l i t i c a l process has simply f a i l e d to d i s t r i b u t e income and wealth i n proportions which would allow the poor to buy housing meeting the minimum standard or need as defined by society. A 'technical' shortage can be described through the use of non-economic terms such as the r a t i o of houses to households or the percentage of houses-in an area that are u n f i t . Professors Pennance and Gray argue that such s t a t i s t i c s are based on non-economic assumptions about desired housing standards and by ignoring the importance of incomes, consumers-preferences, prices and costs, provide an unreliable i n d i c a t o r of what i s actually happening i n the. housing market. They are. a measure - 72 - . of need not demand. This approach .is i n y a l i d as i t implies a d i s t r i b u t i o n a l problem and demands a non-economic standard which undermines the processes of consumer choice and price rationing. Professors Pennance and Gray describe two methods of defining a housing shortage which are v a l i d f or economic analysis. They refer now to economic shortages rather than 'technical 1 shortages. Economic shortages are quite different.. They are always r e l a t i v e to some l e v e l of costs and prices and refer to situations of market imbalance i n which e f f e c t i v e demand outruns supplies f o r t h -coming at the p r e v a i l i n g p r i c e , but something prevents price r i s i n g to balance things out. Al t e r n a t i v e l y they can be regarded as market situations i n which although price has moved up to achieve a temporary balance between demand and supply, i t i s regarded as high when referred to a 'normal' price which would p r e v a i l when sup-p l i e s had been able to adjust over a longer period. ' One can then speak of a 'shortgage', using a normal price as a benchmark. Obviously, where supplies are slow to respond to changes i n demand (as they are i n housing) such shortages may p e r s i s t over quite long periods.13 It i s i n this context that the present housing market must be evaluated. The submarket for homes i n fee and for r e s i d e n t i a l leaseholds w i l l be examined as t h e i r i n t e r r e l a t i o n s h i p i s key to this study. In the context just defined i t can safely be argued that i n Greater Vancouver there i s not only a shortages of units to buy but also a shortage of units to l e t . The questions to ask - 73 -i n each market are f i r s t l y 'are prices being held below the equilibrium lev e l ? ' And secondly,'is the price l e v e l above a 'normal' price which would be reached i f supply was able to adjust quickly?' This paper w i l l argue i n response to the f i r s t question that prices i n Greater Vancouver i n the r e s i -d e n t i a l leasehold market are probably below equilibrium pro-ducing and perpetuating a shortage as defined above. In res-ponse to the second question i t w i l l argue that i n Greater Vancouver the ownership market demand, the r e s u l t of a number of factors not the least of which are the pro ownership p o l i c i e s of the various governments, has resulted i n price levels above that which would be considered 'normal 1. I t w i l l further be argued that the re.distributional.< n a t u r e o f the re-a l l o c a t i o n a l p o l i c i e s i n the housing market i s the prime cause of these two phenomena. - 74 -FOOTNOTES - CHAPTER III 1. J. Tobin, "On Limiting the Domain of Inequality", i n E.S. Phelps, (ed.), Economic J u s t i c e , (Harmondsworth: Penguin, 1973), p. 447. 2. A j i t K. Dasgupta and D.W. Pearce, Cost Benefit Analysis: Theory and Practise, (London: MacMillan, 1972) , pp. 5 4-59, Chapter Two on Pareto Optimality, compensation tests and equity contains a valuable discussion of ..the Pareto, Kaldor-Hicks and Scitvosky arguments about optimality. 3. The incidence of taxes and subsidies i s a d i f f i c u l t question which should be dealt with i n more depth. See Peter Mieszkowski, "Tax incidence theory: The effects of taxes on the d i s t r i b u t i o n of income," Journal of Economic  Lit e r a t u r e , December 1969, pp. 1103-1124. Tax incidence aside, i t i s clear that the r e l a t i v e production of goods i s s t i l l altered by r e a l l o c a t i v e p o l i c i e s . 4. John F. Due, Government Finance: Economics of the Public  Sector, 4th e d i t i o n , (Homewood, I l l i n o i s : Irwin, 1968), pp. 7-8. 5. Ibid, pp. 146S-1.477 6. Some c l a r i t y may be given to t h i s discussion by r e f e r r i n g to the l a t t e r part of Chapter Two of this paper. The impact of a subsidy p r e f e r e n t i a l to ownership i s repre-sented by Figure 2 . a n d 2.8. 7. David V. Donnison, The Government of Housing, (Harmondsworth: Penguin, 196 7) , p. 4 3 8. David V. Donnison, "Housing Problems and P o l i c i e s " , i n Michael Wheeler, (ed.), The Right to Housing, (Montreal: Harvest, 1969^ p. 23. 9. Ibid, p. 23. 10. Wallace F. Smith, Aspects of Housing Demand-Absorption, Demolition and D i f f e r e n t i a t i o n , (Berkeley: Regents of the University of C a l i f o r n i a , The Center for Real Estate and Urban Economics, 1966), p. 1. 11. Sherman J. Maisel, Financing Real Estate, (New York, McGraw-H i l l , 1965), p. 335. - 75 -Demand as the dominant factor i n the housing market i s discussed i n d e t a i l i n Chapter IT. F.G. Pennance and Hamish Gray, "Housing Shortgage: Fact or F i c t i o n " , Bullding, March 17, 1967, p. 104. CHAPTER IV THE CHOICE BETWEEN RENTING AND OWNING Two separate but cl o s e l y related housing submarkets have been defined according to tenure, the market for r e s i -d e n t i a l leaseholds or re n t a l units and the market for freehold or owner occupied units. It was suggested i n the conclusion of Chapter III that a housing shortage can be defined i n two ways. F i r s t l y , a shortage can exis t i f demand outruns the supply forthcoming at the p r e v a i l i n g price and something prevents the price from r i s i n g to balance things out. Secondly, a shortage can exist i f price has moved up to balance supply and demand but i n so doing has se t t l e d at a l e v e l above what would be regarded as a normal price i f supply has been allowed to adjust over a longer period of time. These t h e o r e t i c a l approaches to the d e f i n i t i o n of a housing shortgage appear to represent respectively the problems i n the rent a l market and the ownership market i n Greater Vancouver. It has been argued successfully that rents are just not high enough to j u s t i f y the construction of more rental units par-- 77 -t i c u l a r l y i n the Lower Mainland. This s i t u a t i o n exists despite a low vacancy rate which indicates a high demand for e x i s t i n g u n i t s . In the face of t h i s s i t u a t i o n prices had not r i s e n to a point high enough to j u s t i f y construction 2 of new r e n t a l units even p r i o r to rent control l e g i s l a t i o n . Hence a shortage of the f i r s t type exists i n the r e n t a l sub-market. However the question remains to determine what prevented prices r i s i n g p r i o r to rent control l e g i s l a t i o n . It i s apparent to most that prices of single family homes throughout the Province but p a r t i c u l a r l y i n the Lower Mainland have r i s e n far above 'normal'. With the pressures of i n f l a t i o n , higher incomes and the r e l a t i v e l y strong economy of 197 2 and 1973 i t would be ludicrous not to expect some upward pressure on housing prices but have they increased too much? Recent studies indicate that prices of homes for sale are c e r t a i n l y 3 much higher than a l e v e l which would be considered 'normal'. Hence a shortage of the second type exists i n the market for houses for sale. - A l l of t h i s has occurred i n a market where construction at least of single family homes has reached record l e v e l s . A l l provinces experienced very high i f not record-breaking housing a c t i v i t y i n 1973. B r i t i s h Columbia was among the provinces where previous records were broken i n the year. In 1973 B.C. starts t o t a l l e d 37,627 (up 6.5% from 1972), completions numbered 34,604 (up 1 1 . 3 % ) , and a further 27,112 units were - 78 -under construction at the year end (9.0 per cent higher than i n December 1972). As in most other provinces, the high l e v e l of 1973 starts i n B.C. r e f l e c t e d a large increase i n single dwellings (one and two family units) and almost as large a decrease i n multiples (row and apartment units).4 So i n spite of a very active construction industry any shortage in the ownership submarket has not been met. Since the multiple unit sector would include most units being constructed for rent and since construction of multiple units has decreased the shortage i n the rental submarket i s not about to be met either. This paper has stressed the dominance of the demand sector i n the housing market. If t h i s argument i s r e a l i s t i c then a further analysis of the choice between renting and owning should be h e l p f u l i n interpreting the 197 3 and early 1974 market s i t u a t i o n . The key question i s why did the consumer continue to bid up the prices of•houses for sale while rents reamined at a l e v e l too low to encourage new building? By c l o s e l y analyzing the comparative costs and benefits of rental versus ownership t h i s chapter w i l l provide the answer. F i r s t , ' i t w i l l be necessary to look at the theories of s u b s t i t u t a b i l i t y , u t i l i t y and consumer decision-making which influence that choice i n tenure. 4.1 SUBSTITUTABILITY AND CONSUMER CHOICE AND UTILITY The c h a r a c t e r i s t i c of hetorogeneity i n the housing market and the c l u s t e r i n g of substitutes into submarkets has been 5 discussed. No matter how tenuous the f r o n t i e r s between sub-- 79 -LEAF 80 OMITTED I N PAGE NUMBERING. m a r k e t s i t i s e s s e n t i a l when c o n s i d e r i n g t h e c h o i c e i n t e n u r e t h a t t h e s u b m a r k e t s be d i f f e r e n t i a t e d . T h e r e i s no d o u b t t h a t numerous o t h e r v a r i a b l e s s u c h a s r e n t , p r i c e , q u a l i t y , l o c a t i o n , a m e n i t y , n e i g h b o r h o o d , t r a n s p o r t a t i o n and w o r k o p p o r t u n i t i e s come i n t o p l a y c r e a t i n g t h e i r own s u b -m a r k e t s . N o n e t h e l e s s i t m u s t be c o n c l u d e d t h a t t e n u r e , i f o n l y b e c a u s e o f t h e d i f f e r e n t p r o c e d u r e o f p a yment f o r s e r -v i c e s a n d t h e r e a d i l y a p p a r e n t c l a s s i f i c a t i o n s o f t e n a n t a n d home o w n e r , i s a n o b v i o u s d i v i s i o n b e t w e e n s u b m a r k e t s . F u r t h e r -m o r e , t h e v e r y d i f f e r e n t t r e a t m e n t a f f o r d e d homeowners as c o m p a r e d t o home r e n t e r s i s a m ple j u s t i f i c a t i o n , a t l e a s t i n C a n a d i a n m a r k e t s , t o c o n s i d e r s u b m a r k e t s a s d e f i n e d b y t e n u r e . D e s p i t e t h e d i f f e r e n c e b e t w e e n t h e " b u n d l e s o f r i g h t s " p r o v i d e d t h e r e n t e r and t h e owner t h e f l o w o f s e r v i c e s f r o m a r e n t a l u n i t i s s u b s t i t u t a b l e f o r t h e f l o w o f s e r v i c e s f r o m an owned u n i t . I n t e r m s o f t h e s e r v i c e s p r o v i d e d by t h e p h y s i c a l c h a -r a c t e r i s t i c s o f a r e n t a l u n i t and an owned u n i t t h e y a r e e c o n o m i c s u b s t i t u t e s f o r e a c h o t h e r . As e c o n o m i c s u b s t i t u t e s a o s i t u a t i o n o f c r o s s - d e m a n d e x i s t s . H o l d i n g t h e p r i c e o f c o m m o d i t y "A" (a r e n t a l u n i t ) f i x e d , a n i n c r e a s e i n t h e p r i c e o f c o m m o d i t y "B" (a u n i t f o r s a l e ) w i l l r e s u l t i n i n c r e a s e d demand f o r c o m m o d i t y "A". * a = f < V o r Q u a n t i t y o f "A" demanded = some f u n c t i o n o f p r i c e o f "B" - 81 -The type of cross-demand rela t i o n s h i p i s defined by the re-l a t i v e change i n the rate of purchase of one good divided by the r e l a t i v e change i n the price of the other good. Cross e l a s t i c i t y = ^ q q a _ ^ P b -r- P b C r o s s - e l a s t i c i t y i s a measure of the degree of s u b s t i t u t a b i l i t y between goods and when po s i t i v e indicates that "A" and "B" are substitutes and when negative indicates that they are complements.^ In simple terms,positive . c r o s s - e l a s t i c i t y implies the following in the re n t a l and ownership submarkets. As the price of renting increases,the demand for ownership w i l l increase while i f the price of ownership increases,the demand for rent a l w i l l increase and v i s a versa. What i s not clear at t h i s point are the non-economic factors which are d i f f i c u l t to measure i n do l l a r s but play a very important role i n consumer choice. As well i t i s not clear what are the economic factors or costs which may or may not vary between renting and owning. In addition to the size of the monthly rent or mortgage payment there are numerous less obvious economic costs which may vary depending on tenure. To comprehend s h i f t s i n demand between submarkets i t i s esse n t i a l that the economic factors be under-stood. It i s un l i k e l y that these factors can a l l be quantified but a greater understanding of t h e i r nature w i l l allow some - 82 -conclusion .with respect to s h i f t i n demand. Having reconsidered the process of substitution as i t applies to the rent or own dichotemy, i t must now be t i e d i n with the broader concepts of u t i l i t y and consumer theory. U t i l i t y i s the s a t i s f a c t i o n derived from the consumption of a good or service during a given period of time. In theory the renta l and .ownership submarkets would be i n substitution equilibrium when the consumer i s i n d i f f e r e n t as to which submarket he participates i n . That i s given a budget cons-t r a i n t , the consumer u t i l i t y derived from expenditure on a renta l unit and whatever cash i s l e f t over i s equal to the consumer u t i l i t y derived from expenditure on a unit for sale and whatever cash i s l e f t over. If more u t i l i t y could be enjoyed by substituting a r e n t a l u n i t for a un i t for sale there would be a tendency to switch away from the unit for sale and substitute a unit for rent. Such trends may be given impetus by r e a l l o c a t i o n a l p o l i c i e s which a l t e r the r e l a t i v e prices of the substitutes or changing preferences of the consumer. Important to note i s that equilibrium between submarkets should not be a goal of housing p o l i c y . Such a po l i c y would r e s t r i c t consumer choice. As well, the unimpeded market w i l l always tend toward equilibrium. What i s more important i s that the equilibrium point as determined by the market should - S3 -generate the appropriate responses from the production sector. The provision of a unit for rent or a unit for sale requires an i n i t i a l input of resources similar i n type and quantity. To meet the c r i t e r i o n of e f f i c i e n t a l l o c a t i o n the costs to the consumer should be approximately the same no matter what the choice i n tenure. This w i l l ensure the e f f i c i e n t use of resources. 4.2 THE REAL COSTS OF: OWNING AND RENTING The intent of t h i s section i s to compare the r e a l costs of g owning and renting. The term "real costs" refers to the costs which would be borne by the tenant and those costs which would be borne by the owner i n an unconstrained market. In other words, ignoring taxes and subsidies, would there be any long run difference i n cost between renting and owning? Clea r l y , i n the short fun consumer preference may s h i f t the demand from one submarket to the other and the i n e l a s t i c i t y of supply and i n s t i t u t i o n a l constraints on conversion of tenure-type w i l l r e s u l t i n a short term price d i f f e r e n t i a l . However over the long run, conversion of units from one form of tenancy to the other and new construction by the production sector should return price equilibrium to the two submarkets i f the cost of providing either unit i s equal. It should be noted that there i s no d i f f i c u l t y i n comparing p r i c e s . It has already been recognized that rents (although • usually paid monthly) can be c a p i t a l i z e d to a r r i v e at a lump - 84 -sum value for a r e n t a l unit and s i m i l a r l y a rental value can be imputed from the lump sum value of an owned unit. It should also be noted that the comparison i s between the r e a l costs which should accrue to the owner and the renter. However i n a r e n t a l s i t u a t i o n most costs i n fact accrue to the landlord and i t must be determined i f they are passed on to the tenant. From the discussion i n Chapter Two, i t i s clear that i n the long run a l l costs which accrue to the landlord w i l l be passed on. Hence i t i s possible to regard costs to the landlord as costs ultimately accruing to the tenant. 4.21 Capital Costs There are two kinds of costs which are entailed i n the provision of housing. They are c a p i t a l costs and ongoing costs. Dealing f i r s t with c a p i t a l costs the following factors must be considered: 1. Land 2. Materials 3. Labour The cost of land i s the easiest to deal with. Since land i s 9 the residual the cost of land as an input to rented or owned units w i l l only d i f f e r to the extent that the market price of owned units minus the non-land factor costs of owned units d i f f e r s from the market price of rented units minus the non-land - 85 -factor costs of rented units. Materials costs do not d i f f e r depending on the type of tenure. Materials costs may d i f f e r to the extent that owned units have a d i f f e r e n t s t r u c t u r a l form than rented units but. such a. statement cannot hold for a general case because tenure type does not imply, any p a r t i c u l a r s t r u c t u r a l form.. The inception - of s t r a t a -t i t l e ownership allows complete f l e x i b i l i t y i n s t r u c t u r a l form. Labour costs do not d i f f e r depending on the type of tenure. Although i t may be argued that non-union labour i s often employed for the construction of single-family homes and that union labour i s usually employed for the construction of high-rises no labour cost difference according to tenure can be established. Hence apart from the question of land as a residual the c a p i t a l cost do not d i f f e r depending on the type of tenure anticipated i n the structure. 4.22 Ongoing Costs The ongoing costs of providing housing are the following: 1. Maintenance 2. Depreciation 3. Vacancies 4. Management 5. Financing 6. Transfer Costs 7. Rate of Return 8. Property Taxes - 86 -Although a number of these ongoing costs would seem to apply only to landlords and hence i n the long run only to renters, a more careful analysis reveals that a l l of these costs are borne by both renters and owners. However i t must s t i l l be determined i f the cost varies depending on the form of tenure. Real costs were i n i t i a l l y defined as excluding taxes and subsidies, but property taxes are included here as they are usually considered an ongoing operating cost of both renting and owning. It i s often argued that owners have more pride i n t h e i r dwelling units than renters and hence take better care of them. Such statements have not been substantiated hence any difference i n either maintenance or depreciation between buildings cannot be attributed to the type of tenancy. Rising land values should perhaps be considered here as they often o f f s e t the losses at the time of sale due to depreciation of the impro-vements. Clearly this i s a benefit which accrues to the home owner and also to the landlord. Since i t i s a benefit which does accrue to the landlord i t must over a period of time be passed on to renters. Vacancies would appear to be a cost which only a landlord would have to face which i n turn would be passed on i n the long run. However two additional factors must be considered. F i r s t l y when a homeowner s e l l s one dwelling unit i n order to buy - 87 -another there are costs other than the transfer costs. The sale of the old unit and the purchase of the new may not coincide hence there may be costs of alternate accommodation or perhaps double costs incurred by the ownership of two units at the same time. Secondly, i n an unconstrained market va-cancies provide the renter with considerable f l e x i b i l i t y which i s a benefit to which a price could be attached. So, although vacancy i s not a cost s p e c i f i c a l l y borne by the owner i t i s not clear that he i s any better off than the renter when other factors are accounted for. Management may also be considered as a cost borne ultimately only by the renter. Such a conclusion cannot be made i f the opportunity cost of the home owner i s recognized. The time required for the owner to operate his own dwelling must be taken into account eliminating management as a s i g n i f i c a n t cost difference. Financing and property taxes do not d i f f e r according to the type of tenure. Property taxes may only d i f f e r to the extent that the prices of owned units d i f f e r from the prices of rented units because i n B r i t i s h Columbia the property tax i s a single rate applied to the assessed value of the property.*^ Hence assuming other costs do not d i f f e r the long run equilibrium price could not d i f f e r and i t follows that property taxes would not d i f f e r according to tenure. - 88 -Transfer costs include l e g a l fees and agent fees charged at the time of a transfer of t i t l e . Shelton argues that th i s i s a cost borne only by the home owner. 1 1 Since the landlord would i n the long run pass on a l l costs to the tenant Shelton's argument i s not v a l i d . The p o s s i b i l i t y that the ownership of rent a l units would transfer hands at a lower rate than self-owned units cannot be substantiated either hence i t would appear that transfer costs do not d i f f e r according to tenure. Rate of return i s the f i n a l cost which indeed i s passed on to the tenant i n the long run. Since the home owner has an opportunity cost of the funds invested i n his own dwelling, rate of return i s a cost borne by the owner as well. In summary,there appears no s i g n i f i c a n t cost d i f f e r e n t i a l according to tenure. The r e a l c a p i t a l costs and the r e a l operating costs cannot be d i f f e r e n t i a t e d according to tenure. The only two p o s s i b i l i t i e s , land costs and property taxes, would i n theory be i d e n t i c a l because none of the other costs 12 d i f f e r . Hence,in the long run,in an unconstrained market the r e a l costs of re n t a l units and owned units would be iden-t i c a l and prices could therefore vary only as demand sh i f t e d from one form of tenure to the other. However,as the production sector responded to d i f f e r e n t i a l prices and conversion of units from one form of tenure to the other took place,the price d i f f e r e n t i a l would be eliminated. - 8 9 -4.3 THE INFLUENCE OF REALLOCATIVE POLICIES There i s , however, a s i g n i f i c a n t price d i f f e r e n t i a l , between renting and owning. There are taxes and subsidies which are ultimately directed toward renters or owners. Chapter T i l ' (Sections 3.1 and 3.2) dealt with the theory and the ef f e c t s of such r e a l l o c a t i v e p o l i c i e s . Unless the purpose i s to account for the costs or benefits of e x t e r n a l i t i e s or the provision of a public good related to the consumption or,production of the commodities i n question the commodity prices w i l l not represent the r e a l cost to society of producing•those commodities. The following i s a discussion of those taxes and subsidies which are r e - a l l o c a t i o n a l and hence influence the price of renting and owning and ultimately tenure choice i n Greater Vancouver. 4.31 Non-taxation of the Imputed Income of Owned Homes Some of the taxes imposed by the Federal Government are re-a l l o c a t i o n a l because they are t i e d to the consumption and production of s p e c i f i c goods and in p a r t i c u l a r , s p e c i f i c types of housing. The f i r s t i s with respect to the income derived from the ownership of rental units and the imputed income of home ownership. The r e a l tax advantage of home ownership i s that the landlord has to pay personal income taxes on that part of rent which represents return on his investment while the homeowner c o l l e c t s t h i s imputed income free of taxes.13 - 90 -S h e l t o n c o r r e c t l y n o t e s t h a t w h i l e t h e l a n d l o r d m u s t p a y i n c o m e t a x o n t h e p o r t i o n o f r e n t w h i c h i s i n c o m e t h e home owner d o e s n o t . T h i s i s a s i g n i f i c a n t s u b s i d y t o t h e home-owner b e c a u s e i n e f f e c t i t r e d u c e d t h e o p p o r t u n i t y c o s t o f R e c e n t C a n a d i a n r e s e a r c h h a s a t t e m p t e d t o q u a n t i f y t h e e x t e n t 14 o f t h e home owner i n c o m e t a x s u b s i d y . I m p u t e d g r o s s r e n t a l i n c o m e was d e t e r m i n e d t o be 1 0 . 3 % . I f i t i s assumed t h a t t h e a v e r a g e homeowner was i n t h e 28.66% t a x b r a c k e t t h e n t h e s u b s i d y f r o m t h e non t a x a t i o n o f t h a t i m p u t e d r e n t a l i n c o m e i n t e r m s o f t h e r e d u c t i o n o f g r o s s r e n t a l i n c o m e i s 1 6 . 7 % . A home owner w i t h no t a x a b l e i n c o m e w o u l d r e c e i v e no e f f e c t i v e s u b s i d y w h i l e a homeowner w i t h a 50% m a r g i n a l t a x r a t e w o u l d h a v e h i s h o u s i n g c o s t s r e d u c e d b y 2 9 . 2 % . The f o l l o w i n g t a b l e s u m m a r i z e s t h e e f f e c t o f t h e s u b s i d y . T a b l e 4^1 Tax s u b s i d y t o home o w n e r s h i p due t o n o n - t a x a t i o n o f i m p u t e d  r e n t a l i n c o m e Homeowners t h e c a p i t a l i n v e s t e d i n h i s home by h i s m a r g i n a l t a x r a t e . M a r g i n a l Tax R a t e (%) S u b s i d y (%) 0 0 14.6 20.0 30.9 41.2 51.5 61.8 72.1 8.6 11.7 18.0 24.0 30.0 36.0 42.0 - 91 -Source: Frank A. Clayton, "Income Taxes and subsidies to home owners and renters: A comparison of U.S. and Canadian experience," Canadian Tax Journal, Volume XXII, No. 3, May-June 1974, p. 302. Research has further argued that the exclusion from taxable income of the imputed net rent of owner-occupied dwellings favours high-income home-owners compare with low income home-15 owners i n addition to discrimination against renters. This argument i s v a l i d because the size of the e f f e c t i v e subsidy i s proportional to the marginal tax rate and the income elas-16 t i c i t y of demand i s well i n excess of unity. Therefore the f a i l u r e to tax the imputed net rent lessens the progressi-v i t y of the income tax structure. In his recent a r t i c l e Frank A. Clayton argues that the renter i s the e f f e c t i v e r e c i p i e n t of a subsidy because of the depre-17 c i a t i o n provisions of the Income Tax Act. This would have been true p r i o r to the 1971 revisions which eliminated the tax shelter provisions for investors i n r e s i d e n t i a l r e n t a l 18 accommodation. Current l e g i s l a t i o n allows tax shelter only to the extent that the investor can defer income tax on the accumulated c a p i t a l cost allowance u n t i l recapture at the time of sale of the property. The l a t e s t federal budget of November 18, 1974 allows taxpayers to charge against income from other sources c a p i t a l cost allowances on multiple-unit r e s i d e n t i a l buildings for rent started between November 18, 1974 and 19 December 31, 1975. This i s a p a r t i a l reinstatement of the - 92 -pre-1971 provisions but being of such, duration i t i s u n l i k e l y to have a s i g n i f i c a n t enough e f f e c t on supply for tenants to receive the benefit of the tax saving. 4.32 Exemption from Capital Gains Tax on Owned Houses The homeowner has been the benefactor of a further subsidy 20 following the 1971 amendments to .the Income Tax Act. Under the new law rlandlords are subject to a tax on the c a p i t a l gain at the time of sale of a property. At the same time the home owner i s not subject to any c a p i t a l gains tax on his p r i n c i p a l residence. Since the c a p i t a l gains tax i s now applied to most personal investments the exemption of a c a p i t a l gains tax on the p r i n c i p a l residence i s l i k e l y to promote greater investment i n t h i s area than p r i o r and r e s u l t i n further negation of the progressivity of the tax structure. Henry Aaron i n a recent a r t i c l e outlines the r e s u l t s of such p r e f e r e n t i a l taxes. To the extent that favourable tax treatment of homeowners causes demand for housing units "to buy" to r i s e at the expense of housing units "to rent" the following e f f e c t s w i l l occur: 1) rents w i l l tend to decline; 2) prices of housing units for sale to owner-occupants w i l l tend to r i s e ; 3) housing .units, previously rented w i l l be sold to owner occupants; 4) construction of new rental units w i l l f a l l and that of units for sale to owner occupants w i l l rise.21 - 93 -I t i s c l e a r c e r t a i n l y f r o m t h e t a x a t i o n p o l i c i e s d i s c u s s e d t h a t t h e F e d e r a l G o v e r n m e n t i s i n t e n t i o n a l l y o r u n i n t e n t i o n a l l y s t i m u l a t i n g h o m e o w n e r s h i p . U n f o r t u n a t e l y i t a p p e a r s t h a t t h e g o v e r n m e n t i s n o t f u l l y c o g n i z a n t o f t h e e f f e c t s o f s u c h t a x a t i o n p o l i c y . I n f a c t t h e F e d e r a l G o v e r n m e n t and o t h e r l e v e l s o f g o v e r n m e n t h a v e s e e n f i t t o b o l s t e r home o w n e r s h i p e v e n f u r t h e r w i t h more d i r e c t s u b s i d i e s . 4.33 O t h e r F e d e r a l P o l i c i e s A r e v i e w o f g o v e r n m e n t p o l i c i e s s p e c i f i c a l l y r e l a t e d t o home-o w n e r s h i p s h o u l d h e l p a s s e s s t h e d e g r e e o f t h e i r c o m mitment. I t i s d i f f i c u l t t o q u a n t i f y t h e s u b s i d i e s a s t h e f o r m o f s u b s i d y ^ r a n g e s f r o m c a s h t o p r e f e r e n t i a l m o r t g a g e r a t e s t o n o n - s u b s i d i e s s u c h a s c h a n g e s i n r e q u i r e d l o a n t o v a l u e r a t i o s , d e b t s e r v i c e r a t i o s , l e n g t h o f m o r t g a g e t e r m a n d s o o n . F rom a l i m i t e d b e g i n n i n g p r i o r t o 1935 t h e f e d e r a l r o l e h a s 22 g r o w n t o a p o i n t w h e r e much r e s i d e n t i a l f i n a n c i n g i s a i d e d i n some manner by t h e p a r t i c i p a t i o n o f t h e F e d e r a l G o v e r n m e n t . T h i s e v o l u t i o n i s c l e a r i f t h e h i s t o r y o f t h e l e g i s l a t i o n i s 23 r e v i e w e d . The f e d e r a l i n v o l v e m e n t h a s b e e n p r i m a r i l y t h r o u g h m o r t g a g e l e n d i n g d i r e c t e d p r i m a r i l y t o w a r d r e s i d e n t i a l r e a l e s t a t e , i n c l u d i n g new and e x i s t i n g s i n g l e a n d m u l t i - f a m i l y u n i t s f o r owner o c c u p a n c y o r r e n t a l ; - h o s t e l s a n d s t u d e n t r e s i -d e n c e s ; c o - o p e r a t i v e s , l i m i t e d d i v i d e n d and p u b l i c h o u s i n g - 94 -p r o j e c t s ; a n d l a n d a s s e m b l y a n d u r b a n r e n e w a l . Though t h e s c o p e o f t h e i r i n v o l v e m e n t i s w i d e t h e g o v e r n m e n t s g e n e r a l o b j e c t i v e s h a v e s t r e s s e d h o m e o w n e r s h i p a n d A l b e r t R o s e a r g u e s : The b e s t c o n c l u s i o n c o n c e r n i n g n a t i o n a l h o u s i n g p o l i c y f r o m 1945 t h r o u g h 1964 i s t h a t t h e g o v e r n m e n t o f C a n a d a was s t r o n g l y i n f a v o u r o f t h e a t t a i n m e n t o f home o w n e r s h i p f o r e v e r y f a m i l y . . . . e v e r y e f f o r t was made t o p r o v i d e a d e q u a t e s u p p l i e s o f m o r t g a g e money, t o m a n i p u l a t e t h e i n t e r e s t . r a t e a n d t o s e t f o r t h a p p r o p r i a t e t e r m s t o e n c o u r a g e i n d i v i d u a l home o w n e r -s h i p . N o t o n l y was m o r t g a g e money made a v a i l a b l e t h r o u g h t h e N a t i o n a l H o u s i n g A c t a t r a t e s l o w e r t h a n t h o s e p r e v a i l i n g i n t h e money m a r k e t s b u t down p a y m e n t s w e r e s u c c e s s i v e l y r e d u c e d a s l o a n amounts w e r e i n c r e a s e d . The p e r i o d o f a m o r t i z a t i o n i n c r e a s e d f r o m 15 y e a r s i n 1946 t o 20, 25 a n d now 30 y e a r s o r more t o e n a b l e l o w e r i n c o m e f a m i l i e s t o a c q u i r e a home o f t h e i r own. I f a n y t h i n g , t h i s was t h e h e a r t o f o u r h o u s i n g p o l i c y d u r i n g t h e p a s t 25 y e a r s . 2 4 C r e d i t c o n d i t i o n s a s a f a c t o r i n h o u s i n g demand w i l l be t h e s u b j e c t o f f u r t h e r a n a l y s i s i n C h a p t e r V. S u f f i c e t o s a y a t t h i s t i m e t h a t e a s i e r c r e d i t a n d p r e f e r e n t i a l t e r m s f o r home p u r c h a s e r s i s j u s t as much a s u b s i d y a s a c a s h g r a n t . E v e n f u r t h e r s u b s i d i e s d i r e c t e d t o w a r d h o m e o w n e r s h i p h a v e b e e n p r o p o s e d a n d i n s t i t u t e d r e c e n t l y . C e n t r a l M o r t g a g e a nd H o u s i n g i s now p r o v i d i n g $500 c a s h g r a n t s f o r a one y e a r p e r i o d t o t h o s e p u r c h a s i n g new m o d e r a t e l y - p r i c e d h o u s i n g f o r t h e f i r s t t i m e . The p u r p o s e o f t h i s p o l i c y i s t o g i v e i m m e d i a t e s t i m u l u s t o t h e c o n s t r u c t i o n i n d u s t r y b u t i t i s n o t c l e a r why 25 home p u r c h a s e r s s h o u l d be t h e o n l y b e n e f a c t o r . The M i n i s t e r o f F i n a n c e , t h e H o n o u r a b l e J o h n N. T u r n e r i n t r o d u c e d a f u r t h e r - 9 5 -b o n u s f o r t h e homeowner i n t h e B u d g e t S p e e c h o f November 18, 1974. He i n t r o d u c e d t h e R e g i s t e r e d Home O w n e r s h i p S a v i n g s P l a n w h i c h a l l o w s p r o s p e c t i v e homeowners d e d u c t i b l e c o n t r i b u t i o n s o f $1,000 p e r y e a r t o a maximum o f $1 0 , 0 0 0 . Payment o u t o f t h e p l a n i s t o be t a x f r e e i f a p p l i e d t o w a r d t h e p u r c h a s e o f a home o r f u r n i s h i n g s s u c h a s e s s e n t i a l 2 6 ' a p p l i a n c e s o r f u r n i t u r e . B o t h o f t h e s e p o l i c i e s w i l l t e n d t o r e a l l o c a t e c o n s u m e r e x p e n d i t u r e t o w a r d home o w n e r s h i p a s do p r e f e r e n t i a l l e n d i n g r a t e s a n d t e r m s . \ 4.34 P o l i c i e s i n t h e P r o v i n c e o f B r i t i s h C o l u m b i a The F e d e r a l G o v e r n m e n t i s n o t a l o n e i n i t s a p p a r e n t q u e s t f o r u n i v e r s a l home o w n e r s h i p . S i n c e 1968 t h e P r o v i n c e o f B r i t i s h C o l u m b i a h a s a s s i s t e d home o w n e r s w i t h d i r e c t g r a n t s o r s e c o n d m o r t g a g e s a n d s i n c e 1957 h a s p r o v i d e d a n n u a l home-owner g r a n t s i n t h e f o r m o f p r o p e r t y t a x r e b a t e s . The f i r s t p r o g r a m i s a d m i n i s t e r e d u n d e r t h e P r o v i n c i a l Home A c q u i s i t i o n A c t a n d p r o v i d e s f o r : a) A $1,000 b u i l d i n g o r a c q u i s i t i o n g r a n t o r a $5,000 s e c o n d m o r t g a g e f o r t " t h e p u r c h a s e o f a new h o u s e ; a n d b) a $500 a c q u i s i t i o n g r a n t o r $2,500 s e c o n d m o r t g a g e f o r 27 t h e p u r c h a s e o f an o l d e r home. The s e c o n d p r o g r a m p r o v i d e s a f i x e d g r a n t a v a i l a b l e t o a l l homeowners w h i c h i s a p p l i e d a g a i n s t t h e homeowners m u n i c i p a l t a x e s a n d g r e w f r o m $28 i n 1957 t o $200 i n 1 9 7 3 . 2 8 I n 1972 a n d 1973 t h e homeowner i f t h e p r i n c i p a l s u p p o r t e r o f t h e h o u s e h o l d a n d o v e r t h e age o f - 96 -65 received an additional $50.00. Compare t h i s with the r e l a t i v e l y meagre $30 yearly grant offered the renter under 2 9 the recent B r i t i s h Columbia scheme. Cl e a r l y considerable preference i s shown the home owner by both federal and p r o v i n c i a l governments i n Canada. 4.4 THE IMPLICATIONS The discussion of t h i s chapter has demonstrated two major points. F i r s t l y the r e a l costs of renting and owning do not d i f f e r . S h i f t s i n demand from submarket to submarket would cause short run price d i f f e r e n t i a l s but i n the long run r e l a t i v e prices would be equivalent just as are r e a l costs. I t i s possible to argue that since the market i s not unconstrained perhaps some of the costs and benefits are not so r e a d i l y passed on to the tenant. This may be so i n the short run but i n the long run price d i f f e r e n t i a l s should generate suitable production responses to eliminate any i n e q u a l i t i e s . Secondly numerous p o l i c i e s by both the federal and p r o v i n c i a l governments tend to reallocate consumer expenditures away from rented units and toward owned un i t s . Although the extent of the r e a l l o c a t i o n i s d i f f i c u l t to quantify the d o l l a r value of some of the s p e c i f i c p o l i c i e s i s sizeable. As became apparent i n the e a r l i e r discussion on d i s t r i b u t i o n and - 97 -a l l o c a t i o n , such, p o l i c i e s are only j u s t i f i a b l e i f they account f o r an e x t e r n a l i t y or the p r o v i s i o n of a p u b l i c good r e l a t e d s p e c i f i c a l l y t o the consumption or p r o d u c t i o n of the commodity i n q u e s t i o n . The commodities i n q u e s t i o n are the s e r v i c e s p r o v i d e d by ren t e d u n i t s and the s e r v i c e s p r o v i d e d by owned u n i t s . The only p o s s i b l e e x t e r n a l i t y which may be unique t o one of these commodities i s the p o s s i b i l i t y t h a t home owners may be b e t t e r c i t i z e n s than home r e n t e r s . T h i s has never been demonstrated and i s h a r d l y adequate j u s t i f i c a t i o n f o r the e x t e n s i v e r e a l l o c a t i o n a l p o l i c i e s i n e x i s t e n c e . In summary an attempt should be made to appraise the economic s i g n i f i c a n c e of the d i f f e r e n c e s i n co s t s and b e n e f i t s of r e n t i n g versus owning. P r e f e r e n t i a l tax p o l i c i e s and go-vernment s u b s i d i e s , apparently w i t h the o b j e c t i v e of pro-moting home-ownership and s t i m u l a t i n g housing consumption have r e s u l t e d i n a t r e n d toward home ownership. Although the argument has been put forward t h a t some p o l i c i e s i n the pas t have promoted the c o n s t r u c t i o n by p r i v a t e e n t e r p r i s e of r e n t a l d w e l l i n g u n i t s , r e s u l t i n g i n b e n e f i t s to the tenant, i t must concluded t h a t on balance most government p o l i c y i n 30 Canada has h e a v i l y favoured home ownership. I t must be determined whether the promotion of home owner-- 98 -ship i s a laudable aim and I f the means"used to promote i t i s suitable. Apart from the unsubstantiated benefits which supposedly accrue to a community when homeowners. predominate there appears l i t t l e to support such a goal. In fact Henry Aaron argues that even i f homeownership i s a goal to be promoted then "the pattern of tax benefits i s i l l - s u i t e d to that objective" primarily because the benefits 31 do not accrue equally to a l l sectors of the population. In Canada there has been fostered a preference for the owner-ship of r e a l property. I t i s unfortunate that the federal and p r o v i n c i a l governments perpetuate this preference through various subsidies. What i s more unfortunate i s that a strange c i r c u l a r reasoning has served to j u s t i f y t h i s go-vernment commitment i n that the government subsidizes home-ownership because Canadians prefer to own and Canadians prefer to own because the government subsidizes homeownership. This i s obviously an o v e r s i m p l i f i c a t i o n of governmental rationale ; for pro-home-ownershipcpoli'cies but i t has i n fact been the major impetus for an overwhelming demand for home ownership. E f f i c i e n t a l l o c a t i o n of resources should be the goal of housing p o l i c i e s i f home-ownership i s not the goal and there seems no reason for such a goal for a l l Canadians,/^ The current p o l i c i e s have brought about changes i n consumption - 9 9 -and ownership patterns which f r u s t r a t e the e f f i c i e n c y of resource a l l o c a t i o n and as a r e s u l t do not maximize the benefit to be gained from those resources. - 100 -FOOTNOTES - CHAPTER IV 1. Robert C. Levine, The Economic Reasons for the Shortage of Residential Rental Accommodation i n Greater Vancouver, Master's Thesis, University of B r i t i s h Columbia, 1974, p. 159. 2. Province o f " B r i t i s h Columbia, Residential Premises Interim  Rent S t a b i l i z a t i o n Act. Although the imposition of rent control has far reaching implications for the housing market, the purpose of thi s paper i s to look primarily at the factors which established the market conditions which resulted i n the rent control l e g i s l a t i o n . 3. United Community Services of Greater Vancouver, Trends i n Home Ownership Costs and Disposable Income over the Past  Decade, (Vancouver: U.C.S. of Greater Vancouver, November, 1973) . 4. Central Mortgage and Housing Corporation, Housing S t a t i s t i c s B r i t i s h Columbia Region, December 1973, Year end Review, (Vancouver: CMHC, January 19 74). 5. This paper, Chapter I. 6. Allan J . Braff, Microeconomic Analysis, (New York: Wiley and Sons, 1969), pp. 9-17. 7. This paper, Chapter II (2.11). 8. For another discussion on this subject see John P. Shelton, "The Cost of Renting versus Owning a Home", Land Economics, February 19 6 8; and Al v i n E. Coons and Bert T. Glaze, Housing Market Analysis and the Growth of Home Ownership, (Columbus, Ohio: The Ohio State University, 19 63) 9. A discussion of considering land as a res i d u a l i n the development process i s included i n Chapter II (2.2). 10. P h i l i p H. White and S.W. Hamilton, The Real Property Tax in B r i t i s h Columbia - An Analysis, (Vancouver, B.C.: B T C . School Trustees Association, A p r i l 1972), p. 4. Property taxes are generally thought to be passed forward to the tenant by owners of rent a l properties. See Henry Aaron, "A new view of property tax incidence", and Richard A. Musgrave, "Is a property tax on housing regressive," American Economic Review (Papers and Proceedings),, Volume LXIV, No. 2, May 1974. - 101 -It should be noted that with respect to .both financing costs and property taxes the comments i n the text assume no prejudice (according to tenure type) on the part of lenders or assessors. In fact t h i s i s not true. As w i l l be discussed i n Chapter V lenders have been encouraged by the Federal Government through various means to pro-vide loans at preferable rates to owner-occupiers. In practise, assessors tend to value ren t a l (income pro-ducing) properties higher than owner-occupied properties with the r e s u l t that landlords (and hence tenants) pro-bably pay higher property taxes than owner-occupiers. 11. Shelton, p. 65. 12. As pointed out land cost i s a residual i n the development process and since property tax i s based on market value and not on tenure type there appears no reason that r e a l costs should d i f f e r . 13. Shelton, p. 66. 14. Frank A. Clayton, "Income Taxes and subsidies to homeowners and renters: A comparison of U.S. and Canadian experience", Canadian Tax Journal, Volume XXII, Number 3, May-June 197 4. 15. Richard Goode, "Imputed rent of owner-occupied dwellings under the income tax", Journal of Finance, December 1960, pp. 505-6; and Frank A. Clayton, p. 302. 16. David L a i d l e r , "Income tax incentives for owner-occupied housing", in A. Harberger (ed.), Taxation of Income from  Capi t a l , (Washington: 1969), p. 52. 17. Frank A. Clayton, p. 303. 18. Robert C. Levine, The Economic Reasons for the Shortage  of Residential Rental Accommodation i n Greater Vancouver, Master's Thesis, University of B r i t i s h Columbia, 1974, pp. 56-71. 19. The Honourable John N. Turner, Minister of Finance, Budget  Speech, November 18, 1974, p. 19. 20. H. Heward Stikeman, Income Tax Act, 2nd Tax Reform Edi t i o n , 1973, (Canada: Richard De Boo, 1973), pp. 91-92. 21. Henry Aaron, "Income Taxes and Housing", The American  Economic Review, December 1970, p. 796. 22. Central Mortgage and Housing Corporation, Canadian Housing  S t a t i s t i c s , 1973, (Ottawa: C.M.H.C, March, 1974) p. 27. Loans approved for new and exi s t i n g housing under the housing acts amounted to $1.7 b i l l i o n on 89,138 units i n 1973 alone. - 102 -23. F o r - a summary o f C a n a d i a n H o u s i n g p o l i c y t o t h e l a t e 1 9 6 0 ' s s e e A l b e r t R o s e , " E s s e n t i a l E l e m e n t s o f a C a n a d i a n H o u s i n g P o l i c y " , i n M. W h e e l e r , ( e d . ) , The R i g h t t o H o u s i n g , ( M o n t r e a l : H a r v e s t H o u s e , .1969) , pp. 63-96.; 24. A l b e r t R o s e , p. 85. 25. The H o n o u r a b l e J o h n N. T u r n e r , p. 19. 26. I b i d , p. 18. 27. P r o v i n c e o f B r i t i s h C o l u m b i a , P r o v i n c i a l Home A c q u i s i t i o n  A c t . 28. P r o v i n c e o f B r i t i s h C o l u m b i a , Home Owner A s s i s t a n c e A c t . 29. P r o v i n c e o f B r i t i s h C o l u m b i a , R e n t e r s ' R e s o u r c e G r a n t A c t . The L e a s e h o l d a n d C o n v e r s i o n M o r t g a g e L o a n A c t d o e s s u b s i d i z e p r o s p e c t i v e l a n d l o r d s t h r o u g h p r e f e r r e d m o r t g a g e r a t e s i f he i s p r e p a r e d t o u n d e r t a k e a c o n v e r s i o n . Enough c o n v e r s i o n s c o u l d i n f l u e n c e s u p p l y e n o u g h t o u l t i m a t e l y b e n e f i t t h e t e n a n t b u t t h e l i k e l i h o o d o f c o n v e r s i o n s i s s m a l l i n v i e w o f r e n t c o n t r o l s . See P r o v i n c e o f B r i t i s h C o l u m b i a , R e s i d e n t i a l P r e m i s e s R e n t S t a b i l i z a t i o n A c t . 30. The t a x a d v a n t a g e s o f a p a r t m e n t d e v e l o p m e n t a r e g i v e n a s one o f t h e r e a s o n s f o r t h e a p a r t m e n t boom o f t h e l a t e 1 9 5 0 ' s and e a r l y 1 960's b y W.F. S m i t h , The L o w - R i s e S p e c u l a t i v e  A p a r t m e n t ( B e r k e l e y : U n i v e r s i t y o f C a l i f o r n i a , 1 9 6 4 ) , pp. 31-35 a n d Max N e u t z e , The S u b u r b a n A p a r t m e n t Boom, ( W a s h i n g t o n , D.C.: R e s o u r c e s f o r t h e F u t u r e , I n c . ) , pp. 31-34. S i m i l a r a d v a n t a g e s e x i s t e d f o r C a n a d i a n I n v e s t o r s a nd t h e s e t a x b e n e f i t s w o u l d u l t i m a t e l y h a v e s h i f t e d t o t h e t e n a n t , a l l o t h e r t h i n g s b e i n g e q u a l . T h e s e b e n e f i t s i n t h e V a n c o u v e r m a r k e t a r e d i s c u s s e d b y F.R.A. D a l e - J o h n s o n , R e t u r n s on A p a r t m e n t P r o p e r t i e s f o r t h e P e r i o d 1960-70 i n t h e G r e a t e r V a n c o u v e r A r e a , M.B.A. T h e s i s , U n i v e r s i t y o f B r i t i s h C o l u m b i a , May 1972 and R o b e r t C. L e v i n e , The  E c o n o m i c R e a s o n s f o r t h e S h o r t a g e o f R e s i d e n t i a l R e n t a l  A c c o m m o d a t i o n i n G r e a t e r V a n c o u v e r , M.B.A. T h e s i s , U n i v e r -s i t y o f B r i t i s h C o l u m b i a , May 1974. However, i n t h e l o n g r u n i t seems t h a t t h e s e b e n e f i t s h a v e b e e n o u t w e i g h e d b y s u b s i d i e s d i r e c t e d t o w a r d home o w n e r s h i p a s e n u m e r a t e d i n t h i s c h a p t e r . 31. A a r o n , p. 803. - 103 -APPENDIX ~ CHAPTER TV  FURTHER COMMENTS ON THE COSTS OF RENTING AND OWNING APPENDIX 4.1 A CASE COMPARISON Section 4.2 - The Real Costs of Renting and Owning - demon-strates that i n an unconstrained market, over the long run, there should be no s i g n i f i c a n t v a r i a t i o n between the costs of owning or renting s i m i l a r housing units. This conclusion, however, assumes an unconstrained market. Hence i t may be valuable to undertake t h i s same comparison i n the context of the current market. The most appropriate methodology of comparing the si t u a t i o n of the renter and the owner would be to look at the costs according to tenure for an i d e n t i c a l dwelling unit. Looking f i r s t at a condominium i n a concrete h i - r i s e i n Vancouver's West End, the purchase price under current market conditions might be about $35,000.00. This would be for a one-bedroom unit. Assuming the purchaser had a $10,000 downpayment he could acquire a $25,000 mortgage for the balance. At 10%% with a 25 year mortgage the payments including p r i n c i p a l inter-", est and taxes would be $3,185.08 (assuming yearly taxes of $400.00). That same unit might be rented under current market conditions for $250.00 per month. To put the renter i n a comparable - 104 -position to the owner, he must be provided an investment of i d e n t i c a l r i s k to that which the owner makes when he invests i n his own home. The only investment which would be i d e n t i c a l would be for the renter to buy an i d e n t i c a l unit and rent i t out. While t h i s approach w i l l s u f f i c e for now i t does have some draw-backs which w i l l be pointed out l a t e r . A summary of the com-parative costs of owning versus renting i s included i n Table I. - 105 -TABLE I CASE COMPARISON OF THE COSTS OF OWNING VERSUS RENTING OWNER RENTER Down Payment Mortgage* Payments ( P r i n c i p a l & Inter-est) Taxes $ 10,000.00 25,000.00 232.09/mo. 2,785.08/yr. 400.00 $ 1,000.00 Benefits P r o v i n c i a l Home Ac q u i s i t i o n Grant ($90.00 per yr . ca-p i t a l i z e d at 9% i s equivalent to a lump sum of $1,000.00) P r o v i n c i a l Home Owner's Grant 235.00/yr. Overa l l Cash Flow Summary Payments - P r i n c i p a l of Interest - Taxes Benefits T o t a l Yearly Cost - $ 2,785.08 400.00 + + 3,185. 08 90. 00 235. 00 2,860. 00 Rent (250.00/mo.) 3,000.00/yr. Invests Down Payment Mortgage* Payments ( P r i n c i p a l & Interest) Taxes Income Rent ($250.00/mo.) - Property Taxes Net Operating Income - Interest - C a p i t a l Cost Allowance Taxable Income x Tax Rate (x%) Tax Paid Net Operating Income - P r i n c i p a l - Interest - Tax Paid Cash Flow Overa l l Cash Flow Summary Rent Investment Cash Flow $ 10,000.00 25,000.00 232.09/mo. 2,785.08/yr. 400.00 3,000.00 400.00 2,600.00 2,559.79 40.21 0 0 2,600.00 225.29 2,559.79 0 185.08 - 3,000.00 185.08 - 3,185.08 *M0RTGAGE: $25,000.00 p r i n c i p a l , 25 year amortization period, 10%% = nominal rate compounded semi-annually. - 106 -This comparison i s based on the int e r e s t expense and c a p i t a l cost allowance i n the f i r s t year. Clearly these costs would adjust over time. This analysis i s optimistic from the renter-landlords point of view as i t assumes property taxes to be the only operating expense and i t ignores the tax treatment at the time of d i s p o s i t i o n . It i s l i k e l y that the renter-land-lord would be subject to c a p i t a l gains tax while the owner-occupier would not. The drawback to using t h i s approach of comparing costs to the owner and renter i s clear. Because of the extent of subsidies to home ownership i t i s obvious that a home i s worth more to the owner occupier than to a landlord, hence the nature of the investment changes depending on the point of view, that of the owner-occupier or that of a landlord. APPENDIX 4.2 RHOSP: SUBSIDY TO RENTER OR OWNER? Ignoring the structured comparison i n Table I, one of the major inequities between owning and renting i s that the home owner i s sheltered from i n f l a t i o n while the renter must save aft e r tax d o l l a r s for home purchase and s t i l l remains subject to i n f l a t i o n . Assuming the renter could afford to make the invest-ment described above he does gain that protection but c l e a r l y his investment i s worth more to him as an owner-occupier than as a landlord. - 1 0 7 -The Registered Home Ownership Savings Plan (RHOSP)"1" i s an attempt by the Federal Government to allow the renter to save before tax d o l l a r s and put these d o l l a r s toward home purchase. While th i s has the. impact of allowing the renter to make up for subsidies directed to owner-occupiers the RHOSP program i s , i n the f i n a l analysis, another subsidy encouraging home ownership rather than r e n t a l . An in d i v i d u a l who chooses not to buy a home cannot benefit from the subsidy. The subsidy i s , of course, the tax savings generated by the funds deposited in the plan. '. " - 108 -FOOTNOTES - APPENDIX - CHAPTER IV The Honourable John N. Turner, Minister of Finance, Budget Speech, Nov. 18, 1974, p. 18. The Registered Home Ownership Savings Plan (RHOSP) i s simply a tax incentive for saving toward the purchase of a home. A summary of the main aspects of the RHOSP i s included in Patrick Durrant, "New Deadline Under RHOSP1s," The  Vancouver Province, Saturday 'March 22, 1975, p.21. To be e l i g i b l e to p a r t i c i p a t e i n an RHOSP, the taxpayer must be 18 years of age or over; resident in Canada; not have previously been a beneficiary under an RHOSP; not have owned at any time i n the year of deduction any r e s i d e n t i a l r e a l estate i n Canada; and not have l i v e d i n an owned housing unit i n Canada at any time i n the year of deduction. If both husband and wife i n d i v i d u a l l y meet these re-quirements, each of them may establish a plan. The maximum in d i v i d u a l contribution i s $1,000 for any year and $10,000 t o t a l contributions. Contribution l i m i t s are not connected i n any way to amount, or p a r t i c u l a r source, of income. Each taxpayer i s allowed only one RHOSP in his l i f e t i m e . If a plan i s started and l a t e r terminated, he cannot be-gin another one. However, a person may enter into a plan and subsequently buy a home, but not use the money accumulated towards t h i s purchase. He cannot c o n t r i -bute while owning the home, although i f he l a t e r s e l l s i t he can resume contributions to the RHOSP and u l t i -mately apply the t o t a l amount towards purchase of another home. Any money contributed to an RHOSP that subsequently goes towards purchase of a house of home furnishings (which, i n c i d e n t a l l y , have not yet been completely defined) w i l l be tax exempt. '-- 109 -CHAPTER V OTHER DEMAND VARIABLES IN GREATER VANCOUVER While the l a s t chapter has shown the prejudice of p o l i c i e s which tend to favour the homeowner, the argument must be considered i n the context of what might be c a l l e d normal demand factors. These normal demand factors are d i f f i c u l t to consider alone due to the profusion of r e a l l o c a t i v e p o l i c i e s which tend to influence consumer preference. None-theless, factors such as demographic c h a r a c t e r i s t i c s , income and income d i s t r i b u t i o n , price and price expectations and cre d i t conditions along with changing consumer tastes and preferences have a s i g n i f i c a n t impact on housing demand and the mix of housing demanded. This chapter looks at the most s i g n i f i c a n t of these factors and.their impact on the Greater Vancouver housing market as d i s t i n c t from the impact of the rea l l o c a t i v e p o l i c i e s discussed i n Chapter IV. 5.1 HOUSEHOLD FORMATION AND HOUSING DEMAND Demographic factors may j u s t i f y not only o v e r a l l changes i n the demand for housing but also the demand for d i f f e r e n t i a t i o n - 110 -i n housing. In p a r t i c u l a r net-migration and household f o r -mation have c l e a r l y increased the demand for housing i n Greater Vancouver. (See Table 5.1). I t i s argued that r e s t r i c t i v e p r o v i n c i a l and municipal laws, by-laws, development p o l i c i e s and procedures have r e s t r i c t e d supply with the obvious consequence of high prices. In the context of the p r i o r discussion on tenure choice, what i s perhaps more s i g n i f i c a n t i s the nature of that increased demand. Table 5.1 Housing Supply and Demand i n the GVRD 1956-81 Dwelling Unit Household Formation Years ' Starts Family. . Non-Family Tot a l 1956-61 42,4.73 27,100 8,400 35 ,500 1961-66 46,391 23,900 19 ,700 43,600 1966-71 69,851 42,100 22,400 64,500 1971-76 98,280* 55,400 35,600 91,000 1976-81 114,804* 67,800 38,500 106,300 *Projections based on household formation demands of 91,000 and 106,300 respectively. Considering demolition, this requires annual averages of 19,656 and 22,960 dwelling units starts for each of the years 1971-76 and 1976^81 respectively i f the forecasting demand i s to be met. Source: Central Mortgage and Housing Corporation, Canadian  Housing S t a t i s t i c s , yearly editions; and J.S. Kirkland, Demographic Aspects of Housing Demand to 1986, (Ottawa: CMHC, 19 71). Cited by United Community Services of Greater Vancouver i n Trends i n Home Ownership Costs and Disposable  Income over the past decade~ (Vancouver: U.C.S., 1973), p. 2. - I l l -In the context of the choice between rented and owned housing i t i s valuable to consider the issue of providing households with units "normally" suited to the i r needs and preferences. 1 Factors such as age of head, size of household and income determine the type of unit which w i l l best meet the needs of a household. Obviously through time the nature of i n d i v i d u a l households changes while the .cc.omp.osa.'itfi:Qni of a l l households grouped together changes as well. In other words, the l i f e cycle influences the nature of i n d i v i d u a l households as a p a r t i c u l a r head marries, raises a family and watches his children grow up and s t a r t the same cycle. Such cycles i n the aggregate are greatly influenced by the general economic and s o c i a l milieu of the nation. For example changing birthrates have implications regarding the number of individuals who w i l l form households twenty to twenty-five years l a t e r . Changing id e a l s , tastes and economic circumstances have some bearing on not only b i r t h -rates but also the timing and frequency of marriage. Knowledge of the o v e r a l l population growth rate along with the house-hold formation rate and the types of households being formed i s e s s e n t i a l to inte r p r e t and anticipate changes i n the housing demand function. Moreover i f an attempt i s made to break up demand according to tenure submarket, the knowledge of the nature of households i s . imperative. - 112 -A household may take any form ranging from tw.o. college students sharing an apartment to a large family l i v i n g i n t h e i r own 2 home. Obviously the type of household and i t s u t i l i t y function w i l l have a d i r e c t bearing on the s i z e , s t r u c t u r a l form, tenure type and location of the dwelling unit demanded. Hence the composition of the households i n aggregate w i l l have implications for.how the housing stock i s used i n the short run and how i t changes i n the long run. 5.11 The War Babies The baby boom i n the post war years has provided probably the single most s i g n i f i c a n t influence on the demand for dwelling units. The largest cohort i n hi s t o r y produced by the post war baby boom has had to be absorbed by the housing market. This cohort or aggregate of persons born between 1945 and 1950 are not a new problem. Demographers have lik^ne'd t h e i r assimilation into society "to the process by which a phython digests a pig. As the pig moves along the snake's digestive t r a c t , i t makes a bulge, just as the boom babies are causing a t r a v e l i n g bulge 3 i n the economy and s o c i a l l i f e of the country". The existence of post war babies i s not something new, i n fact t h e i r presence has been f e l t over the years by d i f f e r e n t sectors of society. In the l a s t half of the 1960s the capacity of the higher educational system was being taxed to the breaking - 113 -point. At the same time Wallace F. Smith and Max Neutze detailed the ef f e c t s of this segment of the population on 4 suburban apartment bu i l d i n g . In fact Neutze forecasts todays problem. "As the babies of the 19 40"s continue to come into the market they w i l l maintain a strong demand for apartments. Toward the end of the decade they w i l l beging to make t h e i r presence f e l t i n the house market and i n the 19 70's w i l l cause a very strong resurgence i n the demand for houses."^ Although the work of Smith and -Neutze relates s p e c i f i c a l l y to the American market there i s no doubt that a p a r a l l e l s i t u a t i o n existed i n Greater Vancouver. Consider the large number of wood-frame three f l o o r walk-up apartments and high r i s e units constructed i n Vancouver during the 1960s. Although i t i s argued that tax-incentives gave impetus to thi s construction i t i s l i k e l y that builders and investors were responding as well to increased demand by young singles, the post war babies. Pursuing this argument, these same households as forecast by Neutze have s h i f t e d into the market for owned homes. Given impetus be r e a l l o c a t i v e subsidies i t i s conceivable that t h i s s H i f t t c o u l d take place much sooner and much more dramatically than under normal circumstances. A recent a r t i c l e indicates that i n the United States where si m i l a r p r e f e r e n t i a l subsidies e x i s t f u l l y 30% of the new condominiums are going to young 7 unmarried buyers. - 114 -The d i r e c t i n f l u e n c e of the coming of age of the war baby cohort on the demand f o r rented or owned housing i s not c l e a r . T h i s i s due to two other f a c t o r s . The f i r s t , one person households as an aspect of changing household formation and the second, immigration. Immigration i s more c o r r e c t l y termed net m i g r a t i o n , t a k i n g i n t o account emigrants and immigrants from other p a r t s of t h i s P rovince and Canada and from o u t s i d e Canada. 5.12 The Formation of one Person Households As the war baby cohort has c o n t r i b u t e d to a g e n e r a l l y i n c r e a s e d housing demand f i r s t i n the r e n t a l market and s h i f t i n g t o the ownership market the i n c r e a s e d prevalence of one person house-holds backed by the p r o s p e r i t y of the 1960's and 1970's has a l s o c o n t r i b u t e d t o a g e n e r a l i n c r e a s e i n demand. A r e c e n t a r t i c l e by Robert M. F i s h e r and John W.' Graham o u t l i n e s the growth of one person households i n the U n i t e d S t a t e s ; the number of one-person households as a p o r t i o n of a l l households i n c r e a s e d from 9.3% i n 1950 to 17.6% i n 1970 while the share of one peron households i n t o t a l household growth amounted to 16% i n the 1940's r 30% i n the 1950's and 39% i n the 1960's. In 1970, 11 m i l l i o n of 52 m i l l i o n occupied d w e l l i n g s were occupied by 11 m i l l i o n one person households, the remaining 41 m i l l i o n d w e l l i n g s g were occupied by 192 m i l l i o n people. Canadian data supports the American r e s e a r c h i n t h a t the number - 115 -of one person households as a percentage of the. t o t a l number of households has increased and that 2 9 % of the new households formed i n Greater Vancouver between 1 9 6 0 and 1 9 7 0 were one person households. Table 5 . I I Growth of one person households i n Greater Vancouver 1 9 6 0 Change 1 9 6 0 - 6 5 . 1 9 6 5 Change , 1 9 6 5 - 7 0 1 9 7 0 No. of one A = person households 3 0 , 0 8 0 1 7 , 2 3 7 5 7 % 4 7 , 2 6 7 1 8 , 4 0 8 3 9 % 6 5 , 6 7 5 B= Total households 2 2 8 , 5 9 8 4 3 , 3 5 8 1 9 % 2 7 1 , 9 5 6 7 4 , 2 5 9 2 7 % 3 4 6 , 2 1 6 A 1 3 % B X 1 7 % 1 9 % A ; A I O O ^ B 4 0 % 2 5 % Source: S t a t i s t i c s Canada, Population and Housicng Characteristics  by Census Tracts, Vancouver, Census of Canada, 1 9 6 1 , 1 9 6 6 , 1 9 7 1 . While i t i s d i f f i c u l t to draw firm conclusions from such data i t i s apparent that changing s o c i a l and economic factors have resulted i n the rapid growth of a new household sector to add pressure to an already d i f f i c u l t market s i t u a t i o n . A society which permits independence from the family unit at an early age, accepts unmarried l i f e as a norm for many and demands independence and freedom for i t s e l d e r l y has given the impetus - 1 1 6 C-to this growing sector of housing demand. That the number of one person households have mushroomed should not be condemned but t h e i r role as disproportionate consumers of shelter space must be recognized i n a market where dramatic increases i n demand are evident. What are the implications of such changes i n the aggregate make-up of households? F i r s t l y i f i t can be assumed that the increased prevalence of one person households has not been o f f s e t by a corresponding drop i n the number of family house-holds then there has been increased competition for the e x i s t i n g housing units . In other words since by d e f i n i t i o n a household must occupy a dwelling unit then one person house-hold must have i n many cases outbid family households for the ex i s t i n g dwelling- units.; In other words the number- of intended households has increased thereby i n t e n s i f y i n g the bidding for the e x i s t i n g dwelling units and the flow of new units . A further c h a r a c t e r i s t i c of one person households which i s a major factor i n measuring t h e i r contribution to demand for housing i s the consistency of t h e i r p a r t i c i p a t i o n i n the market. Louis Winnick i s quoted as having noted as early as the 1950s that "The one-person household may possibly be the most v o l a t i l e sector of housing demand s h i f t i n g from head-ship to other household status more r e a d i l y than other groups. That i s , the 'doubling 1 and 'undoubling' of - 117 -adult individuals may be characterized by wider c y c l i c a l swings than i n the case for married couples or other types of families."9 P a r t i c u l a r l y the young adult i s t o t a l l y f l e x i b l e i n his a b i l i t y to 'double' or 'undouble' or i n fact to return to his family depending primarily on his economic circumstances. E s s e n t i a l l y t h i s means the e l a s t i c i t y of housing demand with respect to income may be considerably greater for the young single householder than for the r e l a t i v e l y established family household. 5.13 Net Migration A f i n a l factor contributing to increased household formation and housing demand i s net migration. Net migration i s determined from the residual increase i n population aft e r natural increase (the number of births less the number of deaths) i s accounted f o r . Obviously, any net i n f l u x of people w i l l s h i f t the demand curve for housing upward. In-migration has long been recognized as a major factor i n the increased rates of household formation i n Greater Vancouver. Net migration accounted for 76.5% of the growth i n population i n the Greater Vancouver regional d i s t r i c t between 1966 and 1971. - 118 -Table 5 . I l l Migration to the GRVD Period Net Migration' % of population increase 1951-56 57,608 55.8% 1956-61 72,052 57.6 1961-66 63,054 61.6 1966-71 103,592 76.5 Source: Population forecast GVRD Planning Department, Vancouver,. B.C., January 1973. While these s t a t i s t i c s are i n t e r e s t i n g because net migration gives some in d i c a t i o n of additional housing requirements*a look at age d i s t r i b u t i o n of the 1961 to 1966 group i s even more h e l p f u l . Table 5.IV Age and Sex Di s t r i b u t i o n  of Migrants to the GVRD 1966-71 Age % Male % Female % Total 0-9 16% 16% 16 10-19 14 15 14.5 20-29 33 33 33 30-39 16 12 14 40-49 9 6 7.5 50-59 5 5 5 60-69 4 7 5.5 70-79 1 . . 3 2 80 + 2 • 3 2.5 : Population forecast GVRD Planning Department, Vancouver, B.C. January 1973. - 119 -The greatest proportion of migrants, to the GVRD during t h i s period were and s t i l l are i n the household formation stage of thei r l i f e cycle. Not only i s the 20-30 age group contributing s i g n i f i c a n t l y to the general increase i n housing demand but also the i r preference for homeownership has been given impetus by pro homeownership p o l i c i e s . This analysis has shown that due to p a r t i c u l a r c h a r a c t e r i s t i c s of demographic change such as the post war baby boom, the f o r -mation of one person households and the ch a r a c t e r i s t i c s of in-migrants the increase i n the rate of household formation has been dramatic during the l a s t decade. I t i s argued that the re a l l o c a t i v e p o l i c i e s that favour home ownership have tended to s h i f t the burden of this growth to the home ownership sub-market. Consequently prices i n the home ownership sector have seen-a much more rapid increase than rents. A 1972 Greater Vancouver study supported this by concluding that younger ch i l d l e s s couples preferred ownership of a single-detached dwelling and remained committed despite i t s ' h i g h cost to them.1^ The relationship between income, price and housing demand has been explored innumerable times i n the past and a wide margin of uncertainty appears to ex i s t regarding the response of housing expenditures to income and price v a r i a t i o n . Most studies have looked s p e c i f i c a l l y at changes i n income and - 120 -changes i n price and t h e i r respective influence on demand. Most s i g n i f i c a n t with respect to the choice i n tenure are the d i s t r i b u t i o n of incomes with respect to the households bidding for dwelling units•and the price expectations of the participants i n the market place. 5.2 INCOME AND THE DISTRIBUTION OF INCOME The view generally held u n t i l the mid-1950s was that the e l a s t i c i t y of housing consumption with respect to current income was less than one. In other words for any increase i n income there was a less than proportionate increase i n expen-diture on housing. Since that time i t has been argued that i f consumption i s related to current income results are downward biased because such factors as wealth and expectations of future income are ignored.''"1 This more recent view of income i n r e l a t i o n to housing demand was given impetus by Ando and Modiglianis' l i f e cycle hypothesis and Friedman's permanent income hypothesis. These theories of consumption behaviour should be considered i n greater d e t a i l i n order to throw some l i g h t on income as i t influences housing demand. Ando and Modigliani suggest a consumption function i n which i n d i v i d u a l consumption depends on the resources available to the i n d i v i d u a l , the rate of return on c a p i t a l , and the age of the consumer unit. The resources available to the i n d i v i d u a l - 121 -include e x i s t i n g net worth, or wealth and the present value 12 of a l l current and future non-property earnings.. Friedman asserted that measured income and measured consumption can each be regarded as the sum of two components: the permanent income component and the tr a n s i t o r y component r e f l e c t i n g the influence of factors regarded as change or random by the consumer u n i t . The permanent income component i s to be interpreted as re-f l e c t i n g those factors which the consumer unit regards as de-. . 13 termining xts c a p i t a l value or wealth. The tr a n s i t o r y component can be either p o s i t i v e or negative and does not influence per-manent consumption which i s proportional to permanent income. A comprehensive survey of housing and income research subsequent to consideration of the permanent income concept indicates an e l a s t i c i t y of income with respect to ren t a l expenditure of between 0.80 and 1.0. For ownership expenditure the estimates 14 J f a l l between 1.0 and 1.5 except for one value of 0.7. This new view on consumer decision making based on permanent or normal income hypothesis indicates a preference of renter to spend less of an income increment on housing than owners and has d e f i n i t e implications for the housing market. The difference i n demand e l a s t i c i t i e s suggests that any p o l i c y which tended to generate a s p e c i f i c tenure preference would have the following e f f e c t . I f i t were a policy which was p r e f e r e n t i a l to home ownership i t would ultimately generate - 12 2 -r e l a t i v e l y more housing demand as income increased than i f the po l i c y were p r e f e r e n t i a l to renters. The further implication i s that the price r i s e generated by the increased demand would be r e l a t i v e l y greater i n the ownership sector than i n the rental sector. This conclusion can be drawn due to the i n -e l a s t i c i t y of supply i n both submarkets. I t should be noted that i t may be possible that the difference i n observed e l a s -t i c i t i e s i s generated by the d i f f e r e n t i a l treatment of owner and renter hence this l i n e of reasoning i s c i r c u l a r . 1 " ' Such a p o s s i b i l i t y s t i l l does not negate the fa c t that income i n c r e -ments w i l l generate r e l a t i v e l y more demand from home owners than renters. Changes i n income over time are important but with respect to the a l l o c a t i o n of housing the changing c h a r a c t e r i s t i c s of the recipiants of that income must also be considered. Con-sidering again the demographic changes recently described, increases, i n income i n the hands of one person households and the 20 to 30 year old war babies are i n the hands of that sector of society which i s the most readi l y able to bargain i t s way into superior housing. By nature of the d e f i n i t i o n of households the existence of an increasing number of one person households and working couples has ensured that t h i s consumer group has been i n a p o s i t i o n to outbid family house-holds for l i v i n g space. It i s read i l y apparent that a one - 123 -person household or even a couple with an income of "x". dol l a r s can afford to spend more income on housing than the family household with only one breadwinner and the same income. Though the income e l a s t i c i t y of demand for shelter may be close to unity i t may be argued that the income e l a s t i c i t y with respect to shelter space and qu a l i t y may be greater than 15 unity. During periods of prosperity the proportion of i n -come spent on shelter space and qual i t y would increase at a greater rate than o v e r a l l income. I n t u i t i v e l y t h i s makes sense and i n fact i s supported by federal l e g i s l a t i o n which demands a certain size and qual i t y of housing unit before financing 17 w i l l be provided. The unfortunate implication of a higher income e l a s t i c i t y of demand for space and qual i t y as opposed to shelter i s that those who are recipients of the increments i n income w i l l b i d away space and quality from those who are not. Where income d i s t r i b u t i o n i s equitable the res u l t s of such a phenomena are not a problem however i f equity does not exi s t this process would tend to emphasize the disproportionate use of shelter space and qu a l i t y . Referring back to the.growth of one person and working couple households i t i s conceivable that i f d i f f e r e n t income e l a s t i c i t i e s of demand ex i s t for shelter and for shelter space and qual i t y the demands of these household sectors would r e s u l t i n the disproportionate use of the housing stock. - 124 -5.3 PRICE AND PRICE EXPECTATIONS Price i s a s i g n i f i c a n t factor i n housing demand. Price w i l l be discussed l a t e r i n the context of cred i t conditions but at t h i s point i t would be valuable to explore the question of price expectations and how they relate to housing demand. Be-fore doing so a look at increases i n rents and increases i n the prices of owned homes over the past ten years might be informative. Table 5.V Apartment • Rents i n Greate,ru.Vancouyer,y - • West End High 1964-1974 Rise Marpoie Frame 1 br. Change 2 br. Q. *6 Change 1 br. o, "o Change 2 br. % Changi 1964 91 117 95.50 120 1965 120 31. 9 •175 , 49.6 130 4.7 4.0 1966 120 175 100 125 1967 4.1 2.9 15. 0 24.0 1968 125 180 115 155 1969 140 12. 0 190 5.-6, 125 .8.7 160 3.2 1970 150 7.1 200 5.4 130 11. 5 175 9.4 1971 165 10.0 225 12.5 145 11.5 185 5.7 1972 170 3.0 230 2.2 155 6.9 185 0 1973 180 5.9 270 17.4 160 3.2 225 21.6 1974 185 2.8 295 9.3 . 175 9.4 250 11.1 Source: Greater Vancouver Real Estate Board. Real Estate trends i n Greater Vancouver, (Vancouver: Greater Vancouver R.eal Estate Board, 1964-1974) . Table 5.VI Average Sales Price i n the Greater Vancouver Area: Multiple L i s t i n g Sales ' ~ (1964-1974) Average Sales Price % Change from Prior Year 1963 $ 12,636 1964 13,202 566 4.48% 1965 13,964 762 5.77 1966 15,200 1236 8. 85 1967 17,836 2636 17. 34 1968 20,595 2759 15. 47 1969 23,939 3344 16.24-1970 24,239 300 1.25 1971 26,471 2232 9. 21 1972 31,465 7994 18. 87 1973 41,505 10040 31. 91 1974 ( u n t i l June) 57,242 15737 37. 92 Source: Greater Vancouver Real Estate Board. Multiple L i s t i n g Service, 1963-1974. The concept of c r o s s - e l a s t i c i t y i s perhaps most important i n th i s a n a l y s i s , p a r t i c u l a r l y because t h i s study i s attempting to look at the rel a t i o n s h i p of the ren t a l and ownership sub-markets. As has been emphasized already the theory of cross e l a s t i c i t y suggests that as prices r i s e i n one submarket there w i l l be a tendency for consumers to s h i f t to substitutes 19 exi s t i n g i n another submarket and vise versa. Under normal circumstances t h i s r e l a t i o n s h i p would exi s t between the rental market and the home ownership market. - 126 -However, i f the consumer i s convinced that prices of houses for sale w i l l continue to escalate he w i l l make every attempt to make his purchase now rather than wait. This results i n the transfer of future demand to the present. The consumer however s t i l l does not react normally to increases i n price i f his expectations of further increases remain high. Ownership becomes a growing asset as the consumer recognizes the pro-tection against i n f l a t i o n which i t affords. In f a c t , higher prices w i l l not deter buyers but w i l l provide them with more and more impetus to est a b l i s h a toe-hold i n the marketplace. In this context any attempt to measure price e l a s t i c i t y with respect to housing demand or c r o s s - e l a s t i c i t y with respect to price seems ludicrous. Higher prices do not deter but i n fact fue\L demand i f higher price expectations are c h a r a c t e r i s t i c of the market. Under normal circumstance where price changes have not and are not expected to be too great expectations would not be a con-sideration. However i n a pos i t i o n where the rate of household formation i s high and where subsidies are p r e f e r e n t i a l to home ownership price increases would be greater i n the owner-ship market than i n the re n t a l market simply because-, of the demand s h i f t . Hence i t i s quite l i k e l y that expectations could begin to take hold r e s u l t i n g i n an even greater s h i f t i n demand. This s i t u a t i o n has no doubt occured i n Greater Vancouver during - 127 -the 1970 to 19 74 period. Prospective home owners have argued that they cannot afford to wait. 5.4 CREDIT AVAILABILITY, COST AND DEMAND Cursury attention has already been paid to the question of credit a v a i l a b i l i t y and cost. Because the mortgage market has been used as a means of subsidizing home ownership, i t s role was discussed b r i e f l y i n Chapter IV. Apart from the r o l e of the mortgage market as a medium for housing subsidies, c r e d i t a v a i l a b i l i t y and cost are s t i l l s i g n i f i c a n t factors influencing the demand for housing and choice i n tenure. While the a v a i l a b i l i t y . o f financing i s not a prerequisite for the p a r t i c i p a t i o n of the consumer i n the r e n t a l market, i t i s a necessity for most to p a r t i c i p a t e i n the ownership market. For new housing i n Vancouver financed under the National Housing Act i n 1973 the average dwelling cost was $33,653 while the 20 average downpayment was only $9,049. 1971 census figures indicate that of 203,525 owner occupied dwellings i n Greater 21 Vancouver 115,060 or 5 7% were carrying mortgages. It i s important to note that financing has a rather unique influence on the consumer. F i r s t l y financing i s a cost and hence could be defined as part of the price of a house for sale. However, as such i t i s a cost unique to each consumer depending - 128 -on the siz e of his downpayment and the terms he can nego-t i a t e with the lender. Secondly, i n addition to cost there i s the question of a v a i l a b i l i t y . In periods of high demand mortgage funds may not be available at any price or i f available only on very demanding terms. Since financing i s so important to many po t e n t i a l homeowners i t s a v a i l a b i l i t y and cost has proved a useful t o o l to government to check 22 or give impetus to. demand and in. turn influence the economy. Unlike most other demand factors, financing costs and a v a i l a -b i l i t y often prevent intended demand from becoming e f f e c t i v e demand. Three cre d i t terms fluctuate to influence e f f e c t i v e housing demand and they are the mortgage maturity period, inter e s t rate and the down payment requirement. A research 23 project undertaken by Jack E. Gelfand attempted to show the influence of l i b e r a l i z e d c r e d i t terms on the lower middle-income housing market i n three Pennsylvania c i t i e s : Philadelphia, Pittsburgh and Harrisburg. He concluded that the downpayment requirement was the most onerous for the prospec-tive buyer. The percentage of respondents who were "finan-c i a l l y capable" almost doubled as the downpayment requirement was reduced from one-third to one-tenth while decreases i n the mortgage rate and increases i n the mortgage maturity period resulted i n only a marginal increase i n the percentage "finan-c i a l l y capable". An - i n d i c a t i o n of the impact of these va-- 129 -r i a b l e s in.a Canadian m i l i e u are provided by the Royal Commission on banking and finance "consumer survey" which indicated that 15% of the families who purchased homes i n the 1957-62 period would have purchased no home (9%) or a cheaper home (6%) i f down payments had been 10% higher. 32-40% would have purchased no home (20-25%) or a cheaper home (12-15%) i f monthly payments had been 10% higher. Needless to say price must be taken into account when considering cr e d i t terms and financing costs. No matter what the c r e d i t terms pr i c e can ultimately become 'the; 'final de-terminant of whether a household can afford to buy or not. Even i f the household feels that i t can afford onerous monthly payments, mortgage lenders may not allow financing to take place due to the high debt service r a t i o , the r a t i o of monthly mortgage payments on p r i n c i p l e , i n t e r e s t and taxes to the individuals monthly gross income. What i s clear from this discussion i s that c r e d i t terms serve either to check or f a c i l i t a t e demand. In the past c r e d i t terms have been eased to give a greater proportion of the population access to homeownership. Adequate proof of th i s i s provided by a record of Central Mortgage and Housing regulations over the past twenty years. See Tables 5.VII and 5.VIII for a summary. - 130 -NHA-INSURED MORTGAGE LOANS TABLE 5.VII: Changes i n Selected Terms, 1954 to 1972 YEAR MAXIMUM MAXIMUM INTEREST LOAN TO VALUE RATE RATIO MAXIMUM MAXIMUM MAXIMUM LOAN AMORTIZATION GROSS PERIOD DEBT SERVICE RATIO 1954 5% new s i n g l e detached 90% of 1st $8000 70% of rest $12,800 25 yrs 23% 1955 5k 1956 5k 1957 6 new si n g l e detached 90% of 1st $12,000 70% of r e s t $12,800 27% 1959 6 3/4 new si n g l e detached- 95% of 1st $12,000 70% of r e s t $14,200 i f 3 bdrms, or l e s s $14,900 i f 4 or more bdrms. 35 yrs 1961 6% 1963 65< • new s i n g l e detached 95% of 1st $13,000 70% of r e s t $14,900 i f 3 or le s s bdrms. $15,600 i f 4 or more bdrms. 1965 1 new sing l e detached $18,000 j 1966 i ' 7% j e x i s t i n g detached 95% of value * $10,000 1967 • 1 • • • < &% i e x i s t i n g semi-detached 95% of value and duplex $10,000/unit 1968 9 1/8 new si n g l e detached 95% of $18,000 70% of r e s t 1969 (9%) r a t e freed new s i n g l e detached, 95% of $20,000 80% of r e s t " row or semi-detached 90% e x i s t i n g $25,000 $25,000/unit $18,000 40 yrs 1970 (103s). 1971 (9) 1972 (9) new single-detached, 95% of value " row or semi-detached 90% of h value 90% of re s t e x i s t i n g $30,000 $30 9000/unit $23,000 30% 30% ' 1 - 131 -Table 5.VIII: NHA-Insured Mortgage' Loans: Maximum Terms as of October 1973 Insured Loans Maximum i n t e r e s t rate: CO o c i-i o ro n PJ H o H- PJ 3 CT* c PJ M 3 w 3 ro tr c o CO H- cn ro PJ H ' L n 3 a • ro H - < 1 o cn 13 M 1 o cn I- 1 M r t O o > 3 PJ LO c r a. pj 3 r o ro 3 H - o 3 o L n 1 H - c • CO rj < VO r t CO M ~J i-i ro H LO Co <* l - i ti ITJ " n o PJ 3 n ro • ul al VO r t LO 3 H -"< Es 03 <J O r t 3 ro rti PJ i-( r t cn n ro vo H- o r t 3 • "< 3 td i-i H " r t H -CO 3* ro i-i o ro (1) Home-owner detached house (2) Home-owner duplex (3) Home-owner semi detached (2 u n i t s side by side) (4) Home-owner row units (5) Home-owner apartment (co-operative or condominium) (6) Rental Properties (7) E x i s t i n g Detached Home Improvement Loans Maximum loan Free to f i n d i t s own l e v e l . The rate on NHA-insured loans by approved lenders i s 10%. Maximum Gross Debt Service Ratio i s 30% for si n g l e family units and 42% for duplex or semi-detached. A p p l i c a t i o n fee i s $35.00. MAXIMUM LOAN TO VALUE RATIO 95% of lending value 95% of lending value on owner's h a l f . 90% of lending value on -other half (rental) As for duplex 95% 95% MAXIMUM LOAN (Excluding" insurance) $30,000.00 $30,000.00 $30,000.00 per unit $30,000.00 $23,000.00 $30,000.00 per un i t $30,000.00 per unit 90% of hal f the lending value Detached house: (Except owner's unit) Duplex (up & down) Semi-Detached(per unit) $30,000.00 per unit Row dwelling(per unit) $30,000.00 per unit (maximum 2 storeys) M u l t i p l e f a m i l y ( f u l l y serviced) $20,000/ 95% of lending value (House must unit be developed to minimum standards) $30,000.00 Maximum i n t e r e s t rate 10% single-family dwelling two or more un i t s Maximum repayment period: $4,000 $4,000 for f i r s t unit, plus $1,500 for each addi t i o n a l unit 10 years Maximum ( e f f e c t i v e 5 years) Eased c r e d i t terms tend to s h i f t demand from the r e n t a l sector to the home ownership sector. While eased c r e d i t terms may provide access to more buyers, that increased access implies greater demand and hence higher house prices . For this reason the inception of easier c r e d i t terms when e x i s t i n g de-mand and prices already j u s t i f y new construction seems a rather pointless p o l i c y . While increased prices may a t t r a c t more builders i t would not appear to serve any purpose i f yearly production i s close to the maximum .3^ 4% of stock which the industry i s able to provide.' Easier c r e d i t when demand i s already•increasing rapidly due to immigration, household f o r -mation, higher incomes and subsidies p r e f e r e n t i a l .to home-ownership only serves to aggravate demand and work at cross-purposes to i t s o r i g i n a l intent. In a market where housing prices are r i s i n g r a p i d l y and easier cre d i t implies a longer term, a smaller down payment and a higher debt service ratio,more onerous payments are not a deterrent to demand. I f the buyer i s consumption oriented he i s not concerned with the t o t a l cost of the package but with the a v a i l a b i l i t y of financing. Even i f monthly payments are high the consumer recognizes that r i s i n g prices w i l l b u i l d his equity and he w i l l always have the opportunity to refinance at a l a t e r date. In fact the equity provided by r i s i n g prices may provide the impetus to refinance i n order to cash out and - 133 -and use that cash to invest in a second property. While t h i s procedure i f prevalent may add to the rental stock i t serves to further aggravate the demand for owned housing. This chapter has attempted to demonstrate by observation of the market how certain variables have given further force to housing demand and for home ownership i n p a r t i c u l a r . The coming of age of the war baby cohort, the growth of one person households and a high rate of in-migration simultaneously have increased the number of households i n the market place bidding for accommodation. S t a t i s t i c s show that production of new housing units i n Vancouver i s barely able to keep pace with the rate of in-migration l e t alone the growing demand for housing space and qual i t y of current residents. Rising incomes have outstripped rent increases and f a l l e n behind increases in house prices but serve to demonstrate the apparent s h i f t i n demand from renting to home-ownership. What i s most int e r e s t i n g to note i s that the combination of r i s i n g incomes and prosperity along with the prevalence of working couples and one person households allows these house-hold sectors to bid away shelter space and qual i t y from those households with less disposable income. With regard to house prices i t i s valuable to recognize that higher prices do not necessarily deter demand i f expectations play a r o l e . S i m i l a r l y , - 134 -high financing costs and onerous mortgage payments are not a deterrent to demand i f expectations are c h a r a c t e r i s t i c of the market. Furthermore i t would seem that l i b e r a l c r e d i t ostensibly to provide housing access to a greater portion of the population serves only to aggravate a market already working, at capacity. - 135 -FOOTNOTES - CHAPTER V 1. The i s s u e o f n o r m a l c y . i s d i s c u s s e d by W a l l a c e F. S m i t h , A s p e c t s o f Hous i n g Demand - A b s o r p t i o n , D e m o l i t i o n and D i f f e r e n t i a t i o n , ( B e r k e l e y : U n i v e r s i t y o f C a l i f o r n i a , 1966), p. 52. 2. C e n t r a l Mortgage and Housing C o r p o r a t i o n , Canadian Housing  S t a t i s t i c s , , 19 73, (Ottawa: CMHC, March 1974) , p. 10 8. ~ D e f i n e s a h o u s e h o l d as f o l l o w s : "A h o u s e h o l d f o r census p u r p o s e s , c o n s i s t s o f a p e r s o n o r group o f p e r s o n s o c c u p y i n g one d w e l l i n g . I t u s u a l l y c o n s i s t s o f a f a m i l y group, w i t h o r w i t h o u t l o d g e r s o r employees. I t may c o n s i s t o f a group of: u n r e l a t e d p e r -sons, o f two o r more f a m i l i e s s h a r i n g a d w e l l i n g , o r o f one p e r s o n l i v i n g a l o n e . E v e r y p e r s o n i s a member o f some h o u s e h o l d , and t h e number o f households e q u a l s the number o f o c c u p i e d d w e l l i n g s . A " n o n - f a m i l y h o u s e h o l d " i s one whose head i s n o t the head o f a f a m i l y . A non f a m i l y h o u s e h o l d may c o n t a i n l o d g i n g f a m i l i e s . " 3. "Those M i s s i n g B a b i e s " , Time Magazine, September 16, 1974, p. 51. I t i s i r o n i c t h a t t h e s e war b a b i e s are p a r t i c i p a n t s i n t he r e v e r s e phenomenon i n v o l v i n g d e c l i n i n g b i r t h r a t e s w h i c h may su g g e s t t h a t households b e i n g c u r r e n t l y formed w i l l demand l e s s h o u s i n g space i n the f u t u r e as f a m i l i e s w i l l be s m a l l e r . 4. W a l l a c e F. S m i t h , The Low-Rise S p e c u l a t i v e Apartment, ( B e r k e l e y : U n i v e r s i t y o f C a l i f o r n i a , 196 4 ) , p. 29 and Max Neutze, The Suburban Apartment Boom, (Washington, D.C.: Resources f o r the F u t u r e , I n c . , 1968), p. 22-25. 5. Max Neutze, p. 23. 6. F.R.A. Dale-Johnson, R e t u r n s on Apartment P r o p e r t i e s f o r the P e r i o d 1960-70 i n the G r e a t e r Vancouver A r e a , M.B.A. T h e s i s , U n i v e r s i t y o f B r i t i s h C o lumbia, May 1972, p. 1. 7. The Urban Land I n s t i t u t e , Land Use D i g e s t , (Washington: U.L.I., O c t o b e r 28, 1974), Volume 7, No. 8. 8. R o b e r t Moore F i s h e r and John W. Graham, "Housing Demand by One Pe r s o n Households", Land Economics, Volume L, Number 2 (May 1974). 9. L o u i s W i n n i c k , American H o u s i n g and i t s U s e / the Demand  f o r S h e l t e r Spaced (New Yo r k : W i l e y , 1957), p. 86. C i t e d by F i s h e r and Graham, "Housing Demand by One-Person Households,", p. 166. - 136 -10. U n i t e d Way o f G r e a t e r V a n c o u v e r , The H o u s i n g Game, (V a n -c o u v e r : U n i t e d Way o f G r e a t e r V a n c o u v e r , J u l y 1 9 7 4 ) , p. 19. 1 1 . F r a n k De Leeuw, "The Demand f o r H o u s i n g : A R e v i e w o f C r o s s S e c t i o n E v i d e n c e " , The R e v i e w o f E c o n o m i c s a n d S t a t i s t i c s , V o lume L I I I , N u m b e r - 1 ( F e b r u a r y 1971) , p. T~. 12. A. Ando a n d F. M o d i g l i a n i , "The ' L i f e - C y c l e " H y p o t h e s i s o f S a v i n g : A g g r e g a t e I m p l i c a t i o n s a n d T e s t s " , A m e r i c a n  E c o n o m i c R e v i e w , Volume 53, Number 1 ( M a r c h 1963) , p p . 55-84. 13. M i l t o n F r i e d m a n , A T h e o r y o f t h e C o n s u m p t i o n F u n c t i o n , ( P r i n c e t o n : P r i n c e t o n U n i v e r s i t y P r e s s , 1957) pp. 2 2 0 ^ 2 2 4 . 14. De Leeuw, "The Demand f o r H o u s i n g . . . " , p. 1. 15. M o s t a n a l y s i s o f i n c o m e e l a s t i c i t y o f h o u s i n g demand h a s r e f r a i n e d f r o m c o n s i d e r i n g t h e i n c o m e e f f e c t s o f h o u s i n g s u b s i d i e s p r e f e r e n t i a l t o home o w n e r s h i p . See f o r e x a m p l e R i c h a r d F. M u t h , "The Demand f o r Non-Farm H o u s i n g " , The  Demand f o r D u r a b l e G o o d s , E d . A r n o l d C. H a r b e r g e r , ( C h i c a g o : U n i v e r s i t y o f C h i c a g o P r e s s , 1 9 6 0 ) : Tong Hun L e e , "The S t o c k Demand E l a s t i c i t i e s o f Non-Farm H o u s i n g " , The R e v i e w  o f E c o n o m i c s a n d S t a t i s t i c s , V o l u m e 46, ( F e b r u a r y 1 9 6 4 ) : M a r g a r e t R i e d , H o u s i n g and Income, ( C h i c a g o : U n i v e r s i t y o f C h i c a g o , 1 9 6 2 ) ; and L.B. S m i t h , R e s e a r c h M o n o g r a p h  No. 2: H o u s i n g i n C a n a d a : M a r k e t S t r u c t u r e a n d P o l i c y  P e r f o r m a n c e , ( O t t a w a , C.N.H.C., J a n u a r y 1 9 7 1 ) . W h i l e t h i s i s a f a c t o r v i r t u a l l y i m p o s s i b l e t o q u a n t i f y i t may i n p a r t c o n t r i b u t e t o h i g h e r i n c o m e e l a s t i c i t i e s f o r owned h o u s i n g r e l a t i v e t o r e n t a l h o u s i n g . 16. A l f r e d M a r s h a l l , P r i n c i p l e s o f E c o n o m i c s , 8 t h e d . ( L o n d o n : M a c m i l l a n Co., 1 9 5 2 ) , p. 90. 17. I t i s a r g u e d b y some t h a t r e s t r i c t i o n s p l a c e d o n h o u s i n g t y p e s w h i c h c o u l d be f i n a n c e d t h r o u g h t h e N a t i o n a l H o u s i n g A c t c o n t r i b u t e d s i g n i f i c a n t l y t o u r b a n s p r a w l . See A l b e r t R o s e , " H o u s i n g P o l i c y i n C a n a d a : 1 9 4 0 - 1 9 6 8 , " i n M. W h e e l e r , ( e d . ) , The R i g h t t o H o u s i n g , ( M o n t r e a l : H a r v e s t H o u s e , 1 9 6 9 ) , p p . 85-86. 18. T h e s e p r i c e s show t r e n d o n l y a s m u l t i p l e l i s t i n g d a t a d o e s i n c l u d e a s m a l l p r o p o r t i o n o f b u s i n e s s and c o m m e r c i a l s a l e s . 19. T h i s p a p e r , C h a p t e r I V , S e c t i o n 4.1. 20. C e n t r a l M o r t g a g e and H o u s i n g C o r p o r a t i o n , C a n a d i a n H o u s i n g  S t a t i s t i c s , 1 9 7 3 , ( O t t a w a , C.M.H.C., M a r c h 1 9 7 4 ) , p. 86. - 137 -21. S t a t i s t i c s Canada, Population and Housing Cha r a c t e r i s t i c s  by Census Tracts, Vancouver, Census of Canada, 1971. 22. Lawrence Berk Smith, Housing i n Canada, Urban Canada: Problems and Prospects, Research Monograph No. 2, (Ottawa: CMHC, January 1971), pp. 81-83. 23. Jack E. Gelfand, "The Credit E l a s t i c i t y of Lower-Middle Income Housing Demand", Land Economics, Volume XLII, No. 4, (November 1966). 24. Royal Commission on Banking and Finance, Appendix Volume, (Ottawa: Queens Printer, 1965), p. 100, Cited by L.B. Smith, Housing i n Canada,..., p. 34 - 138 -CHAPTER VI .CONCLUSION Greater Vancouver i s not unique i n that her housing market i s complicated by subsidies, taxes and controls, a l l of which tend to disable the housing market. Unfortunately Greater Vancouver i s unique i n that the pressures of growth have accentuated these influences i n the housing market with the re s u l t that the housing problem has appeared more serious i n Vancouver than i n other Canadian c i t i e s . The problem i s not a simple one. 6.1 THE APPARENT PROBLEM Professor Pennance 1s d e f i n i t i o n of two types of economic shortage seems to be representative of what has i n f a c t happened i n the Vancouver market. 1 In the ownership submarket prices have increased dramatically during the past four years. A l -though the price has moved up to achieve a balance between supply and demand the prices of houses for sale are considered high when r e f e r r i n g to a normal price which would have occured had supply adjusted over a longer period. This s i t u a t i o n i s common where i n e l a s t i c i t y of supply coincides with a v o l a t i l e - 139 -demand. The second type of shortage exists i n the r e n t a l submarket. In t h i s submarket demand has outrun supply as evidenced by recent vacancy rates, but something has prevented prices from r i s i n g to balance things out. In f a c t even p r i o r to the introduction of rent control prices were s t i l l too low to generate new building. This s i t u a t i o n c a r r i e d on despite there being no apparent controls on the market and very low vacancy rates. Strangely a l l the factors seemed to be present which would generate increases i n rents which would i n turn bring about new construction but t h i s did not happen. It was the existence of t h i s paradox which gave impetus to th i s thesis. Why did rents not r i s e far enough to j u s t i f y new construction i n the r e n t a l submarket p a r t i c u l a r l y when vacancy rates were low and prices of alternate accommodation (owned housing) were r i s i n g rapidly? Why also when prices i n the rental sector were so obviously low r e l a t i v e to costs or r e l a t i v e to increases i n income and i n comparison to prices of alternate accommodation did landlords undergo such c r i t i c i s m i n l a te 1 9 7 3 and early 1 9 7 4 as they began to adjust rent l e v e l s . There i s the argument that during i n f l a t i o n a r y periods the consumer constrained by a budget may protest to the landlord - 1 4 0 -simply because the landlord i s the most v i s i b l e representative of the production sector. I t i s far easier to protest to the landlord about a rent hike than to track down the i n d i v i d u a l responsible for higher food costs. Clearly the a c c e s s a b i l i t y and v i s i b i l i t y of the production sector (landlords and developers) made them an easy target for c r i t i c i s m regarding r i s i n g rents. This however avoids the issue. Why were rent lev e l s even perceived as a problem and why did they become such an issue that rent controls were introduced? 6.2 THE INFLUENCE OF HOUSING POLICY ON DEMAND AND ON THE  HOUSING MARKET. The answers to these various questions l i e i n the kinds of government p o l i c i e s which have molded consumer preferences with respect to housing. Whether inte n t i o n a l or unintentional Canadian p o l i c y has tended to d i r e c t housing subsidies or taxation at s p e c i f i c kinds of dwellings. The implications of such r e a l l o c a t i v e p o l i c i e s should be explored i n the context of current housing problems. Ostensibly the goal of such p o l i c i e s should be to ease access to housing at the same time improving the qual i t y of the housing stock , and preserving the indivuals freedom of choice i n the market place. An analysis of r e d i s t r i b u t i v e and re a l l o c a t i v e p o l i c y measures shows that unless s p e c i f i c costs or benefits (externalities) related to the commodity i n question - 141 -are to be inte r n a l i z e d , F e a l l o c a t i v e measures w i l l r e s u l t i n i n d i r e c t r e d i s t r i b u t i o n of income. While the r e d i s t r i b u t i o n through r e a l l o c a t i v e p o l i c i e s d i s t o r t s consumer preferences, the more serious r e s u l t i s that prices of the commodities i n question do not r e f l e c t the r e a l s a c r i f i c e that was made to produce the goods. With respect to p o l i c i e s which were p r e f e r e n t i a l to home ownership and p a r t i c u l a r l y single family detached home ownership, Albert Rose argued, Although i t occupied only one short, part of Federal l e g i s l a t i o n , a consequence of t h i s set of p o l i c i e s was c l e a r l y the expansion of vast suburban areas adjacent to every medium-sized and large urban centre. The problems that have ensued, both for the governments and the residents of central c i t i e s which did not d i r e c t l y benefit from t h i s encouragement to home ownership, are immeasurable.... I t i s not s u f f i c i e n t for those who have defended such p o l i c i e s to argue that, i n the long run, a vast growth of urban population resulted i n an expansion of metro-p o l i t a n economic development inconceivable i n the years immediately aft e r the end of the war. It can surely be argued that t h i s i s a case where housing po l i c y i n e f f e c t took over the ro l e of urban planning, in t h i s case suburban planning...2 Rose c l e a r l y d i r e c t s his c r i t i c i s m s toward^' the obvious problems associated with the rapid suburban expansion given impetus by federal housing p o l i c i e s . Two points should be made. F i r s t l y , as Chapter Four has noted the Federal Go-vernment has not been the only contributer to t h i s suburban home ownership boom. Secondly, although Rose emphasizes the most obvious r e s u l t , the vast expansion of suburban areas - 142 -and the problems associated with providing services for that expansion, the underlying economic impact has serious im-p l i c a t i o n s on the e f f e c t i v e operation of the housing market. A summary of the numerous p o l i c i e s which have given p r e f e r e n t i a l treatment to home ownership would include the following at the federal l e v e l . The non-taxation of the imputed rent on an owned home, the non-taxation of the c a p i t a l gain on the sale of a p r i n c i p a l residence, and i n addition the various subsidies provided through the National Housing Act over the years ranging from d i r e c t lending of funds to the provision 3 of such funds at an a r t i f i c i a l l y reduced i n t e r e s t rate. Further subsidies have been provided i n the recent budget 4 speech again showing a d e f i n i t e . a preference to home ownership. At the p r o v i n c i a l l e v e l the most s i g n i f i c a n t subsidies are the cash grants or second mortgages available for the purchase of the f i r s t home. In addition the home owners assistance provided through the refund of a portion of the property tax i s a s i g n i f i c a n t benefit to home ownership.^ The l i s t of subsidies i s long and varied and what i s perhaps most s i g n i -f i c a n t i s the incr e d i b l e complexity and v a r i a t i o n of methods which p r o v i n c i a l and federal governments use with the sole apparent purpose of r e a l l o c a t i n g consumer expenditure away from rented dwelling units and toward owned dwelling units . - 143 -Albert Rose has touched on some of the more obvious e f f e c t s of such p o l i c i e s . Since e a r l i e r federal l e g i s l a t i o n preferred one product, the new single family detached home b u i l t on vacant land, the r e s u l t has been the s h i f t i n g of consumer expendi-ture to new suburban homes with the coincident e x t e r n a l i t i e s created. The more obvious include expensive servicing, the provision of transportation f a c i l i t i e s and i n many cases the rapid expansion of municipal boundaries. It has become obvious that rather than subsidizing the rapid expansion of suburbia i t would have been more a propos to tax the participants in suburban expansion i n order to account for the e x t e r n a l i t i e s they created. A less obvious but equally devastating r e s u l t of the array of p r e f e r e n t i a l subsidies i s the economic impact of the s h i f t i n consumer preferences. C l e a r l y subsidies p r e f e r e n t i a l to home ownership have reallocated consumer expenditure to the ownership market from the rental market. As noted i n Chapter Three the ultimate r e s u l t of such re-al l o c a t i v e p o l i c i e s i s that prices no longer represent the re a l costs to society of providing the services. Prices i n the ownership submarket are higher and prices i n the rent a l submarket are lower than they would be i f the p o l i c i e s did not give preference to one type of housing service (ownership^ over another (rental). - 144 -In the context of the economic model presented i n Figures 2.7 and 2.8 the implications i n the production sectors are 7 serious. With a tendency for demand to s h i f t to the owner-ship submarket* prices r i s e much more rapidl y and much further than normal due to the i n e l a s t i c i t y of the .supply curve. Even i f the resultant slack i n demand i n the r e n t a l submarket i s taken up by in-migration and the formation of new house-holds as has been the case i n Greater Vancouver the problem i s not eliminated. Due to the sharing of factors of production by the ownership and rental sectors r i s i n g costs due to the movement•along the marginal cost curve i n the ownership sector w i l l be translated into a s h i f t i n the marginal cost curve i n the re n t a l sector. The r e s u l t i n Greater Vancouver was a drop i n the construction of new rental units and the increasing tendency for conversion of r e n t a l units to s t r a t a - t i t l e or condominium units.. This s h i f t was given emphasis by the two pronged e f f e c t s of the 1971 income-tax r e v i s i o n . F i r s t l y the tax-shelter for owners of apartments was removed r e s u l t i n g i n a reduction of the flow of new re n t a l units and emphasizing the advantages of converting e x i s t i n g units to s t r a t a - t i t l e or condominium units. Moreover the advantages of home ownership were emphasized further by the exemption from Capital Gains Tax of the gain on the sale of a p r i n c i p a l residences. - 145 -R e a l l o c a t i v e p o l i c i e s which do not account f o r e x t e r n a l i t i e s but i n s t e a d i n d i r e c t l y r e d i s t r i b u t e income have a wide-spread unfavourable impact on the o p e r a t i o n of housing markets. Not o n l y i s t h e r e an impact on the way i n which the e x i s t i n g stock i s used but a l s o the response of the p r o d u c t i o n s e c t o r may not be to the r e a l needs of the community but to the demand give n impetus by r e a l l o c a t i v e p o l i c i e s which i n f l u e n c e con-sumer c h o i c e . 6.3 THE IMPLICATIONS The long term r e s u l t i s more f a r r e a c h i n g than Rose.imagined. Not o n l y do the p r e f e r e n t i a l p o l i c i e s serve to promote suburban expansion and i n so doing i n f l u e n c e the form of urban growth but a l s o the f l e x i b i l i t y of markets to adapt to changing demands i s undermined by s h i f t of c a p i t a l to the p r o v i s i o n of d w e l l i n g u n i t s f o r ownerhsip r a t h e r than r e n t a l . Where there i s no apparent need f o r d w e l l i n g u n i t s t o own r a t h e r than to r e n t except to meet the demands c r e a t e d by r e a l l o c a t i v e p o l i c i e s the r e t e n t i o n of such p o l i c i e s l i m i t s the f l e x i b i l i t y of the supply s e c t o r and c o u l d u l t i m a t e l y r e s u l t i n the death of the p r i v a t e r e n t a l housing i n d u s t r y . The o n l y a l t e r n a - ' t i v e t o ensure adequate r e n t a l housing i s massive p u b l i c housing. In view of c o n t i n u a l l y changing consumer t a s t e s and demographic c h a r a c t e r i s t i c s , any p o l i c y which tends to undermine the - 146 -f l e x i b i l i t y of existing markets seems foolhardy. In the context of the influence which the post war baby boom i s currently having on the housing market i t may be int e r e s t i n g to look ahead at the implications for the housing market twenty years from now. Coincidently as the war babies reach retirement age the current declining b i r t h rates w i l l probably r e s u l t i n a drop i n demand for single family homes. Fewer young . families than today w i l l be i n the market and the r e t i r i n g suburban dwellers w i l l l i k e l y prefer a smaller more convenient dwelling demanding less upkeep. Since the contemporary ranch s t y l e home i s p a r t i c u l a r l y i n f l e x i b l e for uses other than that for which i t was designed i t i s conceivable that todays single family home given impetus by current pro-home ownership p o l i c i e s w i l l be the white elephant of tomorrow. Recognizing the extent of conversions of the more c e n t r a l l y located dwellings b u i l t twenty and t h i r t y years ago which due to the simple centre h a l l design were e a s i l y convertible, i t i s conceivable that the preponderance of the contemporary suburban single family home may produce a housing stock at odds with the needs and preferences of the consumer of tomorrow and not rea d i l y convertible to meet that need. As has been recognized at the outset the f l e x i b i l i t y of the housing market i s limited by the d u r a b i l i t y , immobility, high cost and heterogeneity of the existing stock. However d i f -ferent forms of tenure and methods of financing have evolved - 147 -and t h r o u g h the phenomenon o f s u b s t i t u t a b i l i t y have added f l e x i b i l i t y t o a market w h i c h has s u c c e s s f u l l y produced 9 n e a r l y 50% o f toda y s s t o c k over a twenty y e a r p e r i o d . N o n e t h e l e s s , s h i f t s i n demand w i l l t a k e p l a c e due t o changes i n consumer p r e f e r e n c e s and t a s t e s and a t any time s h o r t term p r i c e f l u c t u a t i o n s can be e x p e c t e d i n o r d e r t o m a i n t a i n e q u a l i t y i n s u p p l y and demand and p r e s e r v e t h e p r i c e r a t i o n i n g p r o c e s s . A t t h e same time however t h o s e p r i c e s w i l l g i v e the a p p r o p r i a t e s t i m u l u s . t o the p r o d u c t i o n s e c t o r s . However when t h e s h i f t i n demand i s g i v e n impetus by r e a l l o c a t i v e p o l i c i e s and t h e p r e s s u r e s o f growth due t o i n - m i g r a t i o n and new h o u s e h o l d f o r m a t i o n add p r e s s u r e t o a p r o d u c t i o n s e c t o r w h i c h i s a l r e a d y w o r k i n g a t c a p a c i t y ; and when m u n i c i p a l i t i e s have a l r e a d y been burdened by t h e c o s t s o f e x t e n s i v e suburban growth t h e consequences a r e r e a d i l y a p p a r e n t ; 1) P r i c e s o f houses f o r s a l e w i l l s k y r o c k e t . 2) The p r o d u c t i o n o f new r e n t a l u n i t s w i l l a l l b u t ce a s e . Even though i n - m i g r a t i o n and new h o u s e h o l d f o r m a t i o n w i l l t a k e up t h e s l a c k i n the r e n t a l s e c t o r i t i s u n l i k e l y t h a t p r i c e s even i n an u n c o n s t r a i n e d market would r e a c h a p o i n t where i t was p r e f e r a b l e t o produce r e n t a l u n i t s r a t h e r t h a n u n i t s f o r s a l e . 3) E x p e c t a t i o n s g e n e r a t e d by t h e p r i c e movements i n t h e ownership s e c t o r w i l l a c t as f u r t h e r impetus t o t h e consumer t o s t o p r e n t i n g and t o buy. 4) M u n i c i p a l i t i e s w i l l a t t e m pt t o r e s t r i c t suburban development o r e l s e ensure t h a t t a x e s lower t h e c o s t s of r a p i d suburban e x p a n s i o n . 5) U l t i m a t e l y t h e a d a p t i b i l i t y and e f f i c i e n c y o f b o t h t h e r e n t a l market and t h e ownership market i n meeting t h e needs and demands o f t h e community w i l l be h i n d e r e d . - 1 4 8 -The only way to prevent t h i s kind of r e s u l t i n the housing submarkets i s to ensure that a l l p o l i c i e s used by housing authorities preserve the choice of the i n d i v i d u a l as to tenure, location, building type and so on. In other words housing subsidies should not be commodity s p e c i f i c . In fac t the r e a l implication i s that i f people cannot afford the type of dwelling that society would l i k e to see them occupy then there i s a problem not with the housing market but with the d i s t r i b u t i o n of income. The negative impact of p o l i c i e s which undertake to r e d i s t r i b u t e income while i n fac t r e a l l o c a t i n g consumer expenditures i s clear. If the housing market i s to maintain maximum f l e x i b i l i t y p o l i c y must not influence the choice of the consumer; subsidies and taxes must not be tenure s p e c i f i c and i n fac t must not be s p e c i f i c to any goods unless they account for e x t e r n a l i t i e s of production or consumption of the p a r t i c u l a r good i n question. While i t may be argued that the d i r e c t r e d i s t r i b u t i o n of income through welfare schemes or the progressive income tax and negative income tax i s not p o l i t i c a l l y f e a s i b l e i t appears that to preserve an ef f e c t i v e private r e s i d e n t i a l r e n t a l industry some move must be made to eliminate the extensive program of r e a l l o c a t i v e measures which now ex i s t s . - 149 -FOOTNOTES 1. T h i s p a p e r , C h a p t e r I I I ( S e c t i o n 3.5) 2. A l b e r t Rose, " E s s e n t i a l Elements o f a Canadian H o u s i n g P o l i c y " , i n M. Wheeler, ( e d . ) , The R i g h t t o H o u s i n g , ( M o n t r e a l : H a r v e s t House, 1969), pp. 67-68. 3. T h i s p a p e r , C h a p t e r IV ( S e c t i o n s 4.31, 4.32 and 4.33). 4. T h i s p a p e r , C h a p t e r IV ( S e c t i o n 4.33) 5. T h i s p a p er, C h a p t e r IV ( S e c t i o n 4.34) 6. A l b e r t Rose, "Housing P o l i c y i n Canada: 1940-196 8" i n M. Wheeler, ( e d . ) . The R i g h t t o H o u s i n g , p. 86. 7. T h i s p a p e r , C h a p t e r I I ( S e c t i o n 2.42) 8. T h i s p a p e r , C h a p t e r IV ( S e c t i o n s 4.31 and 4.32). 9. M i c h a e l Dennis and Susan F i s h , Programs i n S e a r c h o f a  P o l i c y : Low Income H o u s i n g i n Canada, ( T o r o n t o : H a k k e r t , 1972), pp. 77-78. - 150 -Bibliography Aaron, Henry. "Income Taxes and Housing." American Economic  Review, December 1970. . "A New View of Property Tax Incidence." American Ec- onomic Review (Papers and Proceedings). May, 1974. Ando, A. and Modigliani, F. "The 'Life-Cycle 1 Hypothesis of Sav-ing: Aggregate Implications and Tests." American Economic Review, Volume 53, Number 1 (March, 19 63) . Baxter, David. Speculation i n Land, Urban Land Economics Report No. 7. Vancouver: Faculty of Commerce and Business Administra-tio n , University of B r i t i s h Columbia, 1974. Berridge, J.D. 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