The Unassuming Economist

From an IMF Blog by Michal Andrle, Cheng Hoon Lim and Troy Matheson:

“Policymakers across the world worry about affordable housing. They should. It represents the cost of a basic human need—shelter. Canada is no exception as it grapples to provide affordable housing in some cities, like Vancouver and Toronto, where rents are high, and for many, the dream of owning a home has faded.

People who can afford a down payment typically borrow as much as they can to get a foothold in the market—stretching themselves financially and contributing to Canada’s record-high levels of household debt.

So, how can governments help make housing affordable? Our latest staff report suggests boosting housing supply to meet demand.

Short-term fixes may not always work

Boosting Canada’s supply of affordable housing is no easy task. Countries like Canada, the Czech Republic, Sweden, and the United Kingdom that face problems with housing affordability in major cities have found that housing policies can quickly become politically contentious.

For this reason, policymakers often resort to short-term fixes to the problem. These include relaxing prudential regulations to enable households to borrow more (higher loan-to-income and loan-to-value ratios), increasing or introducing tax-deductibility of mortgage interest-rate costs, and subsidizing home purchases directly.

According to our research, we find that even well-meaning policies that aim to improve housing affordability by increasing households’ capacity to borrow may unintentionally raise house prices—ultimately resulting in homebuyers having to borrow more and leading to higher household debt.

Why? Because housing supply is fixed in the short term. So, any increase in households’ ability to borrow will increase demand for housing, increase house prices, and ultimately make houses less affordable than they otherwise would have been.

This is what we found when we compared the dynamics of house prices in eleven Canadian Census Metropolitan Areas with households’ ability to borrow—the so-called “attainable” house price.”

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