Why new homes help affordability

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A resident emailed me about my December 8 CBC interview on the 1050 Yates development. (By the way, that project exemplifies building in the right places – near transit stops and protected bike-and-roll infrastructure, and in walkable communities.)

The resident commented on how expensive rent is in this region, among a few other things. A key point they raised was my response to the question of who would be moving into that building. I had said it likely would be people who are relatively well-off (new buildings tend to be more expensive, and this one has a lot of great amenities). And I quickly mentioned that people moving into the new building would vacate more affordable suites, and those more affordable suites would then be available to others. 

The writer – correctly – noted that when those more affordable suites were vacated, the landlords would raise the rent. This is what happens, and rents for those more affordable suites are often raised a lot.

It’s important to delve into that a little more, as I noted in my reply email, below.

(Another point that the resident and I didn’t discuss was that newcomers to the area will rent or buy either new homes or existing homes. Building more new homes means that they are not competing as much for existing homes and preventing local residents from obtaining them or driving up the prices for them. For a longer explanation of this point, you can read about “Yuppie fish tanks.”)

 

From: Dave Thompson (Councillor)

Sent: Sunday, December 10, 2023 10:43 AM

To: ——————-

Subject: RE: CBC interview

Hello —————–,

Many thanks for writing. I’m sorry to hear about your challenges; I have heard from a lot of people are facing serious challenges in today’s housing market. People are being forced out of the city, and some are forced into homelessness. 21% of Victoria’s population are living in core housing need.

You make an interesting point about rent increases in suites that are vacated by renters who move into new suites, and I want to address that briefly.

First, we have to look at the context, which you also mentioned. Yes, when overall market rents rise quickly, they end up far higher than rents for equivalent suites that have been occupied for a long time and that are subject to rent control. This makes it difficult-to-impossible for many renters to move. And when someone does move and vacates a suite, most landlords increase the rent of that suite to the maximum that the market will bear.

Overall market rents rise quickly because the rental vacancy rate is low (around 1% right now), which allows landlords to increase rents because they can easily find tenants willing to pay the increased rent. A low vacancy rate benefits landlords. A high vacancy rate benefits tenants. A balanced one is in between, and would be around 4%.

The only way we are going to achieve a balanced 4% vacancy rate is to have a lot more rental suites.

The 1050 Yates building that I was commenting on will contribute 481 rental suites to the market. That’s a lot, but we need many times that number, and ongoing construction of new suites, in order to achieve and maintain a balanced 4% vacancy rate.

The alternative to building a lot more suites is to build very few suites or none, which would keep the vacancy rate low. That would be terrible for renters, so I am opposed to that. I am strongly in favour of building a lot more suites, and I am working actively to make that happen. My goal is a balanced 4% vacancy rate.

OK so much for context. The question I was answering on CBC was who would move into the new suites in the 1050 Yates building. New units tend to be more expensive than equivalent older ones, and 1050 Yates has a lot of amenities, so it would attract renters with relatively high incomes or wealth. These renters will come out of other homes – some people from out of town, some people from single detached homes (e.g. downsizing seniors), and some people from older and more affordable suites who are upgrading to the more high-end new suites.

The latter group is the one that we both were addressing – those upgrading to a more high-end new suite.

As you pointed out, when they vacate those older and more affordable suites, the landlords will increase the rents. Those rents will go up to whatever the market will bear for those vacated suites. Whatever that rent is, it will generally be lower than the rent in the high-end new suites.

So those older suites, which have a lower rent than the high-end new suites, will be available. Someone will move into them. This begins the same vacating-and-moving process, with some of the people who move into those vacated suites upgrading from more affordable suites. And so on.

This moving-chains process has been observed and reported on in cities around the world. If you’re interested in reading more about moving chains, here are a couple of research articles to start with:

Cristina Bratu, Oskari Harjunen, Tuukka Saarimaa, City-wide effects of new housing supply: Evidence from moving chains – ScienceDirect. Abstract: “We study the city-wide effects of new, centrally-located market-rate housing supply using geo-coded population-wide register data from the Helsinki Metropolitan Area. The supply of new market rate units triggers moving chains that quickly reach middle- and low-income neighborhoods and individuals. Thus, new market-rate construction loosens the housing market in middle- and low-income areas even in the short run. Market-rate supply is likely to improve affordability outside the sub-markets where new construction occurs and to benefit low-income people.”

Evan Mast, The effect of new market-rate housing construction on the low-income housing market – ScienceDirect. Abstract: “I illustrate how new market-rate construction loosens the market for lower-quality housing through a series of moves. First, I use address history data to identify 52,000 residents of new multifamily buildings in large cities, their previous address, the current residents of those addresses, and so on for six rounds. The sequence quickly reaches units in below-median income neighborhoods, which account for nearly 40 percent of the sixth round, and similar patterns appear for neighborhoods in the bottom quintile of income or percent white. Next, I use a simple simulation model to roughly quantify these migratory connections under a range of assumptions. Constructing a new market-rate building that houses 100 people ultimately leads 45 to 70 people to move out of below-median income neighborhoods, with most of the effect occurring within three years. These results suggest that the migration ripple effects of new housing will affect a wide spectrum of neighborhoods and loosen the low-income housing market.”

I didn’t have time to describe all these details during my CBC interview, but I just wanted you to know what I meant. So thank you for the opportunity to expand on it.

And many thanks again for being engaged in these issues and for writing me.

Best regards,

Dave Thompson

PS you mentioned rent control being tied to the unit. This is sometimes called “vacancy control” and municipal governments do not have the legal authority to institute it. It’s up to provincial governments.