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Opinion: It’s no coincidence we have shortages in the most regulated sectors of our economy

Commentary

As the federal election campaign reaches its final stretch, it’s increasingly clear, based on a combination of public polling and how the party leaders have allocated their own time, resources, and attention, that housing, health care, and childcare all rank near the top of the public policy agenda

Although these three policy issues may seem quite different, they share one major commonality: they’re all cases of a persistent supply-demand gap that’s leading to shortages and in turn driving up prices or producing long wait lists.

This isn’t really supposed to happen in a market economy. Markets are supposed to act as signaling devices to transmit information between buyers and sellers in order to bring supply and demand into something approximating an equilibrium. Yet in these three policy areas — housing, health care, and childcare — the signaling device seems broken. We have more buyers than sellers and yet the market isn’t responding to increase supply to meet the demand. 

The impact can be measured in terms of supply shortages, inflated prices, or broader consequences for individuals and families. Take housing for instance. A 2021 report published by Scotiabank estimated that, based on population trends, there should have been 90,000 more homes built in Canada over the past 36 months.

Or consider childcare. A pre-pandemic study by Statistics Canada found that, while most families don’t have difficulties securing childcare, about 40 percent reported challenges related to access, affordability, or compatibility with work. That number has increased slightly in the context of COVID-19.

And, of course, health-care shortages have been top-of-mind over the past several months. Not only does Canada have a poor record on medical wait times generally, but it’s bound to get much worse as the pandemic has contributed to massive backlogs for surgical procedures and diagnostic testing in what’s been described as the “crisis behind the crisis.”

The magnitude of the supply shortages in these areas is the subject of debate (it can depend, for instance, on how one defines different types of supply) but generally there isn’t much contention that these supply-demand gaps exist or that they are manifesting themselves in ways that are harmful to the economic and social well-being of Canadians.

The real debate is what policymakers ought to do about them. At the root of the competing perspectives is differing interpretations about the source of the problem. Is it a market failure or a government failure?

A common view among policy experts and politicians is that the source of the problem is the market itself. The supply-demand disequilibrium, according to this point of view, is a result of market failure. The idea here is that the market is malfunctioning for various reasons and as a result not producing adequate supply to meet demand in housing, health care, or childcare. Governments must therefore step in and solve for the persistent supply shortages in these areas.

This is the underlying basis, for instance, for the Liberal Party’s national childcare proposal. Although politicians don’t necessarily speak in these basic economic terms, the premise of the Liberal plan is that the market won’t create enough so-called “high-quality” childcare spaces on its own and that the government must intervene with a combination of public subsidies and direct public provision to fill the gap.

The problem with this assumption is that it fails to reckon with the role that government policy has played in interfering with the market’s proper functioning in the first place. Take childcare. The economist Pierre Fortin, for instance, has described how after the introduction of $10 per day daycare in Quebec, spaces in non-subsidized care (which, together with non-centre based care, still make up the majority of spaces in the province) “understandably crumbled” as a result of the province’s intervention.

The Quebec daycare case is merely one example of a series of policies enacted by Canadian governments to intervene in the functioning of the housing, health care, and childcare markets in the name of equity, safety, and even aesthetics.

Canadians may be prepared to live with fewer rules and regulations on housing, health care, and childcare if it permits the market to function better.

It’s axiomatic that these policy choices, all of which may be well-intended and even justified in and of themselves, have had the cumulative effect of interfering with the market’s ability to properly function by short-circuiting the transmission of information between buyers and sellers.

In particular, policy interventions such as stringent land-use restrictions, strict licensing requirements for childcare, and prohibitions on the use of private clinics have both muted the signaling device and blocked those who can still faintly hear it from responding by building more homes or creating more childcare spaces or carrying out more surgeries.

These are, in other words, among the most regulated parts of our economy and society and it’s no coincidence that they share a persistent supply-demand gap.

Yet, even still, it’s important to emphasize that the underlying case for these government interventions isn’t inherently wrong just because they affect availability or prices. One can reasonably agree or disagree with the arguments for these various policy choices on their own merits.

These are complicated questions after all: Should we build more homes or have more greenspace? Should we require childcare providers to be licensed or not? Should we permit more private health-care delivery or limit it to the single-payer model?

But no matter how one answers these questions, it shouldn’t be arguable that these policy choices will doubtless have effects on the market’s functioning and in turn lead to more (or less) homes, more (or less) childcare spaces, and more (or less) health-care capacity.

Just because one’s choices may lead to less supply in any of these areas still isn’t in and of itself an argument against them. It may be quite reasonable to argue that a particular policy objective (including, for instance, limiting the ratio of staff to children in a childcare setting in the name of attention and safety) ought to be paramount relative to concerns about access and affordability.

That’s the nature of politics and government in a world of trade-offs: it necessarily places certain goals above other ones and uses the levers of public policy to tilt in favour of those overriding objectives.

In order to make these decisions in an evidence-based and rigorous manner, however, policymakers must understand the inherent trade-offs and how the public thinks about them. Yet so much of the campaign debates about housing, health care, and childcare seems to neglect these trade-offs.

This matters because many of those who argued for existing interventions now want another round of policy interventions to account for the costs imposed by the previous ones. The layering of interventions on top of interventions fails to grapple with the root causes of the problem. It reflects a weird myopia where people can’t seem to see the full consequences of their policy preferences.

What’s interesting though is that polling consistently shows that housing, health care, and childcare are major areas of concerns which tells us that Canadians can indeed see them and may no longer be satisfied with these inherent trade-offs. They may be prepared to live with fewer rules and regulations on housing, health care, and childcare if it permits the market to function better and in so doing improves access and affordability.

The political parties seem to have increasingly heard this message on the housing file. The Conservatives, in particular, have committed to tie federal transit funding to provinces and municipalities liberalizing their land-use rules in order to enable more housing builds.

This is a good step. It reflects a growing recognition that the best means to addressing the country’s housing affordability challenges isn’t to tinker with demand-side supports including new tax credits or mortgage rules. It’s to free up the market to build more homes.

But the parties have been much slower to come to a similar view on health care and childcare shortages. Instead policy activists and politicians continue to assert that there’s a market failure and that’s still somehow a trump card that precludes any constructive debate about the root causes of the ongoing supply shortages in these areas and what we ought to do about them. The sole answer is invariably more spending, more intervention, and more government.

Basically, the health care and childcare policy debates are about where the housing file was five-to-ten years ago. Perhaps that’s a cause for optimism. Maybe it’s a sign that dispassion and evidence can still ultimately prevail.

It’s also possible though that both sides are correct. It’s conceivable that even in a more permissive and pluralistic policy framework that over time we could find a remaining supply-demand gap that would necessitate the types of interventions (including greater state involvement in childcare) that some are calling for in this campaign. But it’s impossible to make this judgement now given that the panoply of pre-existing interventions is obscuring our ability to see how the market would function on its own devices.

This is all to say that in the remaining days of this campaign when policy experts and politicians assert that the government needs to intervene to correct a market failure, we shouldn’t merely accept their claims. Canadians ought to push them for evidence that the real problem is a case of the market malfunctioning and not the government short-circuiting the market’s signaling device.

The root cause of the problem is usually the latter. It certainly seems the case in housing, health care, and childcare. If only our political parties could see it.

Philip Deck: Foreign investment in the real estate market is an opportunity, not a threat

Commentary

As she announced a one percent vacant buyers’ tax as part of the spring budget, Finance Minister Chrystia Freeland remarked that “the idea here is that homes are for Canadians to live in. They are not assets for parking offshore money.”

It’s a familiar sentiment on the campaign trail. The Liberals, Conservatives and NDP all have some policy cracking down on foreign buyers and a recent poll commissioned by The Hub revealed it as one of the most popular proposals on the housing file.

But leaving aside the question of why the government should be telling owners of private property how they should be using it, Freeland’s comment reveals a belief that the supply of housing is largely fixed and we need to decide as a country how to allocate this scarce resource.

It’s also evidence that the government has noticed how big the housing sector has become and how attractive it is from a revenue standpoint, regardless of the unintended side effects.

Canadians have looked at housing the wrong way for a long time. While we have seen a perpetual lack of supply in both the rental and home ownership markets, we have always resorted to restrictions on demand to alleviate it. We have seen new construction starts regularly lagging immigration levels and then wonder why prices seem to spiral out of control. We use rent controls that lower the return on rental housing and discourage investment. We use lending rules that restrict mortgages and now we are increasingly imposing vacant home taxes and restrictions on home purchases by foreigners.

According to Statistics Canada, we now spend almost as much in real estate transfer costs — much of it tax — as we do on new construction.

But is housing scarce? Why would it be? Canada is a vast country with one of the lowest population densities in the world. Yes, much of that is cold and remote, but even in our urban areas we have ample opportunities to build more density. It’s scarce because we want it to be. It’s scarce because our municipal political system does virtually nothing other than get in the way of development. It’s scarce because people resist any kind of change to their local neighborhoods. It’s scarce because we won’t displace 12 tenants to build a new building that would house 100.

We have placed some of Canadas most historically important export industries under pressure. For whatever right or wrong reason, we seem determined to export less petroleum by restricting pipelines, imposing carbon taxes and discouraging demand. Apparently, we also want less mining to stop what seems like environmental degradation. And apparently, we don’t want to export automobiles or other manufactured goods with our uncompetitive and inflexible labour structures. But Canada has to sell something to someone to finance one of the highest standards of living in the world. We can’t just keep borrowing to fund our economy without any way to replace the exports that created the economy that we now enjoy.

Housing is Canada’s biggest asset, with more than 7.5 million single family homes valued at over $5 trillion, far exceeding the $2.5 trillion value of our publicly-traded companies. At that size it’s also one of our biggest sources of long-term job growth and our biggest export opportunity. And if we could start to think about it the right way it could meaningfully help us rebuild our fiscal balance.

Export opportunity? Well, what is an export? It’s selling something to a foreigner that produces income for the country exporting it. If we export a ton of iron to a foreigner it’s gone, along with any further income opportunity. But if we sell a house to a foreigner, we get to retain the long-term tax revenue, maintenance opportunity and the spending that will come as the new owner uses it. It’s the best kind of export, because the product we sell never goes away. Discouraging this kind of export is sheer lunacy, regardless of how much or even whether it’s used by the new owner. Canadians are free to buy a car and not use it, but not so with a house.

As incomes and living standards have increased, Canada has become increasingly uncompetitive in traditional exports and has become, increasingly, a bedroom community to the world. A place that has lots of housing and an economy focused on the building and maintenance of houses and the support of the residents that live in them, but a declining amount of traditional commodity and manufacturing exports. The jobs are in construction and maintenance of houses and light commercial buildings, along with the retail, restaurant and entertainment businesses that support them.

Low productivity in Canada has led to low foreign investment for more than the past decade. The largest target for foreign investment, the oil sands, has been hampered by policies imposed to limit its growth and ultimately shut it down. Investments in mining and forestry are limited, for some sensible reason, by environmental concerns. Real estate is one sector that should be open for business, but increasingly it seems that policy makers would like to shut it down too.

Many countries have started to capitalize on their real estate by offering tax incentives that will attract high-income immigrants or part-time residents to shore up their housing values and provide economic opportunities in home maintenance, retail and entertainment. In Canada we seem to want to keep the world away.

Canada needs to see the opportunity of its own real estate, encouraging foreign investment and the economic activity that comes with home construction, maintenance and the local business that support housing. We need to shift our focus from restricting demand to increasing supply. We need to see real estate as a long-term economic opportunity, not an artificially scarce resource.

All ways of increasing supply are not necessarily helpful. The worst way is the one proposed by all of the major parties; direct involvement by the federal government in home development. It’s hard to imagine a more expensive, slow or inefficient way to build housing. There is no shortage of high-quality real estate development capacity of Canada. The last thing we need is government-built housing and all of the additional federal debt that would come with it.

Focusing on affordable housing is another bad strategy. Any new house, regardless of price, increases aggregate supply and will put downward pressure on the price of existing homes. Demanding affordability just increases the cost of production and discourages private investment. We make housing more affordable by making more housing, and since the highest returns come from making more expensive housing, that is the kind that is easier for the private sector to produce.

Greenfield home construction is also not the answer, or at least not most of the answer. While we have vast amounts of land in Canada, the continued sprawl of single-family home developments puts huge pressure on infrastructure, eliminates green space, and adds to highway congestion. There is a massive opportunity to increase density on existing urban spaces and around existing transportation corridors.

Immigration patterns are also a challenge. Immigrants typically choose to stay in major centres where their diasporas can provide support and a familiar culture. Vancouver, Toronto and Montreal face the largest pressure on immigrant settlement. But over time, with increasing patterns of remote work and increasing integration of immigrants, smaller centres can become more compelling destinations if they can develop higher density cores linked with decent transportation hubs.

Restricting immigration is also not the answer. Canada needs the skills of new immigrants that fuel some of our highest growth sectors. And to help dig us out of the fiscal hole dug by the pandemic, we need the assets, the entrepreneurialism and the skills that the right kind of immigrants can bring. But we can’t bring more immigrants if they can’t find places to live.

How do you increase supply? By removing many of the restrictions that stand in the way. By allowing the re-development of major streets, by curtailing the NIMBYism that adds years to the redevelopment of existing low-density areas. By taking away some of the development levies that make new construction more expensive. By working to encourage development of construction skills that can alleviate labour shortages. By finally scaling back COVID income supports so that people will be encouraged to go back to work. And by eliminating the rhetoric that sees development and investment in real estate as a threat rather than an opportunity.