Walking in the streets of Toronto you are bound to come across a sign for a redevelopment project to build a new condo complex. Often, these signs are scribbled with graffiti saying “stop building condos for the rich.” The sentiment is popular, especially among the left-wing NIMBYs who say that we just aren’t building the correct homes.
With interest rates so high, the cost of building for developers is exorbitant. So, many developers have to build high-quality condos if they want to turn a profit, which is why they are seemingly the only type of housing being built.
Left-wing NIMBYs will oppose new condo development because new market-rate housing is more expensive than the average price of already existing housing. In their view, new housing often comes with new restaurants, stores, and amenities that push rents even higher by attracting people with higher incomes. This drives gentrification by displacing people who have been already living close to construction.
While gentrification and displacement are definitely concerning issues, the narrative pushed forward by left-wing NIMBYs mistakes the causality of events that are leading to rising rents.
New luxury housing doesn’t raise prices, it lowers them
It’s not new housing developments that are attracting high-income people and raising rents—on the contrary, building more new market-rate housing is a necessary step if we want to solve the housing crisis.
The big mistake left-wing NIMBYs make is misunderstanding why the cost of housing has risen so much in recent years. The main reason housing costs have risen so much is that housing construction has not been able to keep up with the growing population, leaving a growing number of people to compete against each other for a limited amount of homes.
That’s why Canada’s housing crisis is most concentrated in the biggest urban areas. Toronto and Vancouver are the two biggest cities for new immigrants to stay when they settle in Canada as many of them want to be near family, friends, or a community of people from a similar background.
It is not just immigrants that big cities attract. They also are the targets of adults who work in the downtown cores as these areas have seen the largest amount of job growth in the country. In recent years, even the towns surrounding big cities have become destination points, mainly because housing is more affordable in the exurbs and workers are still able to commute into the city from Monday through Friday—a trend economist Mike Moffatt has described as “drive until you qualify”.
The influx of more people has led developers to build new condos to fill the growing demand and make the most profit. But to blame these new housing developments for raising housing costs is confusing the causality of events. As Noah Smith writes, believing that the development of new “luxury” condos causes high-income workers to move to a city, raise rents, and gentrify your neighbourhood is like believing that people opening umbrellas during a drizzle causes it to rain harder.
On the contrary, new luxury housing provides homes to new residents and takes the pressure off older buildings, leading to less competition and fewer bidding wars for condos and rental units.
There is a large body of academic literature that has found new housing construction lowers the cost of rent. For example, one literature review concluded that “from both theory and empirical evidence, adding new homes moderates price increases and therefore makes housing more affordable to low- and moderate-income families.”
Another study found that market-rate housing construction reduces rents for the low-income housing market specifically. Most importantly, because new housing lowers rents, it also reduces displacement. One study found that within 100 meters of new housing construction, rents fell by 2 percent, and “renters’ risk of being displaced to a lower-income neighborhood [fell] by 17 percent.”
House filtering isn’t trickle-down economics
Critics of new housing developments and government policies to build more new housing often claim that this is just trickle-down economics, creating housing that will be solely for the rich.
As someone who is adamantly opposed to 1980s-style conservatism imposed by Ronald Reagan and Margaret Thatcher, I am sympathetic to the concern. However, there is one crucial difference between the two. The notion that any type of tax cut would spur economic growth for everybody across the income spectrum has been found not to be true by many different studies, while house filtering has been backed again and again by economists.
Economists and housing policy experts have talked about “filtering” as a process that alleviates pressure from the housing market. When a new apartment comes on the market, people with higher incomes living in the same metropolitan area will move in from their old apartment looking to find a better place. That creates a vacancy in their old unit that will be filled by another person who doesn’t have as high an income. In turn, a third apartment will be vacated and then filled, creating a “moving chain” which can be understood as a process of “musical chairs” of people finding better housing options.
Moving chains have been found to help in a number of cities. One of the studies cited earlier found that in 12 of the largest American cities, 67 percent of people who moved into a new luxury apartment building came from another apartment in the same metropolitan area. Only 20 percent of those people moved from a neighbourhood with below-average incomes. Most importantly, the moving chain was more likely to reach lower-income neighbourhoods. As more and more people moved, by the sixth time someone moved 40 percent of movers were coming from neighbourhoods with below-average incomes.
Other studies have found similar results. A Finnish study found that “for each 100 new, centrally located market-rate units, roughly 60 units are created in the bottom half of neighborhood income distribution through vacancies,” the researchers write. Even more remarkable, 29 vacancies are created in neighbourhoods in the bottom quintile of the income distribution.
A 2020 study of the impact of new construction on rents in German cities yielded similar results.
It’s important to note that just because the government makes it easier to build new market-rate housing, it does not stop them from investing in more affordable social housing. As Steve Lafleur points out, the housing crisis is working on two different levels: the first being not enough market-rate housing and the second being a lack of social housing. We cannot solve one without solving the other, and that means building new luxury housing will help solve the housing crisis too.