Would building more supply slow Edmonton's rising home prices?

As Edmonton prepares to enter a municipal election period where growing housing prices are expected to be a central issue, Taproot spoke to experts with Community Housing Canada and the Collins Lab for Urban Excellence at the University of Alberta to determine if municipal officials need to focus on increasing housing supply if they hope to help slow those increases.

"I would say we need to build more housing just to stand still, and that's because we're a rapidly growing city," said Damian Collins, professor of human geography at the university.

The economic principle that prices tend to increase when the supply of a good is constrained and the demand for it is increasing underpins the idea that building more homes could slow price growth. Edmonton certainly has a rising demand for housing — more than 100,000 people moved here between 2021 and 2023, and the municipal government projects 100,000 more will move to the city over the next three years. Housing prices are increasing, too. Rents are increasing faster in Edmonton than in any other large Canadian city — in September, the average rent increased by 12% to $1,600 per month. A Royal LePage report said the aggregate price for a home in Edmonton increased by 5.4%, to $456,300, in the third quarter of 2024 when compared with the same period in 2023. For comparison, the national average increase in the third quarter of 2024, compared to the year previous, was 1.6%.

Would building more supply in Edmonton slow the growth in these prices? Collins said it depends.

"The more detailed answer is, more supply is generally a good thing, but we need to build the right kinds of supply in the right kinds of places," Collins said.

New homes, especially infill homes, tend to be expensive, Katie MacDonald, an associate professor at Athabasca University and co-investigator on the Community Housing Canada research project, said. "In Alberta Avenue, where I live, one of the most affordable neighbourhoods to buy in right now, a house will be for sale for $300,000 and then an infill will be, like, $800,000, so it's really radically changing our neighbourhood quickly," she said. "This is the way that infill is done."

Even though new housing units can be eye-wateringly expensive, studies suggest that when these types of units are built, higher-income people will move into them and thereby free up wherever they were living to those with lower incomes.

A study in Finland, for example, used population-wide register data to see where people of different incomes moved around Helsinki, a city with roughly the same population as Edmonton, after new, more expensive units in the centre of the city were built. Researchers tracked movements to this new housing and to the housing that was thereby freed up (scored as rounds one and two, respectively) across six rounds to test whether lower-income renters actually did move into units that were left by people moving to newer, more expensive housing.

The study found that "new housing built in expensive areas of the city does indeed primarily house the better-off. However, the moving chains triggered by these new units reach middle- and low-income neighbourhoods."

By the fourth round, 50% of movers were ranked in the bottom half of Finland's national income distribution. "This is direct revealed-preference evidence that low-income individuals in the city area also benefit from new expensive housing, even when the new units are allocated to individuals higher up in the income distribution," the study said. Additionally, the study found that for every 100 new central market-rate units, about 31 units are "created" in the bottom half of neighbourhood income distribution through vacancies. A study conducted in the United States using a similar method found that 100 units of new market-rate units "create" between 45 and 70 units that people making below-median income can afford. This effect should be felt within two to five years, the study said.

Collins, though, said the private market will essentially never be able to provide housing for the lowest-income Edmontonians.

"The private, for-profit sector cannot build housing that is affordable for people on very low incomes, and nor do they really seek to do so," he said. "The lowest 20% of income earners in Edmonton — that's people who earn $38,000 a year or less for their household — there is essentially no way the market can provide housing that is affordable to people in that group, and it just doesn't."

Collins said the only way people in this group will reliably be able to find housing that costs 30% or less of their pre-tax income is if the non-market sector provides it. That sector is typically subsidized by different levels of government.

Collins said it's also important to consider constructing purpose-built rental housing for all income levels in neighbourhoods where people don't need to have an expensive and long commute. "We want them to be able to live in parts of the city where they can, with the money that's left over after they paid 30% of their income on rent, actually afford to flourish because they're not locked into a highly car dependent lifestyle."

MacDonald added there's also a need for larger units that can house families.

Collins said the city's regulatory environment encourages more housing supply. "In terms of getting the basics right to allow, let's say, the market to flourish, it's hard to imagine what more Edmonton could do," Collins said.

He pointed to the new zoning bylaw, which went into effect in January, as a change that made it easier to build denser housing by allowing up to eight residential units on any lot in the city, with higher density allowed in other areas.

In the first nine months of 2024, the city said housing starts have increased by more than 48% compared to the same period in 2023. Construction has started on more than 10,000 units so far this year, and the city said construction starts are on track to surpass the record of 13,300 starts set in 2015. More than two-thirds of permitted residential units are in denser housing forms like apartments, row houses, and secondary suites.

But housing starts don't tell the whole story, MacDonald said. There are low-end rentals in the private market, or housing that is not subsidized by government, that are naturally priced at about 30% of the income of someone earning within the bottom 20% of incomes across the city. The supply for these units is decreasing, MacDonald said, thanks to renovictions, new construction, and investors who "aren't really interested in providing housing, they're interested in profit."

MacDonald said the best way to address that lowest quintile is for governments and non-profits to partner to build non-market, subsidized housing. Taproot will explain how governments stopped building and maintaining subsidized housing in a future instalment of the Housing Complex series.