Supply not meeting demand in Merritt home market

·7 min read

It is no secret that housing in BC has become increasingly unaffordable. According to the Canadian Real Estate Association, British Columbia is the most expensive province as far as average house prices go, with Vancouver being the most expensive city in Canada.

The CD Howe Institute, a non-profit policy research organization, recently released a report which highlights several issues driving the high cost of housing within the province. They cited an increased demand without an increased supply, but also found that restrictive regulation was responsible for the bulk of excess cost in housing.

Ideally, in a well-functioning housing market, the price of a home would be close to that of the cost to construct; this cost would include labour, materials, and the time it takes to build.

“In any competitive market without barriers to entry, regardless of the product being sold, the overall market price should equal its marginal cost of production,” states the report.

“If prices persistently exceed this construction cost, it is often due to barriers that inhibit new construction. These barriers often stem from excessive regulation.”

The CD Howe Institute delved into the exact cost of this excessive regulation in greater detail, finding that homebuyers were on the hook for more than half a million dollars as a result of housing restrictions in the city of Vancouver.

“…homebuyers in the eight most restrictive cities paid an extra $229,000 per new house between 2017 and 2016,” reads the report.

“In Vancouver, the cost of housing restrictions is by far the largest in Canada, at $600,000 for the average new house.”

That number is now estimated to be closer to $644,000. When you consider that the average house in Vancouver costs $1,092,000, that amounts to more than half of the sale price.

Not only do these restrictions affect the cost of new construction, they also, in turn, affect the cost of existing homes. Further studies have indicated that the regulatory burden in Vancouver is nearly equivalent to those of Manhattan, New York.

For a time, municipalities outside of Vancouver were not drastically affected by the increased cost of housing in the city itself, but that has changed in recent years as the rest of the province suffers the shockwaves of exorbitant housing costs in the Lower Mainland.

Kelowna is now another of the province’s most expensive cities, with the report turning up similarities between added cost there and in Vancouver.

Restriction cost per square foot in Kelowna is $120, in Vancouver it is $322.

Restriction cost as a percentage of cost in Kelowna is 27%, in Vancouver it is 50%.

The average new, single-family house price in Kelowna is $775,000, in Vancouver it is $1,298,000.

Increase in cost per new house in Kelowna is $207,000, in Vancouver it is $644,000.

Merritt, a town of just over 7,000 people, is located between the highly desired real estate markets of the Lower Mainland and the Okanagan, with Vancouver three hours to the southwest and Kelowna one and a half hours to the southeast.

Housing prices in the community have skyrocketed in recent years, increasing in some cases by more than 200%.

As an example, a selection of three homes sold in Merritt in 2004:

House 1) $145,000

House 2) $45,500

House 3) $150,000

Those same houses were once again listed for sale in 2020:

House 1) $529,000

House 2) $189,900

House 3) $499,900

After adjusting for inflation using the Bank of Canada inflation calculator, the cost of these houses has risen by 279.86%, 320.16% and 255.65%, respectively.

Part of the reason for this increase in cost is due to the fact that Merritt has not added a significant number of new homes to its neighbourhoods in several years, limiting the supply as the demand continues to increase.

According to a Housing Needs Report by the City of Merritt, Merritt’s population grew 3% overall between 2006 and 2016, with a 9% growth projected from 2016 to 2025 (about 1% per year). Household totals grew nearly 10%, from 2,975 in 2006 to 3,260 by 2016. It is estimated that Merritt may possibly reach 3,840 households by 2025.

As such, development has become a hot topic in the community, with as many as four potential developments being proposed to the council, and construction of a new four-storey apartment building on Walters St. now well underway.

However, realtor Tony Luck, who serves on the Merritt City Council after moving to the Nicola Valley from Mission where he also served as a councillor, believes the regulatory burden placed on development is as much an issue in small towns like Merritt as it is in major cities.

“I think it’s relevant,” said Luck.

“What’s going on down there (Vancouver) cascades into all of the province. I think it’s important here. It’s an important piece that we need to address. Some of the problems like supply are huge. Government regulation is huge, what government does to create anything but affordability for housing, fees, taxes, land use, land use restrictions, all those kinds of things. That happens here as much as it does in the Lower Mainland, it’s a little more common in the Lower Mainland but there are some systemic things that have been set in place.”

Luck made reference to a Gyourko and Malloy report which indicated, “increasing the strictness of building regulations increases housing prices by limiting the growth in housing supply”, in some cases by as much as 22%.

This same report looked at housing markets in the US and Europe, and discovered this to be true across the board. It was determined that cities in England could cut housing costs by roughly 25% if the most restrictive region changed its policies to align with those of the least restrictive region. American cities with more regulations surrounding housing created a ‘bubble’ and had higher volatility in house prices.

“Government is the biggest impediment to affordability and accessibility of housing,” said Luck.

And Luck believes that is not just in the matter of overbearing regulation, but also a lack of available land due to the fact that 94% of BC is held by the province as Crown Land, with another 1% held federally.

“I think the thing that’s impeding housing affordability in Merritt is the same thing that’s impeding housing affordability all over the province,” said Luck.

“In 1955 when I was born, we had a million people in the province. At that time, those million people were fighting over less than 5% of the province to build homes on. If we jump ahead 65 years, the population of British Columbia now is over 5 million, so now 5 million people are competing for the same amount of property available for private ownership.”

“There are a lot of people who want to say supply has nothing to do with pricing, well that’s just absolute garbage,” Luck continued.

“If supply is low, demand is high, prices are up. It’s been proven so many times. So, in BC we have a land shortage for housing development. And in Merritt now, we have a land shortage to build affordable housing. Look at the issues we’re up against in Merritt. One, we have a lot of slope land, unstable land. And we have a huge floodplain in Merritt which eliminates a bunch of property, there are a couple of natural restrictions that are causing us to have only so much land. We are very limited with the amount of land here in Merritt available for housing.”

Despite predictions by CMHC, BC Assessment and some of the biggest banks and financial institutions, home prices have continued to increase, even during the COVID-19 pandemic.

This is a trend that Luck doesn’t believe will change unless there is a drastic overhaul of BC’s systems of housing regulation and restrictions. Merritt may be poised to benefit from a development boom, but for those looking to put a roof over their heads, the price tag of that boom may just be more than they can bear.

“We do a lot of things to restrict housing through fees, legislation and things like that,” concluded Luck.

“We’re not the only community dealing with this, we’re just seeing it now because people have recognized Merritt as a nice place to come to.”

Morgan Hampton, Local Journalism Initiative Reporter, Merritt Herald