Chapter 2 (Up, up Supply)

New housing supply outstripping demand

Extra, Extra! The Canada Mortgage and Housing Corporation announced that new housing construction has cooled down the market in British Columbia. There is enough supply of houses to supply the large demand. They predicted that 36,900 new housing would start in B.C. this year and diminish off to 35,300 in 2007. Currently, there are a large number of projects launched in Richmond and New Westminster. These projects need time for the market to absorb. Overall, this allows prices and sales to slow down which is good thing for the market. Economists state that the main factors that reduce housing are the combination of rising prices and moderately higher interest rates. This factor is going to slow the demand and have a huge impact on monthly mortgage payments. Presently, in the housing market supply has outpaced demand in some areas of Greater Vancouver.

In the last few years, the housing prices in Vancouver increased immeasurably. A number of factors combined to increase the supply for houses are prices, production costs, and psychology of owner. Due to the increased prices of housing along with a high demand, suppliers are able to receive a profit for their product. The higher the price, the more the supplier will offer the product onto the market and hence there is an increased in construction of residential areas. They suggest that in the future, cost will increase so the supply of new housing diminishes too. Demand for workers and materials for housing will be increased due to higher cost because the only way suppliers are willing to supply the new housing after granting a wage increase is if higher prices for the product is received. The quantity supplied of housing to the market increases when the price of housing is also higher. The additional costs of supplying more housing in Vancouver is beyond the certain level of output. People have other choices such as living in the suburbs or alternatives such as apartments and condos. These substitutes allow them to have more choices which constantly changes the supply side of the market. The supply of a product to the market will change over time because changes in the factors that influence that supply. For example, renting houses in Vancouver have been very popular due to the higher prices. Now the housing bubble might burst due to the upward-sloping supply curve because of the change in quantity supplied in response to the change in the price of housing. Housing is shifting on its elasticity curve in the Greater Vancouver market. Housing is frequently categorized as elastic because it is expensive and has multiple substitutes like trailers, apartments, etc. Time is influencing the elasticity of housing. The market is at current equilibrium where there is large supply and demand on the market. The total revenue of housing is increasing meaning majority of the housing investments are cash cows. Over time, housing is a reliable market to invest in. It is unlikely that market prices will decrease and hence it will continue to constantly increase. There is still a large demand because the time to invest in housing is profitable. The resulting concept is that time does make all products even more elastic.

When Canadian economic conditions are booming, it can also create the perfect breeding ground for speculative price bubbles to form in BC expanding housing market. There is a sense the air is leaking out of what had become an over inflated market even though in the bubble scenario, prices keep climbing at the same rate as supply of housing grows. High costs have not restricted housing construction. In the new supply of houses created, there is the increasing supply that will have a downward effect on the price. The market needs just a little bit of time to recharge before the next introduction of supply. So the air of the housing bubble must be released from the earlier tight market.