High housing costs making it harder to move for jobs many are seeking

High housing costs burden Canadians in many ways. Here, we concentrate on how these costs discourage Canadians from moving to better places to live and to the cities where they would like to work. Improving affordability will hence boost the productivity of Canada's economy.

When choosing where to live and work, Canadians not only look at the wage increase they might get. They must be realistic about housing costs if they have to move to a new location. And they may give up on opportunities given by a new job that improves their skills and knowledge — and hence the productivity of the country — if they can't afford to cover the cost of housing after moving.

Similarly, employers must pay more to attract highly skilled workers to their locations to cover those workers' higher cost of living. This raises costs and lowers productivity.

Changes in housing affordability across the country lead to knock-on changes for other cities. For example, our modelling suggests that were Toronto to double its housing starts over the next decade to address its own affordability challenges — but without policy changes — its population would be 3% greater than currently projected. Others, mostly from the rest of Ontario, would be attracted there.

More generally, we find that a 1% increase in house prices in the destination city will make it less attractive and will lead to a decline in the number of people moving there of a little more than 1%. Cities need to understand the impacts of house prices across the country when planning for their own growth.

Population mobility has been declining across Canada

Household mobility across cities and regions has been declining in many countries. Figure 1 shows a similar pattern exists in Canada over the past few decades. This trend reflects many factors including population aging and technological changes, but housing costs have a role to play as well.

While many have linked the lack of affordability in Vancouver and Toronto to population growth, the data show that Calgary and Edmonton (with relatively better affordability) have experienced faster population growth over the past 2 decades (Figure 2).

The reason for this is that more housing supply keeps house prices under control relative to income, which in turn attracts people. Population growth can be accommodated if there is sufficient housing supply. In contrast, if there is insufficient housing supply then more people arriving in a city will lead to higher house prices limiting growth of the city. This has happened in Vancouver and Toronto.

Loss of affordability lowers population mobility and productivity growth

Our statistical analysis suggests that a 1% increase in the house prices in the destination city of where people would like to move will make it less attractive and will lead to a decline in the number of people moving there of a little more than 1%. This is in line with Organisation for Economic Co-operation and Development (OECD) research (PDF).

Canadians value their home for its size, suitability, quality and location. Households judge its location on amenities in the house's neighborhood, including how close it is to their place of work and where they spend their leisure hours. Canadians trade off these various attributes, perhaps choosing a smaller-sized home to be closer to work and reduce time spent commuting.

High housing costs make these trade-offs more difficult when looking for a job offering a higher wage or greater prospects for personal or professional growth. The better job may be in a different city or have a longer commute. So, workers may refuse to take up that offer if higher housing or commuting costs outweigh any wage increase.

This effect on mobility not only affects those in the workforce, it is critical for those trying to enter it. If a student came out of school in Toronto or Vancouver, they may be able to take a job there to learn new skills while continuing to live with their parents. But this is difficult for many who want to move from elsewhere in Canada.

The impacts of these decisions on where to live and work play out on a wider scale. Their broader effect is to curtail upskilling that in turns undermines growth in one of the key drivers of productivity growth, the skills and knowledge of Canadians.

In turn, decisions on where to live and work across the country affect who employers can hire. Even within a city, high housing costs coupled with a lack of transportation options limit mobility. With our major cities now so large and traffic so bad, Torontonians, as an example, may be reluctant to accept a job in the west end of Toronto when they live in the east end.

While some may welcome less growth in our cities to avoid noise and congestion, it also unfortunately undermines the long-term vibrancy of our leading cities. As well as being a rich store of arts and leisure, our major cities are the focus of excellence in innovation from high-tech software to life sciences and financial services. As such, they are an engine of productivity growth.

Cities that are homes to clusters of dynamic industries, such as San Francisco, based their growth on a rich and diversified pool of talent. Narrowing the pool of people available to work lowers a city's attractiveness for investment and curtails growth.

Cities are not just for those able to pay high prices for homes. To prosper, they require an extensive ecosystem of support services from transportation to retail, nurses and teachers. Cities should be building homes that support everyone. High housing costs that force people working in the service industry to move out undermine this whole ecosystem, imperiling economic benefits that this clustering brings about.

So, while high housing costs make it difficult to rent or buy a home and diverts spending from other goods and services that households want, high housing costs also discourage Canadians from moving to expensive cities. Our cities end up smaller than they could be. Smaller cities mean less innovation, skills and productivity growth.