Could more big cities in Canada help ease runaway home prices?

When it comes to addressing housing affordability and supply issues, Canada should consider creating more big cities, according to a new study.

This should be performed beyond simply growing the existing major urban centres of Toronto, Montreal, and Vancouver, as well as Calgary, Edmonton, Winnipeg, and Ottawa.

Canadian housing affordability supply issues were previously primarily isolated to the Greater Toronto and Metro Vancouver regions, but more recently, especially since the pandemic, this has become a nationwide issue — further exacerbated by high immigration numbers.

According to the study by the CD Howe Institute, new strategies need to be put in play to create more new big cities, while also growing Canada’s existing big and secondary cities. Such a strategy should also include growing existing secondary cities, with the study specifically noting Kamloops and the Kitchener/Waterloo region as examples.

Kitchener-Waterloo’s growth into a larger city could be significantly boosted by the project to transform the GO Train commuter rail line between Kitchener-Waterloo and downtown Toronto, making this secondary city more attractive for residents and businesses alike.

When complete, GO Train’s upgraded Kitchener Line will provide all-day, two-way service with frequencies of every 15 minutes throughout the day and greatly enhanced travel speeds and reliability.

The upgraded Kitchener Line forms just one part of the overall GO Train modernization project in Southern Ontario.

It should also be noted that the federal government is also considering constructing a high-speed rail line along the Quebec City-Windsor corridor, linking Toronto, Montreal, Ottawa, and secondary cities in between.

However, to scale up smaller secondary cities so that they are better able to compete with larger cities, some subsidies for new and improved infrastructure are required.

“Subsidies aimed at favouring the emergence of new big cities will need to come from higher levels of government. Since agglomeration externalities often only arise if cities grow to a certain size, such subsidies should not be spread out thinly across the entire country,” reads the study.

“If they are spread out across too many cities, no individual city will become large enough to rival our big cities, and affordability will not improve. Infrastructure subsidies aimed at city growth must therefore be designed in such a way to allow a few new major cities to emerge. This is different from a blanket policy of regional development. It is a policy that recognizes the value of agglomeration and supports the smaller cities best placed to become our new big cities.”

Policies that only focus on increasing housing supply in large cities could have unintended negative consequences, with migration from small cities to large cities decreasing housing affordability overall.

Strategies that increase gross domestic product (GDP) and productivity by moving more people to higher-wage big cities could paradoxically decrease overall welfare, according to the study. Higher housing costs inflate GDP without improving housing affordability or the welfare of non-landowners. While landowners may benefit, the primary goal of improving affordability remains unachieved.

Essentially, the attractiveness of different cities to newcomers should be equalized, including the growth potential of these existing secondary cities.

“Even if the goal is to increase affordability mainly in large cities, for this to happen, it is essential that the attractiveness of smaller cities increase as well. In other words, we need policies that also increase the attractiveness of cities that are below the threshold at which housing costs start dominating agglomeration gains,” asserts the study.

“Focusing exclusively on increased housing supply in our major cities is unlikely to improve affordability in those big metropolitan areas. Instead, this will likely contribute to greater population in our major cities and increasing or constant house prices.”

“Such a policy may be beneficial to existing landowners in these cities, and it may even increase GDP due to agglomeration effects, but it is unlikely to decrease the cost of housing and make life more affordable for people and families not yet vested in major cities.”

Although the study does not mention it, countries like Japan, China, India, Thailand, Malaysia, and Indonesia have implemented strategies to create new big cities or grow secondary cities to better distribute population and economic growth during periods of significant national development.