Measures to cool Canada's housing market and curb the rapid increase in house prices are working, but industry groups say housing will not get more affordable until governments find a way to help builders increase the supply of homes available.
"It is obvious that government action is having an impact on demand in the new home market," says David Wilkes, president and CEO of the Building Industry and Land Development Association in Toronto. "We have 115,000 new residents coming to the Greater Toronto Area every year and we need to be building 55,000 new homes annually to meet their housing needs. Government policy needs to recognize the need to increase housing supply as part of a long-term solution for our region."
In the next decade, pent-up demand from millennials will put much more stress on housing prices, says a recent study by The Centre for Urban Research & Land Development at Ryerson University, funded by the Ontario Real Estate Association.
"Those waiting for baby boomers to downsize may be holding their breath for some time," says the report. "Boomers are not expected to downsize in a meaningful way until mid-2040."
In addition to higher house prices, the shortage will force millennials to take on higher debt loads to get into the market, it says. More millennials will "abandon the urban core for the suburbs in search of affordable housing. This will lead to longer commutes and more traffic congestion." The report says the combination of high housing costs and reduced income prospects "could make it difficult for the region to retain this highly talented and educated workforce."
Benjamin Dachis, who along with Vincent Thivierge recently wrote a study about barriers to housing supply for the C.D. Howe Institute, says, "Recent policies -- such as taxes on foreign buyers or new federal mortgage rules -- have focused on curtailing the demand for housing, instead of taking meaningful steps to increase the supply."
Their study says that excessive government regulation pushed up the cost of new single-family homes by an average of $230,000 in the eight most restrictive cities between 2007 and 2016. In Vancouver, it increased the cost by $600,000 on average, which the authors say is by far the highest in Canada and among the largest internationally.
These "barriers to housing supply" include zoning rules, restrictions on developing agricultural land and development charges, the authors say.
"Our evidence shows that policies that restrict the supply of these kinds of houses are a major cause of their high price, much more so than low interest rates and household growth have been," they say. "Across Canada, the current owners of single-detached homes enjoy higher prices for their homes at the expense of people looking to buy homes, such as young and growing families, people looking to move to another part of Canada and new immigrants."
Dachis and Thivierge acknowledge that land-use regulations have some benefits, such as separating housing from industrial uses that so that residents have a cleaner environment for their neighbourhoods. And "land-use regulations such as greenbelts can maintain local amenities, including views of natural landscapes. These regulations generate social benefits that might be more important for certain localities than the costs of building regulations."
But they say research has generally shown that "the cost imposed by housing regulations in many cities largely outweighs the benefits provided by land-use regulation. Our analysis relates solely to the economic costs of supply restrictions. Policy-makers should weigh these costs against the benefits of building-restriction regulations before adding any additional regulations."
The restrictions now account for about half of the cost of housing in Vancouver and more than 20 per cent in Toronto. In those cities along with Kelowna, B.C., Abbotsford, B.C., Victoria, Regina, Calgary and Ottawa-Gatineau, the regulations pushed up prices by an average of $230,000, the study says.
Reducing zoning and approval barriers would go a long way to help create new housing, they say. The City of Toronto, for example, has not updated some of its zoning regulations since the 1950s, which means that most new development proposals must go through a long and expensive zoning review. Municipalities should also modernize their review and approval practices, says the report.
Cities like Toronto and Vancouver use the planning reviews to squeeze developers for more local amenities, such as providing more parkland or public art, in exchange for allowing zoning variances. Dachis and Thivierge say there may be an incentive for municipalities to keep their zoning bylaws out of date, to give them more leverage in negotiations with developers. But while the amenities increase the value of the housing, the developers simply pass this cost along to homebuyers.
"Development fees are politically popular because they are portrayed as money paid by profitable developers rather than by homeowners, who have little appetite for increased property taxes," says the report. The largest component of these charges is for water and wastewater construction, which accounts for more than half of the cost in some municipalities. The report authors argue that instead of development fees, it would be better to charge for these services based on end use, as electricity and natural gas is charged.
"When customers pay the full cost of using an asset on a life-cycle basis, they are making the choice of consuming the right amount of water every time they turn on the taps or flush the toilets. Water prices on end use are too low in many places, partly because of municipal reliance on capital financing from development charges." Eliminating these charges, say the authors, is one realistic way that house prices could be reduced.
