Yahoo Finance High cost of regulation makes housing in Canada unaffordable
Hardly anyone disagrees that housing prices and rents have been unaffordable in Canada for decades, but there’s agreement about why housing prices have moved out of step with incomes.
A recent report by think-tank C.D. Howe Institute analyzed housing prices and construction costs and concluded that excessive regulatory burden contributes to prices being much higher than the cost of producing new dwellings. The gap should not exist or be small in competitive markets with little or no undue regulatory burdens, but that’s not the case in Canada.
The report estimated that the price of single-family detached housing in Vancouver was $1.3 million more than the cost of producing the same house in a market without excessive regulatory barriers. In Toronto, the gap was $350,000. Stated differently, single-family detached housing prices in Vancouver were 60 per cent higher than the cost to build such homes.
“Any difference between the cost of (new housing) supply and the market price, especially over a decade’s worth of data, is likely due to persistent restrictions on access to new land,” Benjamin Dachis, the report’s author, said.
The lack of access to developable land slows the rate at which new housing is constructed, resulting in an imbalance between housing demand and supply.
Of Canada’s three tiers of government, the federal and some provincial governments have finally figured out that housing supplies have lagged demand over the past few decades. In particular, Canada Mortgage and Housing Corp. (CMHC) and the Ontario government have acknowledged that millions of more homes need to be built in addition to the units produced under business-as-usual scenarios.
This realization should have accelerated the rate of housing construction, but that is hardly the case. Current housing starts, a proxy for new housing construction, are at levels similar to when all tiers of government were in denial of the omnipresent supply deficit.
The essential missing leg in the housing supply tripod is the municipal governments that control access to developable land through land use planning. C.D. Howe said the excessive regulatory burdens imposed by municipal governments add hundreds of thousands of dollars to housing prices.
Its report suggests strategies to address the regulatory burdens choking the housing supply. C.D. Howe wants the provinces to set mandated minimum targets for municipalities to build new housing, a move already in place in Ontario. It further proposes a monitoring system that can reward or penalize municipalities for how they comply with the mandated construction targets.
The report also proposes to replace upfront development charges, which can run into hundreds of thousands of dollars per new dwelling unit, with user fees for some infrastructure services, such as water supply and sanitation. Another proposal is to change some per-unit development charges to land-value charges — for example, Ontario’s Community Benefit Charge — so that builders are not deterred from adding “additional units that are even marginally economical.”
Another proposal likely to cut the municipal red tape is to set province- or city-wide intensification targets. This will save effort, money and time spent obtaining municipal consent to build at densities higher than pre-zoned. Hence, if a city is required to permit an increase in density by 25 to 50 per cent, new construction projects that help a city meet its mandated intensification targets will avoid getting stuck in municipal planning bureaucracy.
Realizing housing supply shortfalls, CMHC last year estimated that an additional 3.5 million affordable housing units were needed in Canada to restore housing affordability. This is in addition to the 2.3 million dwellings that will likely be built if the current (inadequate) rate of construction continues. Canada will fall short of meeting these ambitious, but necessary targets if it continues the path it has followed over the past five decades.
Toronto's condo market shows signs of recovery, but can it last?
Trudeau's immigration policy worsening housing crisis: Rosenberg
To boost housing construction, Canada must address excessive regulatory burdens and other factors contributing to market dysfunctions. It is time to eliminate or, at the very least, substantially reduce the gap between average housing prices and the marginal cost of producing a new house.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.
