By Ted McIntyre
It can be the costliest component of new construction, but what are the answers?
The dream of homeownership continues to die for many Ontarians, according to a new survey conducted by Abacus Data on behalf of the Ontario Real Estate Association (OREA). Entitled Housing Affordability in Ontario: Perceptions, Impacts, and Solutions (Wave 5), the survey, released in January, found that “despite a steady desire to own a home (71%), lower interest rates and cooling inflation, homeownership continues to be perceived as expensive, unaffordable and overpriced.” A quarter of aspiring homeowners have given up believing they will ever own a home, while another quarter are pessimistic about the possibility.
Soaring development charges and taxes on new-home sales have been primary concerns, although there is talk of reformation on those fronts. The looming impact of American tariffs could further increase the cost of new homes, but at least they’d be theoretically temporary.
The one constant, however—and it’s a more complex problem—is the price of land. Consider the city of Vaughan. In 2010, developers were paying, on average, approximately $400,000 to $500,000 per acre for land zoned for residential development. By 2019, the price had risen to over $2 million per acre. And there are situations where that cost is dearer still. “There are recent transactions that go well beyond the $2.5 million-an-acre range for lands with specific zoning that allows for higher density, particularly around major transit areas,” notes FarSight Homes partner Bob Schickedanz. “The higher values of some of these lands are also the result of major changes in provincial planning policy that make it easier to obtain approvals for higher-density projects, which takes some risk out of the project—hence why builders/developers are willing to pay more for that land asset.”
One hundred kilometres southwest in the Kitchener-Waterloo region, a similar story has played out. “As bad as development charges are, land is still a bigger expense per unit where we’re building,” says Rick Martins, V.P. of Kitchener-based Huron Creek Developments. “Twenty-five years ago, raw developable land in our region was $50,000 to $100,000 per acre. Today, it’s $900,000 to $1 million per acre.”
How do many builders and developers cope with these inordinately high land costs? “They pay more than they are comfortable with, knowing that if they don’t, they won’t have a home-building business in a few years since they’ll have no land to build on,” says Mike Memme, OHBA chair and the operations manager at Mountainview Homes in Thorold. But it’s a high-stakes game, paying interest on that land while “waiting for the market to improve to the point where you can move product without being upside down,” notes Memme, who cites serviced land as composing an average of 25-30% of the price of a new low-rise home in his region. “If you line up financing, invest millions in roads and sewers, go to market and only sell 10% of the product in the first year, you risk losing everything. Right now, our company has land purchased and construction drawings done for three mid-rise condos, but we’re not going to market because no one can afford what we’ll have to charge for those units. If we go to market and don’t get the 70% sales required to satisfy the bank, they won’t release funds. And without the bank, you’re not a builder.”
Releasing more developable land into the Southern Ontario greenbelt, where demand is highest, would certainly help alleviate the problem, suggests Martins. “We live in the largest country in North America, yet we restrict the land we can build on as if we have precious little of it. Since the Places to Grow Act (2005), we’ve seen a rapid restriction on new greenfield-, white- and grey-belt land to incentivize intensification. But we’ve still seen a housing shortfall of more than 500,000 homes. When will these restrictive policies be removed? When will practical land-use planning be implemented? In Florida, a builder can pick up a serviced-ready duplex lot for $35,000. That same lot costs $500,000 in Ontario! We have both supply and tax issues that must be changed.”
Consolidation
Memme is a passionate proponent of the provincial government releasing more land for development and says the restriction hurts the housing industry on multiple fronts. “We used to have a large cross-section of builders and developers in Niagara, but with land being artificially restricted, everyone from everywhere is jumping on anything they can find at any price,” he notes. “The next generation of houses in Niagara will be built on land now owned by out-of-region developers. Restricting the land supply has forced consolidation of the development industry into the hands of those with the deepest pockets. The craftsmen are getting squeezed out by Bay Street.”
It’s a trend Cavanagh Communities Senior V.P. Pierre Dufresne has seen growing for some time. “Larger land development companies are not only the only ones that can afford large-acreage land purchases, but they also often pay a price the rest of us cannot make any financial sense of, further driving up land costs,” Dufresne says. “They also do not offer retail lots to other homebuilders. That means many smaller builders don’t get opportunities for lot purchases and either become renovators, go into other businesses or retire.”
Colliers Canada Executive V.P. Steve Keyzer, however, believes there is room to grow but that market conditions are currently to blame. “There’s more than enough land within the urban boundary and zoned downtown high-rise sites to fill the housing gap. But right now, it’s a matter of numbers,” says Keyzer, who represents vendors of urban and rural development land throughout the Greater Golden Horseshoe Area but has conducted deals as far north as Kapuskasing, where his firm sold roughly 200,000 acres, and as far south St. Catharines. “Land is pretty inelastic in terms of its reaction to the market. It takes years to find equilibrium. And that’s where we are right now. The market is currently mostly void of large transactions. They’re smaller deals—add-on pieces, land assemblies, receiverships. We’ve had some transactions on the brink that were in the $100-$250 million range, only to see purchasers or vendors decide not to go ahead with it based on one or two variables that wouldn’t have been as consequential in the past. The due diligence period has much more scrutiny now, and underwriting and financing are a lot harder because those buckets of debt and equity that were available for land have dried up significantly. So there’s more vendor financing in today’s market, or large builders with those Schedule-A relationships who can still get debt.
“Devoid of government initiatives, there’s currently minimal to no profit for builders, which is why there’s no building,” Keyzer adds. “This could go on for another 12 to 18 months—some think longer, but I’m optimistic. Government initiatives will deliver housing faster than waiting for landowners to discount land. Land has a floor where other uses are more profitable—especially in a dense urban setting. Landowners will discount land only if they need to—if they have a lot of debt or it’s a receivership. They’ll come to where the market demand is. But transactions aren’t prevalent enough yet for a full market reset. Until then, many developers will invest outside of real estate, putting their money in more attractive asset classes.”
Getting the Forecast Wrong
Politics and policy are to blame for the predicament as much as anything, suggests Dufresne. “Lands have become overly expensive, but those who make corporate decisions that drive up the price are only doing so due to the policy choices our municipal decision-makers encumber the industry and the home-buying community with. It’s no secret that many municipalities adopt growth management strategies and official plans that actually constrain land supply rather than providing sufficient opportunity for Ontario’s growing population. Despite the Province’s initiative to build 1.5 million homes in 10 years, compliance by local governments is based upon political decisions by council that are responsive to existing community resistance and advocacy efforts. Ministry of Finance population projections are not being adopted, and unmodelled and unrealistic intensification targets are often used to justify limited settlement boundary expansions. This has led to a depleted land supply for builders to pursue opportunities, as well as land pricing inflating to unaffordable levels.”
You’ll get few arguments from Malone Given Parsons principal Matthew Cory, whose firm specializes in land use and development planning, urban design, growth management strategies and land economics. Cory cited government policy as a key culprit in the housing crisis during his sobering presentation at OHBA’s Central Ontario Housing Summit in late January. The problem isn’t merely that we have emerged from the 2006 Growth Plan for the Greater Golden Horseshoe with a shortfall of all housing types or that forecasts project a shortage of an additional 100,000 units over the next 20 to 30 years—it’s that we’ve been building the wrong mix of housing all along. In virtually everywhere but Toronto, Cory indicated that the province has a vast oversupply of high-density land but an alarming undersupply of low- and medium-density land.
Urbanation’s 2024 Condominium Market Survey bears that out, noting just 4,590 condo sales in the GTHA last year, a decline for the third straight year. This marked a 64% drop from 2023 and a 78% decline from the 10-year average. While the high-density market is expected to turn around eventually, Cory cautions that it won’t absorb all the market glut if we continue down the same growth plan route.
“To support the 2006 Growth Plan, the Province had Hemson Consulting, who I think does very good work, provide background forecasts for what was needed to house the coming population. The regions then had to implement the Growth Plan, including the policies for intensification. The Hemson forecasting didn’t account for or adjust anything relative to what policy requirements would be in the Growth Plan itself. So the Province did the background forecasting first, then issued a Growth Plan requiring municipalities to hit 50% intensification. And then when they run their numbers, in order to meet the Growth Plan targets you have to change the unit mix from what was originally forecasted. That’s the problem—in order to accommodate the intensification, it forced you to warp the unit mix into too high levels of apartment growth. So now you’re providing many more apartments than forecasted, and there’s a real question about whether they’ll even be needed. The problem is further compounded by committing infrastructure dollars to that. It’s not realistic, and it’s a very financially risky and costly way of doing development because you’re reserving all kinds of infrastructure and allocations that could otherwise be used to develop other lands better suited to demographic demand—all because you’re holding out for this forecasted intensification. So we ended up with a systematized unrealistic housing mix forced by the Growth Plan.”
Halton exemplifies the resulting housing mismatch in municipalities across the province. Of the region’s 17,800-unit shortfall after the Growth Plan, 12,600 were low-density, 4,600 were medium-density, and just 600 were high-density. The projections moving forward (2021-2051), assuming the current path, indicate a continued divergence in that path, with an estimated shortfall of 45,900 low-density units but a surplus of 47,400 high-density units.
The numbers are repeated across the GTHA, where the overall projected shortfall of grade-related housing is 206,800 units by 2051, with a surplus of 326,800 high-density units. “But in fairness to Halton and the other regions, they were required to hit the targets of the Growth Plan,” Cory explains. “They had to plan for 50% of all the new residential units to be through intensification. Most of that would need to take the form of apartments and condos. Around 50% or more of all the GTHA housing for the next 30 years is planned to be apartments and condos, whereas the forecasted need is closer to 30%. So we have an opportunity, now that the Growth Plan is gone and a new provincial planning statement is in effect, to revisit those assumptions. Otherwise, we will knowingly make it worse and risk people not coming here at all, with people and businesses moving out of the GTHA.”
Keys to Victory
If things are to improve, a little planning assistance would be appreciated. “In searching for development land, the primary consideration, particularly with today’s enormous restrictions and red tape, is planning status,” says Schickedanz. “Are the lands in the settlement boundary? Are they zoned? Do they require a secondary plan? Do they have upper-tier and or lower-tier planning status? These and other metrics are important.
“But just as important, and often overlooked, is whether infrastructure is available,” Schickedanz continues. “You can’t build the house if you can’t flush the toilet. While this is getting broader attention lately, critical investment in expanding and maintaining municipal infrastructure, particularly sewer and water, has been dwindling for decades—to the point where in the vast majority of Ontario communities, there is minimal capacity of systems to support the 1.5 million homes we need to build. This is a difficult problem to overcome, one that requires vast sums of money, which is reflected in the enormous development charge rates and years of lead time for the required environmental assessments, engineering designs and construction timelines. Just look at the Eglinton Crosstown LRT in Toronto! So when I conduct due diligence in purchasing candidate development lands, regardless of the planning status, if there isn’t a reasonable solution (time and money) to resolve how the land will be serviced, I’m not interested unless there is a very steep discount in the purchase price—which is not happening, hence the problem.”
“There are three things that can happen quickly to help release land for development,” Cory says. “The first—and easiest, since it doesn’t cost a thing—is to release infrastructure capacity currently reserved for unrealistic intensification so that these lands can be developed with more low- and mid-rise housing. One of the challenges is that about half of the greenfield areas that were introduced in the past are still vacant and waiting to be developed. A lot of them are held up by the lack of infrastructure.
“The second thing is triage—to prioritize infrastructure investments on lands already slated for development,” Cory continues. “And third, additional lands are required to accommodate as many forecasted grade-related housing units as needed for the 2051 horizon. If we are to stem the anticipated housing crisis, those lands must be brought on now, with long-term planning and infrastructure requirements assessed. So we’re talking about near, mid-term and long-term housing supply solutions.”
As to the latter initiative, if the gates to developable land are to swing open, it might be in the hands of the next generation, suggests Memme. “Our children have been decimated so completely that they’ll open the land up without question,” he predicts. “It’s just going to take another 15 to 20 years before they’ll be the ones calling the shots.”
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