By Ted McIntyre
What is the cost to society if the housing affordability crisis isn’t solved and how can we fix it?
To address the present and future housing crisis, the federal government looked to the past last month. Dusting off a WWII-era housing plan, the intent is to build tens of thousands of quality homes, including multi-unit properties, using standardized, code-compliant plans. Cookie-cutter designs? Yes, but their construction would provide the efficiencies that saw some homes—many of which remain—built in as little as 36 hours.
Last summer, Toronto City Council approved two-, three- and four-unit multiplexes across the city to help address the growing housing crisis. The B.C. government recently committed to densification measures of its own that it believes will reduce housing prices by 7-14% over five years from anticipated costs. To some, the measures seem radical, but we’re running out of options when it comes to affordability, and the ramifications if we fail to solve the housing crisis are serious.
Here’s a little context. According to the Bank of Canada, in 1985, the median Toronto family income was approximately $32,000, while the average home price was just below $109,000. That meant a residence cost 3.4 times the median family income. As of December 1, 2023, the median Toronto family income was about $94,217, with the average Toronto home going for $1,187,646, according to the National Bank of Canada. That means the ratio has leapt to 12.6-to-1. On a national level, the end of Q3 2023 marked the worst housing affordability numbers in 41 years and the second-lowest mark ever.
And don’t look for any short-term relief, cautioned a September report from Desjardins. Entitled, How Low Can Prices Go in T.O.?, the report concluded that “even in the direst of economic scenarios, we don’t see affordability returning to Canada’s largest city anytime soon.” The most likely scenario, the report suggests, is a mild recession, “with Toronto house prices bottoming out by the end of 2024 “at about 5% below July 2023 levels,” which “would still only result in a return to early-2021 levels.”
In the meantime, the cost of living is putting added pressure on homeowners and renters. In September, Equifax Canada noted a continuing uptick in fraud across automotive, credit card and mortgage sectors, spiking delinquencies by 86.9% in Ontario and 33.9% in B.C. year-over-year. In June, the numbers were sufficiently disturbing that the International Monetary Fund warned that Canada was now at the highest mortgage default risk among the world’s advanced economies.
SOCIETAL IMPLICATIONS
The view from 10,000 feet shows that the divide between homeowner and renter wealth is widening, leading toward a two-tiered society. While the concept that wealth breeds wealth is hardly revolutionary, a November report from Statistics Canada, Bank of Mom and Dad, highlighted the advantage of parental property ownership. The report noted that adult children born in the 1990s whose parents were homeowners were more than twice as likely to own a home than those whose parents were not homeowners. That advantage was highest in Ontario and B.C. “This may signal that in housing markets with higher property values, where higher incomes are necessary for ownership, parents’ property ownership or wealth plays a larger role in their adult children’s homeownership outcomes,” said the study.
TD Economics Managing Director Francis Fong was one of the authors of Digging Beneath the Surface: Is Housing Perpetuating a Wealth Divide in Canada? “One of the points we tried to tease out in that report was that throughout history, there was this pathway for a non-homeowner to keep up with the homeowner in terms of net wealth gains—if they saved diligently and were financially literate and invested assets. But now, the barrier a non-owner needs to climb to get into the housing market is much higher because rent takes up a much more significant proportion of disposable income, and housing prices have been more resilient than anticipated. And the gap now is worse than a year ago when we published the report!
“We are already seeing implications of what that wealth divide looks like in terms of declining civic engagement, declining faith in institutions, and feelings that our economic system isn’t working for the benefit of everyone,” Fong says. “There are many benefitting from the current system—wealth is actually building. But its distribution is creating a system where a lot of younger folks have been left behind and are finding it increasingly difficult to accumulate wealth and access homeownership.”
Housing affordability also plays a vital role in population growth. Shockingly, there were 20,000 fewer children under age 15 in the GTA in 2021 than in 2016, noted MacLean’s magazine in “The End of Homeownership.” And it’s not merely an exodus of young parents to more affordable outskirts. “One of the most widely cited studies on the relationship between homeownership and fertility comes from the U.S. National Bureau of Economic Research, which found in 2012 that a 10% increase in housing prices led to modestly higher birth rates—but only for homeowners, who enjoyed a bump in their net worth. Birth rates fell among renters. In 2011, 44% of Canadians 25 to 29 were homeowners; by 2021, that had declined to 36.5%. In B.C. and Ontario, our most expensive provinces, the data shows that people wait longer than elsewhere to have children.”
Apart from the economic burden of supporting an aging population, “pricing out the middle class in our cities is going to cause all kinds of other issues,” suggests Dr. Mike Moffatt, senior director at the Smart Prosperity Institute and an assistant professor at the Ivey Business School. “Look at San Francisco’s Bay Area as an example. We’ve seen an out-migration to places like Texas and elsewhere because of the combination of housing demand due to the tech sector and some restrictive rules on building more supply. We’re seeing some of that in the GTA—increasing migration out of Ontario as young workers move to places like Alberta or New Brunswick in search of housing that they can afford. The rich stay where they are because they can afford to, and the lowest-income folks usually have to stay because they don’t have the means to move elsewhere. The middle class tends to be the most mobile. But when they move, you lose all the nurses and personal support workers you need to make a community work. You’re seeing Bay Area schools offering workforce housing where if you become a teacher, you’ll have a home as part of your job, so long as you remain in that job. Their inability to staff middle-class jobs should be a warning sign for us.
“And you also see an increase in crime due to a lack of affordability—people do what they need to do to get by,” Moffatt says. “That’s not to stigmatize anyone; this is what happens when cities are only affordable to the top 5%. You see a loss of social cohesion.”
THE FIXES
But there’s also a need for the right kind of housing to address the looming demand. “There have been 83 purpose-built rental projects totalling 20,288 units built in the past 20 years in Toronto, according to research firm Urbanation. This compares to 968 condominium projects totalling 234,535 units built over the same period,” the Toronto Star reported last month. Just as problematic, investors now own more than 50% of Toronto’s new condos, including 80% of the pre-construction sales—”and experts say they’re driving up housing prices.”
That level of control is dangerous, as panicking investors can crash a market by unloading large numbers of residences, whereas most homeowners would typically cling to that asset during a downturn. Measures to penalize or discourage investment ownership, such as higher taxes on investment income, would lessen that vulnerability.
“On new leases, we’re seeing rents are up about 32% across Canada in the last 30 months,” Moffatt says. “Some of that is as a Covid rebound, but a lot of it is this high level of demand from population growth. The government needs to bring some rationality back to the international student market by building more on-campus rental housing. That will lower the rate of return for investors, and they’ll start to move away from those markets, and we can get those single-family homes bought by families once again. If enrollments keep going up and up, I don’t see rents and home prices doing anything but skyrocketing.
“Overall, we do a pretty good job in this country of building one-bedroom apartments, but it’s more family-sized units that we need—three bedrooms-plus—and that could be in various forms: single detached, row housing, etc.,” Moffatt notes. “But if the zoning is not there, that won’t happen.”
Moffatt admits the Ford government’s 10-year target of 1.5 million new homes is probably unrealistic, beginning with a “roughly flat Bay Street forecast” for 2024, with housing plus or minus 5%. “We’ve never built more than 850,000 in any 10-year span.”
But the revamped wartime housing measure—something Moffatt personally proposed to the federal cabinet last summer—is a great way to address the challenge. “It worked very well,” Moffatt says. “And at the end of the 1960s, we had the first wave of Baby Boomers leave their parents’ homes and move into apartments. And we had immigration increases back then too. We also had several policies to get apartment buildings built nationwide. I think we can do it again.”
Part of the issue is the dearth of prime real estate. A new study from Malone Given Parsons Ltd., commissioned by OHBA and BILD, indicates that there needs to be more land within municipal official plans in the Greater Golden Horseshoe and GTA to meet mid- and long-term population growth. Greenbelt lands must be opened to accommodate—not merely from a sheer space standpoint but for the impact it could have on lowering land costs for builders.
However, the biggest challenge might be the shortage of skilled trades workers—something the federal government no doubt needs to scrutinize in its immigration screening efforts. “The irony is that immigrating trades workers are moving to places beyond the GTA where they can afford to live but are not needed most,” Moffatt observes. “So I think a big thing for builders and developers will be figuring out how to be more productive—building high-quality homes by new methods while using less labour.”
Ontario has enacted some measures to encourage more young people to take up trades, but much more needs to be done—and quickly. The ‘silver tsunami’ of retiring trades plus increased demand means that the shortage of skilled construction workers “will get far worse,” warns Manny Neves, podcast host of The Construction Life. “My solution is that anyone retiring from the trades should ask for a government grant to educate the next generation of trades because they have that knowledge and will enjoy sharing it.”
Certainly the apprenticeship ratio needs to be increased to three apprentices per journeyman to bring it online with much of the developed world (Ontario currently has a one-to-one ratio.) As part of its $100 million investment over the next three years to speed up the recruitment and training of skilled tradespeople, Nova Scotia recently upped its ratio from 2:1 to 3:1.
THE COST TO BUILD
Speeding up the approvals process remains a critical step to incentivize builders to build cheaper and more homes. Perhaps re-evaluating proposed immigration numbers needs to be considered if most experts acknowledge it will be all but impossible to house them all.
Ironically, what’s missing in many discussions of housing affordability, though, is the actual product cost. “I remember going into city hall in 1999, and the building permit for a block of six townhouses was $3,000 total, and the development charges were zero,” relates Huron Creek Developments V.P. and OHBA Past President Rick Martins. “Today, the development charges would be about $53,000 per unit for that same townhouse, and building permit fees are about $2,000 per unit. And look at the cost of land! We were buying lots at $1,500 a front foot in Kitchener then, but now they’re $15,000 a front foot.”
Add labour and materials to the equation, and you’ll have to look a very long way up to see the new bottom line, says Martins. “A house that cost me $99,000 to build in 1999 costs me $749,990 today.”
Another OHBA past president, Burlington-based condo developer Vince Molinaro, says his numbers are similar. That means that even were all development proposals expedited and trades miraculously became plentiful, the physical cost of building a home would still exclude an excessive number of people from the housing market. But given that 31% of all new housing costs are taxes, according to the Canadian Centre for Economic Analysis, that’s a prominent place to begin cost-cutting measures. In an October Twitter/X thread, Republic Development President and CEO Matt Young examined a hypothetical but typical high-rise condo in an average mid-market location, measuring 250,000 square feet with 321 units. His firm examined the pro forma in the current tax and interest rate environment and compared the average unit size (roughly 600 sq. ft.) to the same unit in a tax- and government-charge-free environment. The collective charges added up to $57.5 million—24% of the total budget.
“We next looked at the impacts of those taxes on people looking to buy a home,” Young continued. “In the status quo scenario, approximately 3.6% of households in all of Toronto can technically afford to buy an average 600 sq. ft. condo ($860k incl. closing)! You need $233,000 in annual household income to qualify for the requisite mortgage. No wonder we are in a crisis! But when you remove the taxes, the story changes a lot. There are roughly $210,000 in taxes and government-related charges per unit, so without those, it comes down to $650,000 all in, which now 22% of Toronto households can afford. I’m not saying that is affordable for everyone, but it does take a huge amount of pressure off people and resets the crisis in a meaningful way; 600% more families can now afford that cost, and it trickles throughout the spectrum of housing options. For example, a studio, the most affordable ownership product available, would be attainable by 47% of households in Toronto. For a young couple, small as it may be, that means a sense of housing security.”
“The government is starting to address this with rental housing by removing the HST,” Young says, “but this really should apply to all housing and should go farther, looking at reducing development charges, land transfer taxes and other fees.”
On top of the enormous bank account of development charges possessed by Toronto—estimated at $2.6 billion in 2021—increasing property taxes would help replace development charges in financing municipal infrastructure costs, says Young. “Toronto has one of the lowest property tax rates of any municipality in the country and by far the lowest in Ontario. In addition, the assessments are so outdated that my home, which I purchased nearly 10 years ago, is still assessed lower than what I paid. For too long our government had had a perspective that growth should pay for growth and, as a result, have piled on taxes into the construction of housing while reducing the property taxes that existing housing should pay, effectively leaving first-time homebuyers and new immigrants to shoulder the burden. I don’t think Toronto needs to raise the mill rate, but they need to bring assessments up to date, allowing them to remove much of the municipal-level taxes from new construction. The provincial and federal governments should follow suit and remove the HST for all housing, not just rental. Those two moves would significantly improve affordability overnight.”
The prohibitive costs of land and code compliance remain two sizeable impediments, and both will factor into the viability of the feds’ proposed WWII-styled housing initiative. But it is more than the government’s responsibility to solve this monumental challenge, Moffatt reminds: “It’s everyone’s.”
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