Barriers to constructing new single-detached homes drive a wedge between what it costs to build and the market price. On average between 2011 and 2021, a single-detached home in the Vancouver area cost homebuyers $2 million. But the construction cost of a new home was only about $700,000. The $1.3-million difference reflected high costs for the right to build on the limited land governments allowed housing to be built on. Homes in the Toronto area now cost homebuyers $350,000 more than they cost to build. In the Montreal area, however, the difference between cost and market price is negligible.
Why is there this gap between what houses cost to build and what they cost to buy? High profits for homebuilders are not the explanation: if builders were making 50 per cent and more on every house they built and sold, other builders would be coming in and undercutting them. The big gap between building costs and buying prices shows how dysfunctional some Canadian housing markets are. Factors to blame include: high upfront development charges, regulatory restrictions on land use and a lack of available transportation.
In theory, land purchase costs should only be about a quarter of total home costs. Anything more reflects barriers to accessing land. In areas that don’t have much land, builders put homes in more technically challenging — and costly — places and in higher-density configurations.
All sorts of rules discourage new builds, with the beneficiaries of such barriers being current owners wishing to sell to people willing to pay the high prices. Those who can’t afford supply-constrained prices find themselves stuck in basements or substandard homes.
Here are three ways to try to increase supply and reduce prices.
First, provinces should enact mandated minimum targets for municipal housing construction. They need to act because municipal governments typically approve fewer homes than an unimpeded market would. Ontario has started down this path with municipal housing pledges. But who will enforce them?
Last week, Ontario expanded “strong mayor” powers to large cities that have agreed to meet provincial housing pledges. Mayors with these powers, including the one Torontonians will choose Monday, should enforce council-approved housing plans. Ontario should delegate assessing whether plans can achieve pledges to neutral adjudicative bodies. Such bodies should have the power to compel cities and mayors to revise their plans if the pledge is likely to be missed.
Second, governments need to reform upfront development charges on new housing. In Montreal, there are no such charges. In some places in Toronto, they add over $100,000 to the cost of new homes. Water and wastewater are the largest components of development charges. People who benefit from services certainly should pay for them — but over the life of the asset, not all at once up front. That’s not an efficient way to pay for infrastructure. Cities should instead pay for these services with per-use fees financed by debt or equity investment. Regulators could define how capital costs translate to annual fees. Fees could be higher in new areas to reflect the capital cost required for growth. But other capital costs would be shared by all who benefit over the life of the asset. That’s fair and efficient.
Where user fees can’t be charged over time, we should reduce existing fixed charges. To replace foregone revenue, provinces should allow cities to levy a sizeable land-value charge, which would encourage developers to plan for more units than if they had to pay a separate charge for each unit, as they now do.
Finally, we need to re-think zoning. Urban planners like to set command-and-control density targets for neighbourhoods. But existing residents invariably object to higher density than currently exists. A common target is to seek rules that allow automatic approval of fourplexes everywhere. The intention is good. But good luck to politicians in selling it. Such a target may also be too low in some areas, such as around transit stations. We’ll need to grow in the future too. Today’s ambitious target should not become tomorrow’s barrier to growth.
Instead of fixating on density levels, provinces and cities should set a broad target for increased relative density. For example, 50 per cent higher around transit stations vs. just 30 per cent higher elsewhere. Applications that propose gradual density increases relative to the surrounding area could be given automatic approval. Densities would rise but governments would have less direct control over where housing growth goes.
Provincial and local governments across Canada need to start making major changes to how they plan housing. Our current system has consigned a generation of new buyers to the sidelines.
Benjamin Dachis is associate vice president of public affairs at the C. D. Howe Institute.