A long-term view on housing

The Ontario government introduced a raft of measures this summer aimed at reining in the price of buying or renting a home in the Greater Toronto Area. The goal is laudable and the approach may create some temporary reprieve — but the long-term consequences could be devastating.

There are two sides to the housing market, like any market: supply and demand. Of the 16 measures the government proposed, 15 aim to tamp down demand for housing in the GTA, including rent control and a tax on foreign homebuyers. However, there are good reasons to believe the bigger problem is on the supply side of the equation.

The stock of new housing units in Toronto, for example, has grown over the past decade, as evidenced by the number of cranes building condos and the number of new subdivisions in the region. But the number of new residents has also grown. If the rate at which developers and home builders can respond lags behind this population growth, the cost of renting or buying can escalate. Moreover, if rents aren’t allowed to reflect market conditions, developers won’t have much reason to provide new rental units.

There are both theoretical and empirical reasons to believe that regulations have held back the supply of new housing units — and that’s before we consider the proposed measures.

A recent Fraser Institute study estimated the impact of government regulations on the supply of new housing in Canadian metropolitan areas, including the GTA. The study compared the number of new units that should have been built, based on underlying demographic and economic factors, to the number actually built. The results were clear: fewer new units were built in the most desirable neighbourhoods, notably in Toronto.

Why the discrepancy? The Fraser Institute’s recurring survey of developers allows us to identify variations in the cost and ease of development in Canadian municipalities. The shortest approval timelines for building permits in the GTA (Burlington) are 10 months shorter than the longest (Georgina), and per-unit costs for regulatory compliance in Hamilton ($21,000) are half what they are in Toronto ($46,500).

But that’s not what’s happening. While the foreign buyers tax may simply distract from more important reforms, the introduction of rent control could devastate the rental market.

As much as rent control could benefit some existing renters, in the long run it reduces the incentive to build new rental housing, since it’s just as easy to build condos for sale instead. Moreover, if landlords can’t recoup the costs of building improvements, they may let the quality of their units degrade.

While the Ontario government is right to worry about rental and home purchase prices, its approach is short-sighted. Artificially capping rents and trimming housing demand may lead to savings for some renters and buyers today, but in the long run it will likely reduce the number of new units.

Provincial and municipal governments would be wise to address the underlying factors that reduce housing supply growth, rather than focusing on shortterm policies that could exacerbate the problem in the future.