Not a week goes by when a newspaper headline or a corporate blog post doesn’t highlight the rapidly increasing prices of low rise homes in Greater Toronto Area. It appears that if matters continue like this, there is a high probability that average home price will cross the the one million dollar mark before the end of year.
The reason the price of high rise dwellings didn’t increase as rapidly as of low rise dwelling is the reducing average unit size of high rise apartments. However, as the average unit size has start to increase in high rise apartments as well, we expect the average of high rise units to increase rapidly going forward, if all else remains the same.
Another element in increasing prices of housing the reduction in supply i.e., remaining inventory. It has been at the lowest level of last 10 years as per the below graph.
Below chart makes it clear that future supply is going to be remain subdued in the coming years as both under contruction and pre-construction high rise levels continue to decline despite increase in prices.
Elementary economics or even common sense tells us that rising prices lead to increase in supply which in turn brings the prices back to equilibrium. But going by the above graph, that doesn’t seem to be happening. What is the reason? Talking to businesses and analysts, the Places to Grow Act seems to be the culprit behind this. But is that really the case?
War of the Words
The way news outlets cover the issue, it becomes hard to distinguish propaganda from facts. By not relying on one source and researching alternative viewpoints, I have been able to understand the nuances of the issue. [It should be noted that dates below refer to the date of news article or a blog post. The blog post/article may be based on research carried out earlier].
CEO of BILD fires a shot by summarizing a Fraser Institute study in thestar.com [CEO of BILD seems to prefer thestar.com for his firing shots] by headling it as
Land-use regulations part of affordability crunch
CIBC Capital Markets publishes a report The GTA Housing Market: Is There Logic Behind the Madness? The report is rich in detail and is cognizant of the fact housing issue is caused by multiple factors, yet it can’t help and identify the culprit as “Places to Grow Act”
Policies such as the “Places to Grow Act” have limited the availability of serviced land for ground-oriented houses through setting aggressive intensification and density target
Executive Director of Neptis Foundation writes a column in Globe and Mail directly referring to the aforementioned claims and calling them disingenuous,
…an insistent drumbeat from certain members of the development industry rose to a crescendo, with the often-repeated claim that these plans were the direct cause of rising house prices and of a shortage of developable land for ground-oriented housing across the region.
The argument is disingenuous and deflects from the real policy solutions needed to address the pressing problem of housing affordability. It also has the potential to further weaken a provincial policy that is at best a modest attempt to bring a more co-ordinated approach to planning across the Toronto region and address the problems associated with low-density urban sprawl.
Those who make this argument by trying to link provincial land use policy, particularly the Growth Plan, to the real issue of housing affordability in the region, tend to obfuscate what they mean by “supply.” The issue demands clarity about the two different types of land supply for growth.
She classifies land supply into two areas: Designated Greenfied Areas (DGAs) and Serviced Land explaining it as:
The first is the type that planners call “designated greenfield areas.” This is undeveloped land set aside by municipalities for urban expansion. The 2006 Growth Plan required municipalities to plan for population and employment growth to 2031 and allowed for up to 60 per cent of that growth in designated greenfield areas (rather than in already developed areas).
In 2013, research found that in the process of bringing official plans into line with the Growth Plan, municipalities set aside more than 107,000 hectares of designated greenfield land; an area nearly twice the size of the City of Toronto. About half (56,200 hectares) is in the Greater Toronto and Hamilton Area (GTHA).
While some of that land has been built on in the past 10 years, a preliminary update of research shows that about three-quarters remains unbuilt, more than enough to accommodate the hundreds of thousands of ground-related houses planned by municipalities in the GTHA. The Growth Plan requires that greenfield communities be built at a modest density of 50 people and jobs per hectare on average across each county or regional municipality. (To put this standard in perspective, such a density can only cost-effectively support a 30-minute bus service.)
The second type of land supply is “serviced land” — that is, designated greenfield areas that have municipal water and wastewater pipes and connections to treatment plants in place, and therefore are immediately developable. Little information is publicly available on how much serviced land supply exists. Those who claim that the lack of serviced land is the cause of rising house prices have never presented data to substantiate their argument.
Since the early 1990s, Ontario, under its Provincial Policy Statement, requires municipalities to maintain a three-year supply of serviced land at all times although it does not collect data on this supply. So the claim cannot be proven or refuted. But one thing is certain: the Growth Plan has nothing to do with the supply of serviced land; that is the responsibility of municipalities.
It should be mentioned that the aforementioned reply is based on painstaking research carried out by Neptis Foundation in 2013 that is freely available here.
Later on, Neptis Foundation publishes a brief on its website building upon the arguments in the above column. It is titled No Shortage of Lands for Home in Greater Toronto and Hamilton Area
New analysis shows that since 2006 (the year the Growth Plan was established), only a small portion of the GTHA’s land supply for greenfield development has been built on. Neptis researchers have estimated that only about 10,800 of the 56,200 hectares was developed between 2006 and 2016; less than 20% of the total supply. That leaves 80% of the designated land supply to accommodate another 15 years’ worth of growth to 2031 and possibly beyond.
A closer look at where development has occurred across municipalities in the GTHA shows that the municipalities of Brampton, Vaughan, and Milton together account for nearly 45% of the hectares urbanized so far. Even so, these three municipalities still have plenty of land to build on — about 15,700 hectares, or 35% of the remaining DGA land supply in the GTHA.
Other municipalities, such as Oakville, Whitby, and East Gwillimbury, which have significant amounts of Designated Greenfield Area, used up relatively little of the land supply available to them between 2006 and 2016. And the municipality of Pickering has almost 3,000 hectares of land available for development in the Seaton area.
BILD contests the above claim through various forums and a blog on its website We are all paying the price for the GTA’s lack of shovel-ready land. [Why did they use scare quotes for “brief”, I do not know]:
Major decisions around development, land use and housing supply must based on facts and evidence and to do that we need more information and better data.
A recent “brief” and commentary by the organization whose work informed the development of those very polices is not helping inform an evidence based discussion. The Neptis Foundiation has recently been in the news saying that there is ample land available for building homes in the GTA and therefor lack of land can’t be causing home prices to increase.
Neptis is focusing on the wrong things. Prices are escalating largely because there are not enough new low-rise homes being built to meet the demand of GTA residents. This is as a direct result of government intensification policies, lack of serviced land and ever growing amounts of red tape.
The issue limiting the GTA’s supply of homes is not the overall amount of land that has been set aside for development. The issue is how much of that land has the critical infrastructure that makes developing it possible.
The GTA has an acute infrastructure shortage due to decades of underinvestment and most land designated for development has no access to existing water and waste water services. Planning and building new infrastructure takes decades and we are already far behind.
Neptis issues another brief using Brampton Municipality database to make an argument backed by data:
A new analysis by researchers at the Neptis Foundation that focused on the City of Brampton, however, shows the shortage-of-serviced-land argument to be false in the case of one of the fastest-growing communities in the Greater Toronto and Hamilton Area (GTHA).
The analysis found that Brampton has about 1,200 hectares of serviced land that have not yet been developed. If urbanization in Brampton continues at its current pace, this supply of serviced land could easily last about five years — more than the three-year supply that provincial policy requires.
In the last 10 years, only 2,290 of the 8,740 hectares of designated greenfield in Brampton have been built on; that’s 21% of its supply for future urbanization until 2031. Of the remaining designated greenfield supply, about 2,830 hectares in the northwest and northeast areas of the city have been put “on hold” through an Interim Control Bylaw, because the lands fall within the study area for a proposed transportation corridor. That leaves another 2,420 hectares of designated greenfield land available for future development.
Neptis remains cognisant of the fact that this data just relates to one municipality and more data is needed to reach an informed conclusion whether lack of serviced land is at fault.
The City of Brampton’s open data policy has allowed Neptis researchers to shine a light on an issue that has been in the news lately. If similar data were available from other municipalities across the region, we would have a complete picture of the availability of serviced land, rather than unsubstantiated claims that the lack of designated greenfield land, both serviced and unserviced, is to blame for the shortage of new homes and rising housing prices.
As these things go, this is not the end of it and I expect to see this to and fro continuing in the papers for some time to come. However, what it proves is that Places to Grow Act isn’t the culprit for increasing unaffordability of GTA housing.
So what factors are responsible for the decrease in supply? Based on the various reports, following stand out:
- Bureaucratic red tape and community opposition
- Increasing development charges
- Rising land prices
There is also an additional factor “Cost of Urban Sprawl” but these costs are usually externalized.
1. Bureaucratic Red Tape and Community Opposition
From the Frasier Institute recent study NEW HOMES AND RED TAPE IN ONTARIO: Residential Land-Use Regulation in the Greater Golden Horseshoe
Estimates of typical project approval timelines in GGH cities range from 14.4 months in Burlington and 15.1 months in Barrie, to 22.3 months in Clarington and 24.3 months in Georgina. Toronto’s estimated timeline is shorter than the regional average, at 17.7 months. Timeline uncertainty’s deterrent to homebuilding is strongest in Barrie.
Reported compliance costs and fees add up to a low of $21,000 per home built in Hamilton and a high of $60,500 per home in Oakville. Reported compliance costs in Toronto average $46,570 per unit.
The survey reports that zoning classifications need to be changed to accommodate more than 50% percent of new residential development in 28 out of 32 cities. Estimates of rezoning’s effect on approval timelines range from under one additional month in King Township to 11.25 months in Hamilton.
Council and community opposition to residential development is perceived as strongest in cities where dwelling values are highest, raising questions about the causes and consequences of local resistance to new housing. The strongest opposition is reported in King Township, Toronto, and Oakville. This opposition is typically not perceived as a significant deterrent to building in Brampton, Oshawa, and Burlington.
The following table gives the summary of results:
The Index of Residential Land-Use Regulation is negative in cities that are less regulated than average and positive in the GGH’s most regulated cities.
Of the GGH cities ranked, Burlington tops the Index of Residential Land-Use Regulation. This is driven by good ratings on timeline length, regulatory costs, and rezoning, and despite a moderately negative impact from timeline uncertainty and council and community. Oakville — Burlington’s neighbour — stands in contrast to Burlington’s relatively efficient and low-cost regulations, ranking worse on all indicators. King Township ranked the lowest, as it scored poorly on all measures except for the prevalence of rezoning.
Toronto’s shorter-than-average timelines are offset by its relatively high timeline uncertainty, and the impact of opposition.
To summarise the above table, in Toronto, an approval requires 17.7 months and ends up costing $46,000 per home in regulatory costs and expenses on average.
2. Increasing Development Charges
Whether it is a high rise condo building or a sprawling single family township, both require sufficient infrastructure in place in terms of electricity, gas transmission, water and sewerage capacity, road etc and extending those to new dwelling has a cost. Due to lack of investment in infrastructure, new dwellings put strain on existing infrastructure with the result that charges levied by municipalities to extend infrastructure are increased. As CIBC puts it in their report:
…Chief among them is the meteoric rise in development charges that municipalities levy on developers for land development and redevelopment projects to help pay for the increased capital cost required to service growth. Development charges skyrocketed over the past decade, rising, for a single detached lot, by more than 400% (Chart 4).
3. Rising Land Price
Now, if you are an owner of potential development land and you are well aware that Places to Grow will result in a shortage of land by even more than currently anticipated, you probably will not be eager to sell. Clearly, time is money for land owners. Holding on to land is already a significant force restricting supply in the GTA.
Cost of Urban Sprawl
Unfortunately none of the aforementioned studies explicitly mention the cost of urban sprawl (obviously it was the main reason for Places to Grow Act but it has not been brought up in the recent salvo).
A study was conducted by LSE in collaboration with Victoria Transport Institute in 2015 to estimate the cost of urban sprawl in US:
..our analysis indicates that by increasing the distances between homes, businesses, services and jobs, sprawl raises the cost of providing infrastructure and public services by 10–40 percent. Using real world data about these costs, we calculate that the most sprawled quintile cities spend on average $750 annually per capita on public infrastructure, 50 percent more than the $500 in the smartest growth quintile cities. Similarly, sprawl typically increases per capita automobile ownership and use by 20–50 percent, and reduces walking, cycling and public transit use by 40–80 percent, compared with smart growth communities. The increased automobile travel increases direct transportation costs to users, such as vehicle and fuel expenditures, and external costs, such as the costs of building and maintaining roads and parking facilities, congestion, accident risk and pollution emissions. Figure 3 illustrates estimates of these costs.
On average automobiles require 20–60 square meters of road space plus two to six off-street parking spaces averaging about 30 square meters each, or 80 to 240 square meters in total. This means that automobiles typically use more land than is devoted to an urban resident’s house. This increased need for roads and parking facilities increase development costs, stimulates sprawl, creates traffic and parking congestion, displaces greenspace, and increases noise and air pollution.
Some critics have responded to our work, arguing that sprawl provides benefits in addition to costs, and that planners should not dictate the type of housing that resident choose. They are correct on both points, but their criticisms are based on false assumptions about this our analysis and conclusions. In fact, we do recognize the benefits of sprawl. However, these are mostly direct benefits to sprawl community residents, such as increased private greenspace (lawns and gardens), and more privacy and quiet. There is no reason to believe that there are significant external benefits of sprawl (non-residents benefit from increased sprawl) which would offset the substantial external costs, since rational economic agents (people and businesses) externalize costs and internalize benefits.
In light of the above, there are no quick solutions and all else remaining the same, there doesn’t seem to be any factor on the horizon that will lead to reduction in costs or increase in supply. Thus from supply side, no downward pressure is expected on pricing of houses.