Ontario housing measures—short-term gain for long-term pain?
The Wynne government this summer introduced a raft of measures aimed at reining in the price of buying or renting a home in the Greater Toronto Area (GTA). As laudable as this goal may be, the government’s approach may create some temporary reprieve at best—but with potentially devastating long-term consequences.
There are two sides to the housing market, like any other market—supply and demand. Of the 16 measures the government recently 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 in the sky 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 homebuilders can respond lags behind this 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 indeed held back the supply of new housing units—and that’s before we consider the new 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 housing units that should have been built based on underlying demographic and economic factors to the number that were actually built. The results were clear—fewer new units were built in the most desirable neighbourhoods, notably in Toronto.
Why the discrepancy? To answer that, we turn to another Fraser Institute study. Our recurring survey of developers in Canadian municipalities allows us to identify variations in the cost and ease of development in different 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).
Given that recent research by the province found only a small percentage of property transactions involved foreign buyers, local governments would likely make more progress on home prices by eliminating undue housing supply restrictions.
But again, 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. In a recent survey of top academic economists, only two per cent said rent controls have a positive impact on the quality and supply of rental housing. However, it’s easy to see the short-term benefit. As one respondent put it: “Incumbent renters benefit from capped prices. New renters face reduced rental options.” 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 simply let the quality of their units degrade over time.
While the Wynne government is right to worry about rental and home purchase prices, its current 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, which is bad news for a growing city with already tight rental and purchase markets.
Provincial and municipal governments would be wise to address the underlying factors that reduce housing supply growth, rather than focusing on short-term policies that could exacerbate the problem in the future.
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