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Housing Minister Sean Fraser arrives to a cabinet meeting on Parliament Hill in Ottawa on Jan. 30.Sean Kilpatrick/The Canadian Press

The federal government is withholding up to $70-million in housing funds from Windsor, Ont., after the city refused to loosen zoning rules enough to satisfy Ottawa’s requirements.

The decision was made official Wednesday, a bit more than a week after Windsor city council voted to restrict four-unit residences to specific parts of the municipality. To get access to Housing Accelerator Fund money, cities have typically been required to allow such buildings in all residential areas.

“With more than 500 applications, and a finite amount of cash in the fund, only the most ambitious communities will receive funding,” Housing Minister Sean Fraser said in a letter to Windsor Mayor Drew Dilkens, obtained by The Globe and Mail.

He added: “The economic boom that is happening in Windsor right now is inspiring. … Unique housing challenges come with this extraordinary economic renewal.”

Ottawa had floated the possibility of granting at least $40-million to the city, and up to $70-million if a series of commitments related to housing were met. To raise a similar amount through the property tax, Windsor would have to increase the rate by approximately nine to 15 percentage points.

Windsor’s zoning decision puts it on a very short list of cities that have rejected Ottawa’s request to open all neighbourhoods to what planners call gentle density. Oakville, west of Toronto, has also been reluctant to make such a shift and is awaiting news on its funding request. But dozens of other cities representing millions of Canadians have agreed to rezone.

Mr. Dilkens has argued that he needs to protect homeowners from the possibility of a fourplex appearing next door. He has also raised concerns about the impact additional residents could pose to sewers and other infrastructure.

The mayor’s communications director said Wednesday he was not available to comment on the funding rejection.

While housing in Windsor remains cheaper than in many Canadian cities, prices have risen sharply in recent years. Locals point to houses that cost only $100,000 a decade ago now selling for as much as $400,000. This pressure has been driven by population growth, including people moving from higher-cost cities and a boom in international students.

Among the tailwinds now are the NextStar battery plant for electric vehicles being built quickly in the east end of the city’s suburbs and a new bridge to the United States, currently scheduled to open late next year.

Anneke Smit, director of the Centre for Cities at the University of Windsor, called council’s refusal to meet federal terms an “unfortunate” decision that will leave the city on the sidelines as other municipalities adapt to meet the housing crisis.

“It also would have been signalling a willingness to work with the federal government, to work alongside other municipalities that are committing to making these kind of changes,” she said Wednesday. “It would have shown a commitment to all Windsorites, including newcomers, including young people, including older people, all of whom might find themselves in situations of housing precarity.”

Proponents of the zoning shift have said that fears around infrastructure overload were exaggerated, noting that many homes in Windsor, particularly those converted to student residences, already have large numbers of people living in them. And during the recent council meeting on Jan. 22, a realtor who warned of damaged property values acknowledged under questioning from Councillor Kieran McKenzie that he had no data to prove this would happen.

Mr. McKenzie said in a later interview that there could well be people who simply don’t want a fourplex nearby, but that’s a different issue.

“There’s a housing crisis … it’s across Canada and Windsor’s not immune. Which means there’s going to be evolution in the neighbourhoods,” he said.

“What needs to happen is folks need to see, to a greater extent, there is the possibility for different forms of housing to exist in their neighbourhoods, and that those new forms of housing won’t have the detrimental effects on their own quality of life that’s being imagined right now.”

Windsor’s density plan, passed at that same Jan. 22 meeting, restricts fourplexes to areas deemed appropriate by staff, based on lot size, servicing, infrastructure and transit. The city’s longer-term housing plan is to facilitate the development of an entirely new residential zone near the airport in an area called Sandwich South. Planners envision thousands of homes there, though it will be years before large numbers of people are living in what are now largely agricultural and industrial lands. The land requires extensive infrastructure and engineering work before any construction can begin.

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