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Sales of new condos in the Toronto area in March hit the highest level ever for the month.

Fred Lum/The Globe and Mail

The Globe's new Real Estate Beat offers news and analysis on the Canadian housing market from real estate reporter, Tara Perkins, and others. Read more on The Globe's housing page and follow Tara on Twitter @TaraPerkins.

Toronto's got a problem. (Yes, it's about municipal politics, but not what you think.) A lack of family-friendly condos are being built in Canada's most populous city.

The new housing stock that is being constructed has shifted over the last decade from predominantly detached houses to condos. In 2005, about 35 per cent of the new units being built were condos. Now it's about 60 per cent.

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There are a number of reasons for this, including government policies that encourage downtown densification, and the greenbelt.

Economists continue to debate whether too many condos are going up. One of the arguments that condo developers make to defend the boom in supply is the notion that condos are slowly replacing detached homes as the new predominant form of housing, and that Toronto is on an extended path to becoming an urban centre like New York or London where families learn to live in less space.

But the vast majority of units that are being built here are studios, one-bedrooms, and one-bedroom-plus-dens. And they're shrinking. The average size of a new condo is now 797 square feet, according to RealNet Canada Inc. Between 2005 and 2010 the average size tended to oscillate between about 875 and 925 square feet.

Families that want to live in houses in the city have been bidding prices up, causing a widening gap between the price of houses and those of condos, which have failed to keep pace.

At the moment, the majority of condo dwellers are young, single professionals. And the average family size in Canada is shrinking. But if the construction trends continue at some point many families will be priced out of the market for detached homes.

The city has begun studying the issue. Steven Diamond, chief executive of Toronto condo developer Diamond Corp., and former head of the municipal law and planning group at McCarthy Tetrault, was asked to sit on a roundtable group on the topic.

He says that condo sizes have been shrinking as the land transfer tax, higher development charges and the introduction of the Harmonized Sales Tax on housing all drove up the cost of condos.

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"The way the taxes work generally is that there are exemptions [for units] under $400,000, but as soon as you get above $400,000 the taxes kick in," he says. "So I believe what's happened is that, in order to sell units, the industry has been ensuring they can market them at under $400,000. To keep the units affordable, the unit sizes fell."

He has presented the city with an idea (see the accompanying slides): It's a rough example of something that could be done, and shouldn't be interpreted as a specific proposal, he says.

Basically, it's to increase levies slightly on smaller units and decrease them dramatically on larger units.

The result, in his hypothetical example, is that the buyer of the 1,000 square foot condo would be getting 400 square feet of that condo for $325 per square foot (as opposed to $550), or essentially a bedroom for free. Government would seek to make up the lost revenue with the extra charges on smaller units.

"We're not producing more single-family neighbourhoods," Mr. Diamond says. "I believe as we grow in the future, house prices are going to become less affordable and families are going to consider alternatives."

At the moment developers are building the units that meet current demand.

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"You can't just mandate larger units," Mr. Diamond says.

Editor's note:

An earlier version of these tables included incorrect figures

Editor's note:

An earlier version of these tables included incorrect figures

3 bedroom vs 1 bedroom unit: current conditions

1,000 sq.ft.600 sq. ft.Cost
Differential
Net Purchase Price$475,000$285,000$190,000
Gov’t Fees & Charges$75,000$63,000$12,000
Total Purchase Price$550,000$348,000$202,000

Cost comparison: 3 bedroom vs 1 bedroom unit: Reduce government fees

Reduce government fees by 75 per cent for 3 bedroom units / increase fees on one bedroom by 25 per cent

1,000 sq.ft.600 sq. ft.Cost
Differential
Net Purchase Price$475,000$285,000$190,000
Gov’t Fees & Charges$18,750$78,750($60,000)
Total Purchase Price$493,750$363,750$130,000
Avg Adjusted Purchase Price$494 psf$606 psf$112 psf
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