During the Dutch tulip mania of the 1630s, demand caused the price of a single tulip bulb to reach 10 times the annual salary of a skilled tradesman.
Are supply and demand causing the current housing-price insanity in the Greater Toronto and Hamilton Area (GTHA)?
The issue is complicated and one of the most misunderstood public policy debates I've seen recently. I am stunned by the number of misguided characterizations of the problem and the possible solutions proposed by so-called experts, including:
-It's a foreign-ownership speculation problem, so tax sales to foreigners or impose a property tax on foreign-owned property;
-It's a domestic and foreign-ownership speculation problem, so tax vacant property;
-It's an urban area supply problem, so make zoning in urban areas more "as of right" and speed up the approvals process;
-It's a greenfield supply problem, so amend or repeal the Greenbelt Act and Plan, the Oak Ridges Moraine Conservation Act and Plan, the Places to Grow Act and the Growth Plan for the Greater Golden Horseshoe;
-It's a greenfield supply problem caused by developer greed – they are hoarding inventory;
-It's a "credit is too available" problem, so raise interest rates;
-It's a credit eligibility or mortgage-insurance problem, so tighten lending rules;
-It's a tax-driven problem, so increase, change or remove the capital gains inclusion rate for capital property and remove the capital gains exemption for principal residences;
-It's a rent affordability problem for low-income households, so impose rent control for properties built after 1991 and build more affordable housing;
-It's a "supply is not the problem" problem – we have lots of supply;
-It's a municipal overtaxing problem, so reduce municipal development charges.
All of these problems probably contribute in some measure to the escalation of housing prices in the GTHA, but my 30 years of experience advising both public- and private-sector clients in the planning and development industries tells me that today's problem is overwhelmingly one of long-term supply.
Long-term supply is historically low, but short-term demand is historically high because the lack of supply is creating hysteria and panic, specifically in two very important segments of the market: first-time buyers and move-up buyers. First-time buyers fear they will never be able to enter the market, so they bid up properties just to get a foothold. Move-up buyers are afraid they will not find another home, so they do not list. However, I firmly believe that if you fix the long-term supply problem, the demand problem will fix itself.
Explaining the lack of supply problem is more complicated. This is where most people get confused, because they do not understand what "supply" is in the context of land-use planning. For example, the Neptis Foundation and the Pembina Institute say there are 125,560 hectares of available land in the Greater Golden Horseshoe (GGH). But this number is derived, in part, from looking at satellite photos, which is not the correct way to measure long-term land supply.
In order to understand whether there is an adequate supply of housing in Ontario, there are two important elements to keep in mind. The first is that modern land-use planning in Ontario is based on long-term horizons. Typically, our provincial and local governments plan for development in 10- or 20-year periods, so adequate supply of land is measured using indicia of long-term, not short-term, supply. Second, not all land becomes housing; some gets reserved for commercial purposes or infrastructure, while some is set aside for environmental conservation. The province's supply assumptions do not account for these "take outs."
The best study I've seen on the issue of supply was conducted by land-use planning firm Malone Given Parsons. It concludes that rather than having an oversupply, there is a crisis-level shortage of land for housing. MGP says there are only 17,000 or so hectares of vacant land available for development in the GGH , not 125,560.
The province has used incorrect assumptions in creating the population targets of the Growth Plan, and this has resulted in seriously flawed public policy for regulating the provision of housing.
The government's proposed 16-point plan to fix the problem misses the mark by ignoring the supply problem entirely. Its proposal to tax land purchases by foreigners and to authorize a vacant-unit tax are nothing more than wild stabs in the dark. And its promise to expand the reach of rent controls will kill the purpose-built rental construction industry overnight.
To make matters worse, the province is proposing Growth Plan amendments that will further restrict supply and increase prices. Two such amendments are to increase the "residents to jobs ratio" – which would require impossible densities of 130 to 300 residents and jobs per hectare – and to increase the urban area intensification targets from 40 per cent to 60 per cent before expansion can occur.
There is no question in my mind that the most significant long-term factor leading to the escalating housing prices in the GTHA is the Growth Plan. My recommendations are to scrap the proposed changes entirely, re-examine the plan's underlying principles and subject it to a wholesale rewrite with a view to relaxing the restrictions on expansions in urban areas. This would result in meaningful changes to the supply of housing in the GTHA.
Quinto Annibale is a senior partner at Loopstra Nixon LLP, where he is the head of the municipal, land-use planning and development law practice. The ideas in this article are his own and not those of his firm or any of his clients.