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Business Commentary The impact of supply-side economics on Toronto’s rising house prices

David Amborski is director and Frank Clayton is senior research fellow at Ryerson University's Centre for Urban Research and Land Development. Dr. Clayton is author of the recent report titled Why There Is a Shortage of New Ground-Related Housing in the GTA.

The housing market in the Greater Toronto Area is hotter than at any time since the late 1980s. Prices of existing and new ground-related homes (single detached and semi-detached houses and townhouses) are rising rapidly.

There has been widespread media coverage of the demand factors, low interest rates and rapid population growth that have contributed to the rising price of housing. According to a recent poll conducted by Angus Reid, the public as a whole seems to understand and support the role that demand plays in high regional housing prices.

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Alas, home prices are not determined by demand alone. Supply is a big part of the equation.

Normally, in the private economy, when demand for a product or service picks up, prices begin to rise and suppliers respond by increasing supply, which in turn, moderates the initial price increase. While homebuilders are like other suppliers in their desire to increase the production of homes, they are unable to do so as there is a severe shortage of sites in the GTA for new single and semi-detached houses and townhouses.

Unlike the other requirements for homebuilding – labour, materials and capital – the supply of serviced land rests on the shoulders of municipal governments.

Land-use planning policies enforced by the province of Ontario favour the intensification of sites in built-up urban areas, especially mixed-use developments near existing transit nodes. As a result, in the past decade, more than 143,000 units, mostly condominiums for owner or renter occupancy, have been started in the GTA. This ample supply of sites has moderated price increases for these types of residential units.

Circumstances have been quite different for single and semi-detached houses and townhouses, which are mainly found in the "905" suburban area code.

Beginning in 1989, the province required municipalities to maintain at least three years' supply of serviced or readily serviceable land for a range of housing types.

The current provincial government has stopped monitoring and enforcing this serviced-lot supply requirement and the policy is being disregarded or incorrectly interpreted by most GTA municipalities.

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The previous ample supply of sites for houses has long been exhausted and is not being replenished in anywhere near the numbers required to meet current, let alone future, demand.

As a result, starts of single and semi-detached houses and townhouses in the GTA have fallen by half, dropping from about 30,000 units in 2001-2003 to about 15,000 units in 2013-2014. This is despite very strong demand for this type of housing.

The province, through its imposition of its Growth Plan for the Greater Golden Horseshoe and the Greenbelt and the creation of the Metrolinx regional transit authority, is effectively the regional planning body for the GTA. As such, the province should immediately begin monitoring and enforcing its own requirement that the 905 municipalities maintain at least a three-year supply of serviced and readily serviceable land to meet the current and expected future demand for ground-related housing.

Without a proactive provincial government, there is no hope for relief from high prices for ground-related housing in the GTA.

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