The "affordable home" myth in Ontario

What governments say and what they do are different matters

High levels of immigration combined with artificially low interest rates drove home prices in Ontario to nosebleed levels over the past few years.

In 2022, the average Ontario home sold for $853,915 based on the 9,509 reported transactions. In 1978, the average Toronto home sold for $67,333 according to Toronto Real Estate Board data, and for over $1.1 million in 2023 from the same source. This rise in housing costs is a direct result of federal, provincial and municipal policy choices. It was not mandated by God.

A typical two or three bedroom home in Ontario is about 1,500 square feet in floor space and has a construction cost of about $337,500 at today’s construction costs which approximate $225 per square foot.

I listened to an episode of The Agenda with Steve Paikin entitled “Who should pay for growth?” with an excellent panel of exports including the Mayor of Burlington, MaryAnne Meed Ward (“Ward”). Ward expressed the sensible view that growth in a city has to be thought of broadly since it has to incorporate the services and infrastructure that make the city liveable and not just the cost and number of homes. She defended the existence of development charges totaling some $140,000 per home, if I heard her correctly. She argued that development charges didn’t increase the price of homes since that was determined by supply and demand, and she was correct that prices reflect supply and demand but incorrect that development charges don’t inrease the price of homes - they necessarily contribute to the high prices.

Mayor Ward, a strong leader and capable Mayor, knows that without the development charges the money to build the infrastructure (roads, bridges, community centers, schools, waste treatment plants, water treatment plants, transit, etc.) has to be paid by someone else and without the development charges property taxes and user fees would have to rise significantly.

What a conundrum. Shortages of supply will keep housing prices high, but a surplus of supply will not see them fall below the cost of construction, builders’ profit, land costs, land transfer taxes, and the cost of development charges. In the case of the theoretical “typical 1,500 square foot home”, those charges look like this:

Land - a small building lot in Burlington unserviced with sewer costs about $250,000 based on information from Realtor.ca when legal fees and land transfer taxes are included.

Development charges - $140,000 (assuming I heard that figure correctly on The Agenda)
Construction costs - $337,500 at $200 per square foot. Forget about granite countertops and a paved driveway
Garage - Cost of a 600 square foot garage - ~$20,000
Builder's profit - $58,000 assuming a 10% markup over cost of land and construction by the builder
HST - $50,000 based on 13% of construction cost and builders’ profit ignoring any rebate to a qualified buyer
Legal costs and title insurance - $2,000 (a guess)

TOTAL - $857,500

That is pretty close to the average price of resale homes of $853,915 reported for all 2022 resale transactions.

The reality is that development charges, land transfer tax, and HST comprise a total of more than $200,000 of the cost of a new home in Burlington.

I bought my first home in Don Mills, Ontario in 1978 for $110,000. My former wife sold it last April for close to $4 million.

In 1968, my parents moved to Coquitlam, B.C. and bought a tiny house for $16,000. While they sold it long ago and have both passed on, that piece of land would sell for over $2 million today. It is not worth more today, money is worth less.

Mayor Ward is correct Burlington homes prices are not the direct result of development charges, but the shortage of homes that fueled the shortage giving rise to that price was certainly affected by the pressure development charges imposed on builders with the resulting high costs to develop manifesting themselves in fewer homes being built. Municipal fees, permitting delays and over regulation do contribute to high housing costs as does federal policies that actually promote inflation, albeit a 2% annual rate, which adds to costs. At 2% a year, prices double every 36 years, at a more prevalent 4%, every 18 years. Those who buy a first home for $800,000 today and live it in until death say 54 years from today can expect the house to be priced by their estate at $800,000 x 16 = $12.8 million at 4% inflation rate or $2 million at a 2% inflation rate. The odds are high that a 4% rate of inflation will prevail since as soon as inflation touches 2% there will be an outcry for lower central bank interest rates which will fuel the next inflationary cycle.

Economist Ralph Kershaw¹ argues that is a wealth transfer to the elderly from the youth of Canada, ignoring that the house did not rise in value (it is still the same house) but money went down in value, and the so-called wealth transfer to the elderly is the result of inflation which is a hidden tax on Canadians which disproportionately affects those with the lowest income who spend (rather than save) the highest proportion of their incomes and lack assets that benefit in price from the inflation governments create.

I live in Collingwood, Ontario today. In 2005, a local developer filed a plan of subdivision to build about 700 new homes a few kilometers from my home. I understand the plan was finally approved last month, subject to conditons that increased the density and amount of land reserved for parks, walkways, etc. When it takes a municipality 18 years to approve a plan of subdivision, the result will be much higher costs for the homes ultimately built on the land.

Who should pay for growth? That was the question before the panel on The Agenda. As usual, the answers are both simple and typically unpopular. The citzens of the city wishing to grow should pay and the payment should be through taxes. Voters who know they will have to pay the freight will elect political leaders who reflect their wishes, and if they desire growth and want to pay for it that will follow. If they see growth as a benefit to others, they will elect leaders less interested in growth.

Cities should not look to the Province of Ontario to fund their existence and operations, burdening people who live elsewhere to pay for benefits the citizens of the particular city enjoy. Mayors want voter support, and property owners outnumber developers so development charges are popular with Mayors despite their negative consequences for home costs.

The solution to Canada’s housing shortage and high prices is the power of the free market with a deregulation of the housing industry. All that is needed is a building code which we have. Zoning laws, official plans, development charges, land transfer taxes, HST, “greenbelts” and heritage committees are all needless interventions by governments that contribute to the shortage and the urban sprawl that results.

Free from needless regulations, developers will build the homes that people want rather than the homes regulators want them to build. In rural Canada, free from most of the regulations, people build homes using wells and septic systems that cost a fraction of the development charges levied in Burlington. Public transit should be self-financing, with transit fees sufficient to support the infrastructure. People are willing to pay what it costs for efficient transportation or they wouldn’t have made highway 407 toll-road so profitable for its owners, or wouldn’t buy $60,000 cars and SUV’s to get around.

Canada has over 1 billion acres of undeveloped land, enough to house the entire population of the Earth at a density less than the City of Toronto. Drive anywhere in Ontario outside of downtown and what you will pass is thousands of acres of land without a single home or commercial structure on, and only a fraction of that used for farming. Land is not in short supply yet building lots like the one listed (which is unserviced) costs $250,000 for a fraction of an acre. That is the outcome of Canada’s regulatory system.

My family owns farmland in Moose Creek, Ontario where my ancestors have lived for over 200 years. It is undeveloped, and a mere 45 kilometers from the Parliament buildings. The old farmhouse, built in 1850, still stands square and suitable for living, but built long before Canada had a building code or a zoning law. Free from goverment intervention, it would be relatively easy and certainly cost effective to develop that land and turn the 166 acres into a community of more than 1,000 homes. But it will remain undeveloped for another century with current laws.

The expert panelists on The Agenda overcomplicate the problem and layer on a plethora of issues that reflect their opinions, desires and wishes within a tax and regulatory environment where they are participants who are unwilling to dismantle (or even imagine the dismantling of) the source of their livelihoods. Each of them thinks government money is the answer as if that money magically appeared like mushrooms overnight. Government spending is taking money from some Canadians and giving it to others, and I see no reason why the citizens of Burlington are a protected species that residents of Timmins or Sault Ste. Marie (for example) should pay to help out.

It is about time Canadian voters elected government leaders that will de-regulate wherever possible, cut the size of the civil service, and repeal policies that intervene needlessly in the market place. Federally I think Pierre Poilievre as Prime Minister is the best option for the next election.

1. Professor Kershaw is founder of “Generation Squeeze” and argues that higher home prices benefit the elderly at the expense of younger generations, ignoring the reality that the value of homes did not rise, the value of money fell.