Nova Scotia boom vs. Ontario bust

What's going on?

Mike Moffatt on Twitter

Mike Moffatt notes that if you take the population of Canada and subtract Quebec (23%), the rest of Canada (ROC) divides into two parts which are almost exactly equal: Ontario (38.5%) and all other provinces and territories (38.5%). So the ROC outside Ontario makes a good control group for Ontario.

This graph shows that housing starts in Ontario are down, while housing starts in the ROC minus Ontario are up. Deny Sullivan observes that housing starts in Nova Scotia are way up:

Deny has some theories about what’s going on:

Development charges are much, much higher in Ontario. In October 2022, the Ontario government brought in legislation requiring development charge increases to be phased in over five years. But in April, they backed down and removed the requirement, allowing large hikes to happen immediately. (They weren’t willing to provide replacement funding to municipalities.)

Another big difference between Ontario and Nova Scotia is that Ontario’s cities are determined to squeeze every dollar they can out of new construction. Toronto wants ~$50,000 per unit for new condo apartments, including a 20% increase as recently as May (it also follows a 46% increase in 2022).

Nova Scotia builds a lot of purpose-built rentals, and hardly any condos. The federal government has waived GST/HST and allowed accelerated depreciation (offsetting taxable income) on new rental housing. Ontario builds a lot of condos, and with interest rates up sharply, the market-clearing price of condos is way down.

There’s a lot of Toronto condos for sale (prices are “sticky downward” because sellers are reluctant to lower their prices). Housing sales are a leading indicator for housing starts; a lot of projects are on hold. To make them viable again, the obvious thing to do would be to lower development charges.

In Vancouver, there’s been a number of high-rise projects that have pivoted from condos to purpose-built rentals, including the redevelopment of the Safeway at Broadway/Commercial Station.

What about upzoning?

It’s too early to see any Housing Accelerator Fund (HAF) changes in the data (it only became official in June). Instead, Halifax is likely reaping the benefits of its pre-COVID Centre Plan. There are problems with the Centre Plan (it’s too small and narrowly targeted). But for the strip malls, car dealerships and parking lots it targeted, the allowed density is significant. We are likely seeing the fruit of those changes now.

Developer pledge: cut fees and we’ll pass on the savings

Budget for a Toronto high-rise condo project

A coalition of Toronto condo developers is pledging that if any level of government is willing to reduce taxes on new housing (making more projects viable), they will pass 100% of these savings on to buyers. Equivalently: the market-clearing price of new condos (where homebuyers and investors are willing and able to buy them) is now too low to absorb the current level of costs.

Matt Young on Twitter, August 1:

For every dollar of tax eliminated by any level of government from the cost of delivering new housing, we will immediately reduce the price of all homes we sell by the amount saved, dollar for dollar.

Our group has studied why housing has gotten so expensive over the past 15 years. The single biggest driver of this has been taxes. Taxes today amount to $240,000 for a condo in Toronto (30% of cost) compared to just $36,000 in 2009 (12% of cost). That’s a nearly 600% increase!

Housing can only be as affordable as it costs to build. We need to focus efforts on reducing input costs, and acting to ensure end pricing reduces with it. We are committed to finding a solution and hope that government will step up to help solve this with us.

To learn more and to support our pledge, visit cantwin.ca and read our letter to government.

Earlier thread by Matt Young:

In the status quo scenario, approximately 3.6% of households can technically afford to buy an average 600 sq ft condo ($860k incl closing) in ALL OF TORONTO! You need $233,000 in annual household income to qualify for the requisite mortgage. No wonder we are in a crisis!

But when you remove the taxes the story changes a lot. There are roughly $210k in taxes and government related charges per unit, so without those your cost comes down to $650k all in. How many people can afford that? 22% of Toronto households.

Now I’m not saying that alone is “affordable” for everyone. But you can’t debate it takes a huge amount of pressure off people and resets the crisis in a meaningful way.

The letter warns:

Housing completions will decline rapidly in 2-3 years when many of the homes that were expected to break ground in 2024 but have been paused, fail to materialize.

The three specific asks are for the provincial and federal governments to eliminate HST on condos (same as for purpose-built rentals); to eliminate the land transfer taxes paid by buyers; and for the city of Toronto to reduce municipal development charges from $76,880 per apartment back to 2009 levels (adjusted by inflation): $6,857 for 1BR and $11,033 for 2BR. They estimate that the impact at the municipal level would be 5% of the city’s budget.

Howard Chai, Storeys:

"Everybody always talks about development charges funding infrastructure," Matt Young says. "A lot of that infrastructure that gets funded are used by everybody in the city. In Toronto, the number one line item is for transit. That infrastructure benefits everybody in the city, not just the 20,000 to 30,000 new homeowners that buy every year. I think we need to look at how that's funded and everybody needs to pay their fair share, so we're not burdening first-time homebuyers, young people, and new immigrants."

Municipal governments in Ontario don’t sound very interested. Liam Casey and Allison Jones, Canadian Press:

Municipalities across Ontario are not sold on the proposal from the developer group if it means reducing development charges. The province passed a law in 2022 that cut development charges developers had to pay municipalities for infrastructure such as roads, sewers, and water.

The Association of Municipalities of Ontario estimated the changes would leave municipalities with a $10 billion hole over 10 years. The province later walked many of those changes back, but the association says they still represent a $2 billion hole over the same time frame. 

"The reason that the development charges are going up is for precisely the reasons that the developers have outlined — all of these input costs are going up," said Lindsay Jones, the association's director of policy.

"The answer cannot just be cutting development charges without a new source of funding to fund infrastructure because with that you're not going to be able to get more houses built."

You can’t beat something with nothing. Some alternative municipal finance ideas.

What the cost bottleneck looks like

Even if something is legal to build, if costs are too high, it won’t get built. It doesn’t make sense to build something that will be worth less than what’s already there, after subtracting construction costs.

Here’s a visualization illustrating an analysis by Coriolis of a six-storey rental project in Vancouver, as of May 2022. The total height is the market-clearing price. Increased costs (the red and turquoise parts expanding) are first absorbed by land lift (green), but after that, the project has to wait until rents rise.

More

• Buyers shun new Toronto condos as sales hit 27-year low. Rachelle Younglai, Globe and Mail, July 18.

• ‘I can only drop the price so much’: Inside one condo owner’s desperate attempt to sell in Toronto’s ‘ghost town’ market. Clarrie Feinstein, Toronto Star, July 24.

• Previously: the cost bottleneck. Coriolis has a report indicating that rising construction costs have brought down land values for Metro Vancouver high-rise projects dramatically.