Bill 108, the More Homes, More Choice Act, has proposed numerous changes to land use planning in Ontario. A lot of people are not happy about the amendments and the potential impacts that Bill 108 would have on the financial tools municipalities have to support that growth.
I’ve read the commentary by planners, politicians, municipalities, and others. The consensus outside the development community is these changes will not help housing affordability. Despite my working in the development industry, and being a self-professed YIMBY, I tend to agree that the changes won’t likely have any noticeable impact on affordability. That said, I came to those conclusions by actual analysis, not by the shallow and uninformed opinions being spewed by several of the typical grandstanding politicians that lack even the basic knowledge of housing economics. But unlike the single-family housing they are so desperately trying to protect, I’m not afraid to throw some shade.
Several of the amendments are intended to reduce the upfront costs to developers, and of course the most tired response is “if developers save money, how do we know they’ll pass those savings to consumers?” You don’t, but Bill 108 is about “More Homes,” so it's not about the projects that are already feasible and would be coming to market anyway, it's about making marginal projects feasible by lowering costs. This could potentially help in areas like Scarborough and north Etobicoke, which have seen little new development because revenues are too low. Unfortunately, this will likely result in only a few extra developments per year.
Even if they didn’t pass a single dime of savings to consumers, the developer will now have more resources to pursue more deals and add more supply. Not to mention the revenue generated from developers keeps a lot of people employed, and creates tons of spin-off benefits to local businesses as new residents buy furniture, carpets, window coverings, decorations, etc. If you have a pension or an insurance plan with one of the major players in those industries, they’re investing right beside those developers you so loathe.
However, the truth is, any reduction in development costs is only beneficial in the short run, once it becomes known what developers are saving, the market adjusts quickly. As an example, if the changes to Sections 37 and 42 result in a $2 million dollar reduction in the costs a developer faces on a downtown Toronto project, the next similar development site that a developer wants to buy, the landowner will increase their asking price by $2 million. Development returns will revert back to normal. However, in the outer ‘416’ area and the suburbs, landowners have less power to raise their prices because developments sites are not in short supply and absorption risk can be high. Lower development costs benefit downtown landowners, but could help supply in “C-level” locations.
There’s a strange word used in the previous paragraph, one that should have been on the lips of everyone discussing changes to policies that impact new housing: “Risk.” How could you possibly make an assessment of whether changes will add supply without touching on development risk, as well as a developer’s revenues and costs. Not a single person that was “100% sure” this Bill wouldn’t increase supply even mentioned the word proforma.
Entitlement risk, market risk, execution risk, financing risk - all of these play a huge factor in whether or not a project moves forward. Even if a development is fully approved, it doesn’t mean their project will sell or lease, that the developer can secure debt or equity financing, or that there are general contractors available to build the project on a reasonable budget.
Even if we’re all wrong and Bill 108 results in a flood of units in the market, driving prices down sharply, the benefit is temporary. Declining prices reduces investor demand, the key buyer that supports pre-construction projects. Secondly, when prices trend downward, developers get nervous, and more importantly, lenders get nervous: lenders require higher presales, they limit credit, and they charge higher rates. In addition, there are only so many construction companies and construction workers to build all this new supply, which increases costs. In all of these scenarios, future supply will be reduced, even if Bill 108 achieves it mandate initially.
Before I wrap up, I wanted to comment on “Growth paying for Growth,” the phrase of the day. I recognize the need that cities have for parks, recreation centres, childcare centres, libraries and subsidized housing, and I honestly would hate to see less of those neighbourhood necessities because of Bill 108. We absolutely need complete communities, but amenities and benefits that are going to be shared with existing residents should be more equally funded by both new and old residents. Secondly, you can’t complain about new housing being expensive and also complain that new developments are not paying enough to support new infrastructure and fund growth.
Whenever planning changes are suggested, many politicians and planners hide behind the word “livability,” - it would be nice of them to acknowledge that the cost of living should be considered when discussing the livability of an area. Ignoring the fact that GTA new condo prices have doubled in less than 10 years will not make it go away. Don’t get me wrong, some of the responsibility for that price spike can be laid at the feet of developers, but there is plenty of blame to go all around. I’m looking at you NIMBYs.
Everyone wants a livable city, an aesthetically-pleasing municipality with neighbourhoods that adhere to the principles of good planning. But it would be nice, and there would be less vitriol all around, if the folks at the forefront of those decisions would more regularly discuss the trade-off between livability, affordability and exclusion. For every setback to protect privacy, environmental protection, heritage protection, view plan protection, reduced shadow, prolonged approvals, new development fees, green roof, parking requirements, architectural controls, mandated suite mix, or other restrictive zoning measure results in either lost square footage and fewer units, higher prices for consumers, or a shelved project. When homes don’t get built, someone loses out on the game of musical chairs, and it is almost always the least affluent person that does. Do we want a region with 35-year-olds living with their parents, the less affluent forced to move away or share cramped spaces, and couples choosing not to have children because they can’t afford them?
In conclusion, Bill 108 will not likely make a noticeable dent in affordability. It may increase housing supply in a few marginal neighbourhoods where revenues are too low to support new projects, but it may also reduce the livability of the province from a purely amenities-based perspective. The best solution to help the most people would be to allow higher-densities in single-family neighbourhoods, and raise property taxes to fund affordable housing projects and more transit. However, given the uproar this Bill caused, I can’t imagine the mayhem those two changes would conjure up.
Based on the response to this Bill and the pure and unfettered ignorance of housing and development economics, it is fair to say that Toronto’s housing crisis is unsolvable.
Ben is the President and owner of Bullpen Research & Consulting Inc. With over 15 years of real estate research experience in both the United States and Canada, Ben has established himself as an industry expert, and a go to source for the latest information and insight on the domestic residential housing market.