There’s been a lot of coverage of proposed housing solutions during this federal election campaign, and that’s hopeful. Mike Moffatt and Justin Ling both have posts that dig in deep enough to explain the difference between them.
But there are a few limitations to these plans that I haven’t seen covered, and I have a few grumps about the way that housing solutions are covered in general these days.
Jurisdiction, and Tone, Matters
It’s exciting to see such robust housing plans coming from the federal government, which is the level of government that has the least to do with home building. But for that very reason, some of these plans are somewhat suspect: they require the federal government to promise things that are actually under the purview of the provinces (and even municipalities).
The Missing Middle Initiative has done a lot of analysis of how Development Charges are a tax on home building, and result in fewer homes being built. Many others have denounced municipalities for using DCs at all, for raising them to extreme highs, and for misusing them. Now, federal housing plans from the Liberals and Conservatives talk about reducing development charges as a way to unlock housing development.
The Liberal government has already been doing this a little bit by offering a carrot to municipalities, through funding programs premised on reducing DCs. The Conservatives have been threatening (and that’s the right word) to do the same by withholding funding to municipalities that don’t reduce DCs. Last year at the Federation of Canadian Municipalities conference, CPC MP Scott Aitcheson (representing Pierre Poilievre, who didn’t attend) told a ballroom full of municipal representatives that municipalities “profit the most” from the high cost of housing, and “won’t get away with that anymore once Pierre Poilievre is Prime Minister.” He was eventually led off the stage. The next federal speaker was then-PM Justin Trudeau, who said “I’m here to make partnerships, not threats.” The difference between carrots and sticks is sometimes as simple as tone, and respect.
But all of this misses the points that not all municipalities even use DCs, those that do so are largely trying to make up for the massive amounts of provincial services that have been downloaded to the municipal level, and that the use of DCs is both authorized and highly regulated by the province. People who are angry about the hoarding or misuse of DCs by the City of Toronto would do well to acknowledge that Toronto is an exception in literally every respect compared to the other municipalities of Canada, including in their use of DCs; and that any misuse of DCs by Toronto, Ottawa, or other major cities is a failure of the province to enforce their regulations.
So when the Conservatives threaten to withhold necessary infrastructure funding from municipalities that use DCs, they’re misdirecting the blame and doubling down on the economic insecurity that causes municipalities to use DCs in the first place. And when the Liberals promise to provide federal funding to municipalities to make up for them reducing DCs by half, they’re subsidizing the provinces who have failed to fund municipalities adequately. This is a provincial issue, and yet it was barely addressed in the provincial election earlier this year (which ironically was almost entirely focused on international trade, which is a federal issue).
What Will Sell?
Something I haven’t seen any analysis of is the simple question of what will sell.
We hear a lot about the need for more “missing middle” housing (being housing in the middle of the spectrum between single-detached homes and high-rise apartments, like fourplexes), and how municipalities are to blame for the lack of it due to local zoning restrictions. That’s partially true, but it assumes that developers are just waiting to build fourplexes and municipal planners are standing in their way. At least around here, that’s not true.
I’ve asked local developers why they still build mostly single-detached and semi-detached homes rather than higher density housing. The simple answer they offer is, that’s what will sell quickly; it’s what people want. The amount of debt they need to carry in order to develop housing is significant, which is why they are so frustrated by long regulatory timelines and delays; they want to sell homes as quickly as possible in order to reduce the cost of holding construction loans, so they aim for the product that will sell the most easily. Consumer demand, they say, is for single-detached homes (and increasingly, semis and towns).
But is that really all that people want, or is it just what they can get a mortgage for? When I asked a mortgage agent about how they determine their mortgages, it came down to the exact same metric: what will sell quickly. If a homeowner defaults on their mortgage, the bank wants to sell that home quickly to recoup their costs, and they believe (like the developers) that most people only want single-detached homes, suggesting that anything else will take longer to sell.
They can point to market data showing that single detached homes sell faster on average than other types of homes. I work with market data every day, so I know that they’re not wrong…generally. But I also know that there’s unmet demand for alternative products, like tiny home Additional Dwelling Units, apartments, co-living, co-operatives, etc., but that nobody is building them because builders say nobody will buy them, and nobody is buying them because nobody can get a mortgage for them.
So we can have all of the government programs and economic analysis in the world to promote the “missing middle” of housing types, but that’s unlikely to make a difference so long as developers and banks believe they won’t sell.
Who Benefits From Lowering Building Costs?
The last point I want to make today is that, while all efforts to reduce the cost of housing are important and valuable, let’s be clear that lowering the cost of development will not directly lower the cost of buying a home.
There has been a lot of attention paid to the rising cost of housing development, things like rising Development Charges (which account for over 10% of the cost of housing in some places, but only 5% in Brighton), or the labour shortage (I’ve been told by local developers that a red seal plumber makes about the same as a lawyer these days), or increased materials costs (which skyrocketed during COVID lockdowns, and people are nervous about the impact current tariffs will have today). I’ve seen some reports that indicate that developer profit margins have increased, but I’ve seen others that suggest that they’ve declined — although, with the doubling of housing market value, even a decline in profit margin can still indicate an increase of profit overall. This has been the case for me: as a real estate agent I charge a lower commission today than I did before COVID, but my income per sale has still gone up considerably; but I do less business than I did before, so on the whole my business has declined. Not all real estate agents have lowered their commission rates, and I’ve seen analysis of the industry that suggests that it’s anti-competitive and adds considerably to housing costs. And as I mentioned above, I think the role of banks is under-acknowledged in terms of what they add to the cost of housing, considering they’re financing development and mortgages and profiting from both.
No program can fix all of these problems, but let’s do a thought experiment and imagine that they were all addressed. In fact, let’s go further: imagine that housing was suddenly fast and cheap to build, AND that government was providing subsidies to developers that would reduce the cost of housing to $5. Would that make housing cheaper to buy?
Not at all. At least, not directly.
Market value is, in short, whatever someone is willing to pay for something. A lot of different factors come together to influence consumer behaviour, chief among them being how much someone needs something and how scarce that thing is. Housing is a core need, and is (right now) relatively scarce, so the market value of housing is high. This is true regardless of how much it costs to build housing.
I asked a lobbyist for developers how much they would discount the purchase price of a new home if their development costs went way down, and his answer was: not at all.
“We CAN not,” he said.
“CAN not? Not WILL not?” I pressed.
“CAN not.” Developers are so leveraged, carrying so much debt and preparing so far in advance for their next projects, that a sudden drop in construction costs today will not change their business model, not least because they don’t know what tomorrow will bring. A windfall today means that the next time the market slows down they won’t have to abandon a project and lay off their workers quite so quickly. It would be irresponsible, he maintained, to pass along those savings.
So if we piled up government subsidies and efficiency programs enough to reduce construction costs of a home to $5, but the market value for that home was $500,000, it would still sell for $500,000 and all of those subsidies would go to the developers. It would not directly reduce the cost of housing at all.
Indirectly, developers would take that windfall and reinvest it into building even more homes. Perhaps if they had more money in the bank they would hire more workers and take on more projects at the same time, or be willing to take on higher-density housing projects that require more financial outlay and risk. If this was the case, in theory we’d see more housing hitting the market faster, reducing the scarcity of housing and thereby reducing market value for all housing. But if we’re relying on that (as the Ford government seems to be, based on the approach they’ve taken), we’re effectively giving years’ worth of windfalls to developers, helping their businesses get bigger and bigger, with the hope that they’ll subsequently deliver the scale of development that we’d need to eventually someday hopefully bring the market value down (but not TOO low, because none of us want to lose the value of our primary asset).
So we can’t demonize developers for following their business models and taking the incentives we offer them. But we also can’t rely on reducing building costs in order to reduce purchase costs. The solution I see for this is to lean more into nonprofit housing, through co-ops, nonprofits, and municipal service corporations. When nonprofits own the land, they can determine what gets built there and how much it will cost to live there. It requires a lot of fundraising and careful planning, but without a nonprofit ownership model we’ll continue to see the same types of housing (whatever the developers think will sell) and ownership models (whatever the banks think will sell) at the same market value, no matter how much we manage to tweak the cost of development.