Ontario housing measures offer short-term gain but long-term pain

As much as rent control could benefit some existing renters, in the long run it reduces the incentive to build new rental housing

By Steve Lafleur
and Josef Filipowicz
The Fraser Institute

The Ontario government introduced a raft of measures this summer aimed at reining in the price of buying or renting a home in the Greater Toronto Area (GTA). The goal is laudable and the approach may create some temporary reprieve – but the long-term consequences could be devastating.

There are two sides to the housing market, like any market: supply and demand. Of the 16 measures the government proposed, 15 aim to tamp down demand for housing in the GTA, including rent control and a tax on foreign homebuyers. However, there are good reasons to believe the bigger problem is on the supply side of the equation.

ontario housing foreign buyers
Steve Lafleur

The stock of new housing units in Toronto, for example, has grown over the past decade, as evidenced by the number of cranes building condos and the number of new subdivisions in the region. But the number of new residents has also grown. If the rate at which developers and homebuilders can respond lags behind this population growth, the cost of renting or buying can escalate. Moreover, if rents aren’t allowed to reflect market conditions, developers won’t have much reason to provide new rental units.

There are both theoretical and empirical reasons to believe that regulations have held back the supply of new housing units – and that’s before we consider the proposed measures.

A recent Fraser Institute study estimated the impact of government regulations on the supply of new housing in Canadian metropolitan areas, including the GTA. The study compared the number of new units that should have been built, based on underlying demographic and economic factors, to the number actually built. The results were clear: fewer new units were built in the most desirable neighbourhoods, notably in Toronto.

Josef Filipowicz

Why the discrepancy? The Fraser Institute’s recurring survey of developers allows us to identify variations in the cost and ease of development in Canadian municipalities. The shortest approval timelines for building permits in the GTA (Burlington) are 10 months shorter than the longest (Georgina), and per-unit costs for regulatory compliance in Hamilton ($21,000) are half what they are in Toronto ($46,500).

Given that recent research by the province found only a small percentage of property transactions involved foreign buyers, local governments would likely make more progress on home prices by eliminating undue housing supply restrictions.

But that’s not what’s happening. While the foreign buyers tax may simply distract from more important reforms, the introduction of rent control could devastate the rental market. In a recent survey of top academic economists, only two per cent said rent controls have a positive impact on the quality and supply of rental housing.

However, it’s easy to see the short-term benefit. As one respondent put it: “Incumbent renters benefit from capped prices. New renters face reduced rental options.”

As much as rent control could benefit some existing renters, in the long run it reduces the incentive to build new rental housing, since it’s just as easy to build condos for sale instead. Moreover, if landlords can’t recoup the costs of building improvements, they may let the quality of their units degrade.

While the Ontario government is right to worry about rental and home purchase prices, its approach is short-sighted. Artificially capping rents and trimming housing demand may lead to savings for some renters and buyers today, but in the long run it will likely reduce the number of new units. That’s bad news for a growing city with already-tight rental and purchase markets.

Provincial and municipal governments would be wise to address the underlying factors that reduce housing supply growth, rather than focusing on short-term policies that could exacerbate the problem in the future.

Steve Lafleur and Josef Filipowicz are analysts at the Fraser Institute.


The views, opinions and positions expressed by columnists and contributors are the author’s alone. They do not inherently or expressly reflect the views, opinions and/or positions of our publication.

0

You must be logged in to post a comment Login