Dissecting what’s behind persistent high prices – and what governments should do about it

As we approach the second half of 2024, the housing landscape and new home prices in the Greater Toronto Area (and Canada broadly) continue to be surprisingly resilient in the face of economic headwinds. Despite historical trends suggesting a downturn in housing prices following periods of high inflation and interest rates, recent prices have moderated somewhat, but have largely defied the expected convention. Here are some of the factors behind it.

In the past 18 months, interest rates have surged to unprecedented levels, while sales of new homes have dwindled to half or less of the 10-year average. Although prices have moderated since their peak in 2022, with some types and locations experiencing a 10- to 15-per-cent decrease, the decline falls short of historical expectations. Why is this happening?

Scarcity of land

Firstly, the availability of shovel-ready serviced land within municipal boundaries in the GTA is scarcer today than in the past. Unlike previous cycles and due to current supply and demand, there is less room for the prices of new land to decrease.

Secondly, fixed-rate municipal charges (such as development charges) now constitute a larger proportion of new home costs. In many GTA municipalities, these charges can average between $100,000 to $150,000 for a single-family home and are going up, not down, contributing as an inflationary pressure to the cost of a new home.

Thirdly, the cost to build has seen a dramatic escalation. Between 2019 and the end of 2023, in Toronto, there was a staggering 98.3-per-cent increase in single-family home construction costs and a 74.1-per-cent increase in apartment construction costs. Looking nationally, using an 11-city sample, these figures were 69.1 per cent and 54.2 per cent, respectively. This surge is attributed to widespread rises in material and labor expenses, making significant price moderation unlikely without a substantial reduction in construction costs.

Cost of capital

Lastly, the cost of capital remains much higher than in the previous decade. It is likely that we will see a prolonged period of higher interest rates for longer when it comes to the cost of capital – which further exerts upward pressure on costs as access to capital is vital for financing construction projects.

To turn the impossible into the possible and solve the affordability challenges confronting the current housing market requires a multifaceted approach. Governments must prioritize measures such as controlling the additional charges imposed on new housing, expanding available land for development and increasing density allowances to maximize land use efficiency and spread costs. And, of course, governments should continue to focus on the fundamentals to streamline approval processes and remove unnecessary barriers to new housing construction.

While historical precedents offer insights, the current landscape calls for a targeted approach to tackle the aforementioned root causes. By addressing these and renewing their focus on the fundamentals, only then will policymakers succeed in addressing affordability.