New home supply remains challenged, but long-term price trend is positive

Housing has been a hot button issue in Toronto for a very long time, and no one seems to be able to agree on the right way to go about fixing it. One of the most common solutions is to add as much new supply as possible, but with rising interest rates and inflation both impacting the creation of new housing, there is a high likelihood that the supply situation will get even worse moving forward.

According to the President of Capital Developments, Carlo Timpano, on the Toronto Under Construction podcast, there are three things that are playing a role in the current production of new housing supply in Toronto: “High demand for labour and trades in Toronto, general trade inflation/supply chain issues (especially in wood), and capacity was cut.” In addition to the huge increases in construction costs, development charges that the City of Toronto requires that developer’s pay are set to increase by 49 per cent. These fees and cost inflation gets passed on to the end-user, with higher condo prices and higher rents.

Infrastructure challenges

“These factors are calling into question the types of projects developers are taking on,” Timpano says, adding that unzoned land is becoming more appealing for developers, as there is too much near-term risk. Ultimately, developers buying fully approved “shovel ready” sites will be less common, and supply will not grow as fast as would have been expected with the 2021 and early 2022 spike in buyer demand.

Timpano is also critical of how the City of Toronto is approaching the housing issue. “The City of Toronto is placing all the needs to expand capacity, and deal with infrastructure challenges on new-home owners, instead of raising property taxes to spread the burden of city building to all of the people who benefit from the city.”

The common refrain that growth should pay for growth, is not a stance that a welcoming and inclusive city should take – everyone should participate in the expansion. According to Timpano, the current policy approach taken by the government will likely result in a supply squeeze, which will further increase housing prices in the future, regardless of interest rates.

Timpano says there needs to be a shift in developers’ messaging, or rather, the understanding of people within communities around the benefits of new housing. People often believe that developers are going to come in to “fundamentally change their communities,” when really, developers are putting up towers to house people, support the community, keep extended families close to one another, and to create jobs. In many cities, land transfer taxes, development charges and the incremental increases in property taxes due to new development make up a significant portion of the municipal budgets.

Onerous planning requirements

Creating communities and community infrastructure for residents to live, which in turn will attract more immigration and economic activity and growth, is critical for Toronto to ascend to the next level, Timpano concludes.

We continue to blame investors, central banks, foreigners, money laundering, unscrupulous mortgage brokers and greedy developers for our unaffordable housing in Toronto. In reality, however, our municipal government likely has more to do with the cost of housing than all of those factors combined.

Trade labour shortages and international supply-chain issues may be outside the purview of the City of Toronto, but continuing to add costs to a developer’s proforma in terms of fees and delayed approvals, while making it exceedingly difficult to find a property where the numbers “pencil-out” and generate enough of a risk-adjusted return for developers due to onerous planning requirements, is having disastrous results.

If you’re worried about buying and seeing prices lower in five years, I wouldn’t bet on that occurring. Our politicians have no interest in seeing house prices decline, and almost everything they are doing will lead to even higher prices in the long-run. Good luck!