Why won't housing supply match demand in the GTA?

There has been a lot of debate regarding Toronto’s housing crisis, and nobody seems to be able to come up with a solution. One of the most commonly suggested hypotheses is that we don’t have enough supply.

Supply continues to be impeded by rising inflation and interest rates in the short term, but there are a laundry list of other reasons preventing supply from matching demand.

Cost-push inflation

Capital Developments’ Carlo Timpano explained that three factors are contributing to the shortage of new housing in Toronto on my podcast last year. These include the high demand for trades and labour, the lack of capacity in the supply chain, and general trade inflation. There is the expectation that these will subside in 2024 due to a lack of pre-construction condo sales activity in the second half of 2022 and into 2023, but significant improvements are not expected.

In addition to these, development charges in Toronto have also increased significantly, as have other government fees. The end-users of new condominiums (both owners and renters) are forced to absorb these costs and fees, which lead to higher rents and condo prices. This effect is called cost-push inflation. According to Timpano, these factors are forcing developers to rethink their projects, and the types of land they want to buy.

Timpano has criticized the City of Toronto for its handling of the housing crisis. Our politicians are dealing with three competing issues: Trying to address affordability, increasing the number of new homes, and paying for the infrastructure needed to serve these new homeowners and renters. However, they are increasing the fees charged to developers to pay for infrastructure, which ultimately hurts affordability and decreases housing supply. An alternative is to raise property taxes for all Torontonians to pay for the new transit, community centres, parks and general streetscape improvements. The cost of growth must not be borne solely by new-home buyers and renters, who are often young and just starting out with limited financial resources.

NIMBYs and politicians often believe that developers are interested only in making money and causing problems in communities. In reality, they are the ones who build and provide the homes that Toronto residents need. Timpano claims that many of the policies being implemented by the government will lead to a shortage of supply, which will cause prices to increase even further. The intentions of the government are in the right place, but they don’t understand the economics of development and unintended consequences.

Revenue from new home construction

There has to be a shift in how developers market themselves to the public, as many people believe that they are going to gentrify communities by building new homes. They are actually working to create jobs and support communities by building homes while also generating significant taxes for the city. In many municipalities, the revenue generated by new construction, such as land transfer taxes and development charges, make up a significant portion of their operating budgets.

Politicians and the media continue to blame foreign investors, mortgage brokers, speculators, Airbnb landlords and money laundering for Toronto’s unaffordable housing. While there may be a morsel of truth to this, it must be noted the municipal government have played a significant part in the rising cost of housing.

If you’re worried that housing prices will decline in the next five years, I don’t think that’s going to happen. Employment remains strong, immigration is high, and our politicians are making a lot of choices that will lead to higher prices. We need much more housing supply, but barriers must be removed, and both the municipalities and the province need to work together to make the necessary changes.