Housing affordability has reached a crisis level in Ontario. You have to earn over $200,000 a year just to afford an average home in Toronto. To help slow down escalating home prices, the Ontario government has introduced a series of initiatives. The goal is to boost the Ontario housing supply by cutting red tape.
In this article, we’ll take an in-depth look at “More Homes, Built Faster: Ontario’s Housing Supply Action Plan 2022–2023.” I’ll refer to it as the Ontario Housing Strategy. At the end of the article, we’ll have a couple of experts weigh in on whether these measures will make a difference.
The issue
Canada may be a spacious country, but there is a shortage of the right type of homes in the right locations. This has led to home prices spiralling out of control. It used to be mainly a big city problem, but it has since spread to the suburbs and the country in the last decade.
Affording a home isn’t easy these days. If you want to live in a city like Toronto, you need to earn at least $200,000 just to afford an average home. Most people don’t make that much, so it’s causing an affordable homes crisis.
The Ontario Housing Strategy is looking to make the situation better. There are plans to construct 1.5 million homes in Ontario over the next 10 years.
Building more homes near transit
You’d think that this would have been a priority years ago. The Ontario Housing Strategy is looking to make building homes near public transit a real priority.
There are far too many major transit hubs in Toronto and Ottawa where there is a lack of housing nearby. The Ontario Housing Strategy wants to examine major public transit hubs and get shovels in the ground as soon as possible.
Not only that, but the Ontario government also wants to increase the density of housing near public transit hubs. Living near transit makes it super convenient for residents. They can easily hop on public transit and go shopping, all without ever stepping outside, in some cases.
Gentle density
Gentle density refers to increasing the number of housing units in an area without adversely affecting the area’s charm and character.
To satisfy the need for more homes, the Ontario Housing Strategy allows for more housing units to be built without the need to get further approval. The Ontario Housing Strategy lets you build a maximum of three residential units, without needing a by-law amendment. The province says that by-law amendments are the perfect example of red tape and are what is causing fewer homes to be built.
If you are building an owner-occupied property, an apartment in your basement, or a laneway suite, you wouldn’t need a by-law amendment most of the time.
This helps get more rental units into the market faster. It also gives homeowners the opportunity to expand their homes to let other family members move in.
Opening the Greenbelt for housing development
The most controversial part of the Ontario Housing Strategy is opening the Greenbelt up for housing development. In case you’re not familiar with the Greenbelt, it’s a protected area of land in southern Ontario.
The Greenbelt was created to better protect rural Ontario. This includes important parts of our ecosystem like farms, forests, wetlands, and watersheds. Despite Canada being the second biggest country in the world, it has limited where developers can build homes. This limitation has led to home prices escalating out of control. That’s why the controversial discussion about opening up some of these areas has been brought to the table.
To ease rising prices, the provincial government wants to revoke the Central Pickering and Parkway Belt West Plans. However, it’s receiving a lot of political pushback. As of now, the Central Pickering plan has been officially revoked. A decision is still pending on the Parkway Belt West plan.
The goal of building more housing for cities and towns
The provincial government is working on the local level as well. While it’s nice to say more housing should be built, unless targets are set and met, it’s unlikely that as much housing will be built as needed. The timing is crucial, as Canada is set to accept a record number of immigrants in the coming years. Unless housing is built to accommodate them, an already strained housing supply will be strained even more.
As mentioned earlier, the province of Ontario wants to build 1.5 million homes in the next 10 years. To do this, it’s setting goals for all major cities and towns in Ontario. Toronto is leading the pack with a goal of 285,000 homes in the next decade. Ottawa has the second-highest target, with a goal of 161,000 homes. Going back to the GTA, Mississauga has a goal of 120,000 homes, while Brampton has a goal of 113,000 homes.
To accommodate this massive growth, the Ontario government is going to invest a lot of money into infrastructure upgrades. These improvements will prepare the infrastructure to handle the new demand.
More pressure on developers to actually finish projects
It’s been happening all too often that developers decide to pull the plug on new housing projects. This can be devasting. Not only is the homebuyer left without a house to live in, but it also leads to further delays until this housing that’s vitally needed is built.
The Ontario government is increasing the fines developers face when they break the rules. The fine is going up to $50,000, increasing from $25,000. The hope is that this increased pressure will push developers to complete their construction plans.
It’s expected that this will increase the number of new homes being built. It should also stop another trend of developers trying to collect extra money from homebuyers last minute.
Will the Ontario Housing Strategy work?
Will the Ontario Housing Strategy address the lack of housing supply and escalating home prices? That’s the million-dollar question. It’s not an easy question to answer, so we thought we would share a couple of experts’ insights.
In terms of reducing construction costs and fees, Ben Myers, President at Bullpen Research & Consulting Inc., had the following to say:
“In order to make more new development opportunities feasible and increase housing supply, we need to reduce the costs and risks involved with the projects. There are still many areas of the GTA where expected revenue would not exceed costs on a high-density development and that must change, preferably by costs going down, not prices going up.”
Myers points out that too many politicians think these changes are about saving developers money. Instead, Myers says it is about encouraging developers to take on more projects.
Here’s something that will likely surprise you. Myers pointed out that according to Finnegan Marshall and The Altus Group, government fees account for about 25% of the revenue in a project. That’s higher than most cities in North America. Myers says that many Canadian municipalities are “milking” the developers for everything they can. He argues that it’s all in an effort to avoid property tax increases and upsetting their existing voter base. These costs, of course, inevitably end up coming out of the pockets of homebuyers.
“In a city like Toronto, where the majority of new housing is very small condominium and rental apartments, the common refrain that ‘Growth should Pay For Growth’ means that young professionals and tenants are solely responsible for the city’s new infrastructure needs,” says Myers.
How Bank of Canada interest rate hikes are affecting mortgages
Two-thousand twenty-two was an unprecedented year. We saw the Bank of Canada hike interest rates eight out of nine times. When we add those hikes together, prime rate went up a total of 4% last year. Yikes! For those with variable-rate mortgages, this resulted in their mortgage payments going up by more than $1,000 a month in some cases.
Interest rates are the main driver of home sales and home prices in Canada. When interest rates are low, home sales and home prices tend to be higher. When interest rates are high, home sales and home prices tend to be lower. Right now, we are seeing the latter, rather than the former, and it is unsurprisingly affecting the real estate market.
“Soaring rates have been the number one enemy of home prices for the last 11 months. Not only have they driven up borrowing costs, making home ownership less affordable from a budgetary standpoint, but they’ve also driven up mortgage qualifying rates,” says Robert McLister, Mortgage Strategist at MortgageLogic.news.
That’s made it considerably harder for would-be buyers to get approved for financing. McLister explains that 12 months ago, you only had to prove you could afford a mortgage payment at 5.25%. Today, banks make you prove you can afford rates of 7.09% or more. That’s slashed buying power by over 11% in many cases.
Like the stock market, consumer sentiment plays a huge role in home sales and home prices. There’s also the psychological effect of rising rates.
“A lot of people don’t want to buy until rates start dropping, because that’s when they think home prices will go back up. Others think there’s still room to drop due to recession, mortgage defaults, etc., and so they’re trying to pick a bottom,” explains McLister.
McLister says that household formation, lower prices, falling rates, and rising incomes will increase prices. That being said, no one is clairvoyant enough to know exactly when that will happen.
How interest rate hikes may affect the Ontario Housing Strategy
High interest rates have Myers concerned about the new homes market. He says that the Ontario Housing Strategy will be less effective now than it would have been in a lower interest rate environment.
Myers points out that higher interest rates reduce new home demand and thus reduce housing supply. He says they make developments less feasible by increasing land carrying costs, long-term financing, and other borrowing costs.
High interest rates make Myers skeptical about how successful the Ontario Housing Strategy will be in the short term. That being said, he sees hope in the long term if rates come down.
“Unfortunately, in the short term, the rate hikes could totally offset all of the measures announced in the More Homes Built Faster Act. With that said, the changes are still much needed, and will prove beneficial when the market returns to its 2021 demand levels,” says Myers.
Final thoughts
The success of this plan largely has to do with interest rates. Will interest rates come down? Only time will tell. If they do, it could certainly help a lot more homes be built sooner, which is the goal of this strategy. Then everyone wins in the end.
