Is the "market clearing price" (where supply and demand meet) the current selling price for that home in mid-Toronto? If so (and I think it is), then a lot of the savings from giving up government revenues will simply increase the land value (which is by far the largest piece of the overall cost). Does not solve the problem as far as I can see
That's a valid point, although I doubt we're at market clearing price right now - inventory for detached homes is quite low. Still, such changes would probably need to be accompanied by increased land supply (something that's definitely possible in Toronto through large, underused public properties like Downsview Park) and construction supply incentives.
Given existing demand, and existing supply (which I agree with you is artificially low due to current zoning restrictions in that midtown neighbourhood from your example) then the current sale price IS market clearing. Aside from a (tariff-induced?) major recession that lowers demand, increasing supply is really the only way to lower prices. I don't think we should be hoping for a major recession or depression - so increased supply is really the only structural solution.
You're probably right. Although the good news is that many of my recommendations for municipal/provincial governments would probably help stimulate supply: I'd imagine that sharply reducing investment risk exposure for developers would lower their barriers to entry.
In Vancouver these costs are even higher, and Victoria city council are proposing a 400 percent increase in development and permitting costs. Local and regional government are for the most part the impediments and one of the factors in the increase in housing costs, just as Poilievre states.
In order to reduce spending governments would have to first look at reducing all the nonessential feel good social programs and many of the ridiculous grant programs currently in place that are fuelled by virtue signalling ideological based vote buying scams. Good luck to us all on that one.
in victoria it's tens of millions of dollars for bike lanes. it must be up around 35 million by now. it's done nothing except make commuting and delivery work miserable.
Make the salary of bureaucrats based upon their results and the economy, not on bureaucratic processes and how many people are under them in the bureaucratic hierarchy.
Where possible bring in private companies to compete with the bureaucracy.
That would help to increase efficiency and reduce costs.
Base bureaucratic pay and benefits upon the average in the private sector.
Municipalities are not allowed to run deficits (as you know), which would mean that if all of these charges and fees are dropped (and I agree that the land transfer tax is senseless), municipalities would have to raise property taxes to make up the difference. This would have to go into a purchaser's calculation when they buy the property, and may render it unaffordable even if the up-front price is lower.
Also: in spite of the problems with bureaucracy, here in Niagara over 36,000 permits have been issued that are not being built by builders/developers. They are, for whatever reason, just sitting on them. Many appear to be land-banking: using the property as collateral for other ventures, or hoping to flip the property once the permits are in. Niagara Falls is considering a 'sunset' expiration clause for permits; i'd think a 'sunrise clause' (start by a certain date) is also necessary.
There are problems with bureaucracy, but the issue seems over-simplified.
Municipalities certainly could raise property taxes to meet their mandates. Or they could decrease their spending (an oft-underappreciated option).
Your land-banking observation is a great example of just how complicated the real estate industry is - and how hard it is to get policy right even if you are trying.
Ignoring all else in your post - just for simplicity - you say that your solution can drop new house prices by twenty per cent. Okay, I will accept that for discussion purposes and, further, I will assume that there will be (other than what I am going to specifically note below) no effect of existing housing.
Therefore, if a new house previously cost $1.000 (an imaginary number, no?) then, now it would cost $800. If that new house was on the west side of the street and a one year old identical house was on the east side of the street, then it follows that the "old" house would now have a market value of $800.
If the "old" house was purchased with a mortgage of $950, do you really think that the bank would be terribly interested in renewing that mortgage with the market value being so much lower than the mortgage? As a result, how many existing homeowners would receive notices requiring paydown of $150 at renewal time or no renewal? It follows (at least to me) that very few homeowners would be able to come up with the required $150 so you would then have a massive increase in foreclosures and resulting homelessness. Unless, of course, the government guaranteed the "excess" $150 indebtedness or prohibited foreclosure, or, or, or ...
To me, it is problems like that that prevent such apparently practical solutions from being implemented.
As I mentioned in a reply to a different comment, even if governments were to drop those taxes and even if the policy had the desired impact on the larger housing market, it would almost certainly take years for the price changes to filter through the market. So I would imagine that the impact on individual homeowners would be much gentler than the painful mortgage meltdown in the U.S. back in 2008.
I respectfully disagree with you on the immediacy of the effect.
If you can get the same house for $800 or $1,000, you will always go for the $800 if you are a buyer and $1,000 if a seller. Obviously, those two will have to agree somewhere in the middle so it might be that the immediate effect is $950. The result will be that the existing owner will take a haircut and some/most/all equity will be wiped out.
On the other hand, a real estate appraiser will value a house based on comparable sales and/or cost to build an identical house. That suggests to me that appraisers will have great difficulty in setting a valuation and I further suggest that bank mortgage officers will similarly have a huge problem.
The immediate effect might be to start at $950 and trend down but what loan officer is going grant a five year term on a mortgage when today's value MIGHT be $950 but the likely value in five years is PERHAPS $925 but, in any event, is likely to be noticeably less than $950? With most mortgagors taking the longest amortization period that they can, the amount paid in the first five years is (I'm making this up but it is truly representative) oh, say, $10, meaning that the principal owing five years out is $940. Again, what bank mortgage officer is willing to extend a loan where the collateral value is pretty much guaranteed to decrease and be less that the amount owing?
My takeaway is that a) your commentary is absolutely useful [note: I said useFUL not the antonym of that word]; b) there would be severe collateral difficulties; and c) the government is the only one that can make sense of the difficulties [assuming, of course, that they are interested in breaking eggs to make a housing omelette - sorry for the mixed metaphor!]. Of course, the governments (plural, to be sure) are the ones that created this immense problem and it will be interesting to see if they are sufficiently perspicacious to present a really good and comprehensive solution or whether it would be of such half measures as to create even more problems.
I'm not convinced the impacts would be quick. Remember: most of the policy changes would only impact new construction. For an established city like Toronto, it might take decades before there were enough (cheaper) new houses on the market to drive down the value of the hundreds of thousands of existing housing stock.
Im new to your substack. I really enjoyed your post. One thing, and im not a fully trained in the real estate market or pretend to hold any expertise in this area so forgive me for what may sound like a very facile question, but DC charges, from my understanding pay for the general infrastructure of either existing development infrastructure or new development infrastructure in otherwise undeveloped new neighbourhoods. Yes property taxes, water and sewer charges, transit and emergency service levies help costs to maintain existing infrastructure, but what abt rapid development that results in new cachements or completely new neighbourhoods? Wont reducing some of those DC charges risk the proper infrastructure that new developments need that would not be offset by existing property taxes and levies? The point was made above that that reduction may help new home buyers, who are probably from younger demographics while increasing the burden on existing homeowners who are probably older? Wouldnt this in essence be a weath redistribution policy? Is there something i am missing?
I agree that revenue from development charges might sometimes be used to offset larger infrastructure costs. But I would argue that they're not always *needed* for that purpose - especially for developments in existing neighborhoods. I'd hope that a well-designed set of municipal service user fees should be calibrated to cover the full life-cycle of the services - including initial construction.
When it comes to entirely new neighbourhoods where there's need to build out completely new infrastructure, I don't see why municipalities can't negotiate fees with individual developers based on the specific needs and context. That would be far better than the expensive basket of universal fees we have now.
Your wealth redistribution question is also interesting. I suppose it's possible to see it that way. But what I'm envisioning is a government that drops taxes and fees as it disengages from a sector in order to allow market forces more of a say in guiding an economy. Perhaps that would be more of a reversion to the mean than a redistribution.
Organic economic changes that favour one group over another happen all the time.
I agree that the taxes, fees, permits, etc. artificially inflate the cost of homeownership and there should be fewer fees and low to no permit costs (permits in general) but one of my concerns is how do you course correct without penalizing current homeowners? There is a lot of talk about correcting these issues (especially from PP) but not a lot of details about how we approach it in a measured way as to not hinder the vitality of the current real estate market.
That's an important consideration (especially for me as a current homeowner!) I have a couple of thoughts:
1. Given the scope of the affordability and availability problem (and its many consequences), perhaps we can't afford to hold millions of Canadians hostage in deference to the (legitimate) needs of just one population subset.
2. From a practical perspective, I suspect that there's really nothing any level of government can or will do that would immediately and drastically upset the market. Changes would, at best, have only gradual and incremental impacts on prices.
Is the "market clearing price" (where supply and demand meet) the current selling price for that home in mid-Toronto? If so (and I think it is), then a lot of the savings from giving up government revenues will simply increase the land value (which is by far the largest piece of the overall cost). Does not solve the problem as far as I can see
That's a valid point, although I doubt we're at market clearing price right now - inventory for detached homes is quite low. Still, such changes would probably need to be accompanied by increased land supply (something that's definitely possible in Toronto through large, underused public properties like Downsview Park) and construction supply incentives.
Given existing demand, and existing supply (which I agree with you is artificially low due to current zoning restrictions in that midtown neighbourhood from your example) then the current sale price IS market clearing. Aside from a (tariff-induced?) major recession that lowers demand, increasing supply is really the only way to lower prices. I don't think we should be hoping for a major recession or depression - so increased supply is really the only structural solution.
You're probably right. Although the good news is that many of my recommendations for municipal/provincial governments would probably help stimulate supply: I'd imagine that sharply reducing investment risk exposure for developers would lower their barriers to entry.
In Vancouver these costs are even higher, and Victoria city council are proposing a 400 percent increase in development and permitting costs. Local and regional government are for the most part the impediments and one of the factors in the increase in housing costs, just as Poilievre states.
In order to reduce spending governments would have to first look at reducing all the nonessential feel good social programs and many of the ridiculous grant programs currently in place that are fuelled by virtue signalling ideological based vote buying scams. Good luck to us all on that one.
in victoria it's tens of millions of dollars for bike lanes. it must be up around 35 million by now. it's done nothing except make commuting and delivery work miserable.
Reduce the bloated bureaucracy.
Make the salary of bureaucrats based upon their results and the economy, not on bureaucratic processes and how many people are under them in the bureaucratic hierarchy.
Where possible bring in private companies to compete with the bureaucracy.
That would help to increase efficiency and reduce costs.
Base bureaucratic pay and benefits upon the average in the private sector.
Municipalities are not allowed to run deficits (as you know), which would mean that if all of these charges and fees are dropped (and I agree that the land transfer tax is senseless), municipalities would have to raise property taxes to make up the difference. This would have to go into a purchaser's calculation when they buy the property, and may render it unaffordable even if the up-front price is lower.
Also: in spite of the problems with bureaucracy, here in Niagara over 36,000 permits have been issued that are not being built by builders/developers. They are, for whatever reason, just sitting on them. Many appear to be land-banking: using the property as collateral for other ventures, or hoping to flip the property once the permits are in. Niagara Falls is considering a 'sunset' expiration clause for permits; i'd think a 'sunrise clause' (start by a certain date) is also necessary.
There are problems with bureaucracy, but the issue seems over-simplified.
Municipalities certainly could raise property taxes to meet their mandates. Or they could decrease their spending (an oft-underappreciated option).
Your land-banking observation is a great example of just how complicated the real estate industry is - and how hard it is to get policy right even if you are trying.
David, here is something for you to ponder.
Ignoring all else in your post - just for simplicity - you say that your solution can drop new house prices by twenty per cent. Okay, I will accept that for discussion purposes and, further, I will assume that there will be (other than what I am going to specifically note below) no effect of existing housing.
Therefore, if a new house previously cost $1.000 (an imaginary number, no?) then, now it would cost $800. If that new house was on the west side of the street and a one year old identical house was on the east side of the street, then it follows that the "old" house would now have a market value of $800.
If the "old" house was purchased with a mortgage of $950, do you really think that the bank would be terribly interested in renewing that mortgage with the market value being so much lower than the mortgage? As a result, how many existing homeowners would receive notices requiring paydown of $150 at renewal time or no renewal? It follows (at least to me) that very few homeowners would be able to come up with the required $150 so you would then have a massive increase in foreclosures and resulting homelessness. Unless, of course, the government guaranteed the "excess" $150 indebtedness or prohibited foreclosure, or, or, or ...
To me, it is problems like that that prevent such apparently practical solutions from being implemented.
As I mentioned in a reply to a different comment, even if governments were to drop those taxes and even if the policy had the desired impact on the larger housing market, it would almost certainly take years for the price changes to filter through the market. So I would imagine that the impact on individual homeowners would be much gentler than the painful mortgage meltdown in the U.S. back in 2008.
I respectfully disagree with you on the immediacy of the effect.
If you can get the same house for $800 or $1,000, you will always go for the $800 if you are a buyer and $1,000 if a seller. Obviously, those two will have to agree somewhere in the middle so it might be that the immediate effect is $950. The result will be that the existing owner will take a haircut and some/most/all equity will be wiped out.
On the other hand, a real estate appraiser will value a house based on comparable sales and/or cost to build an identical house. That suggests to me that appraisers will have great difficulty in setting a valuation and I further suggest that bank mortgage officers will similarly have a huge problem.
The immediate effect might be to start at $950 and trend down but what loan officer is going grant a five year term on a mortgage when today's value MIGHT be $950 but the likely value in five years is PERHAPS $925 but, in any event, is likely to be noticeably less than $950? With most mortgagors taking the longest amortization period that they can, the amount paid in the first five years is (I'm making this up but it is truly representative) oh, say, $10, meaning that the principal owing five years out is $940. Again, what bank mortgage officer is willing to extend a loan where the collateral value is pretty much guaranteed to decrease and be less that the amount owing?
My takeaway is that a) your commentary is absolutely useful [note: I said useFUL not the antonym of that word]; b) there would be severe collateral difficulties; and c) the government is the only one that can make sense of the difficulties [assuming, of course, that they are interested in breaking eggs to make a housing omelette - sorry for the mixed metaphor!]. Of course, the governments (plural, to be sure) are the ones that created this immense problem and it will be interesting to see if they are sufficiently perspicacious to present a really good and comprehensive solution or whether it would be of such half measures as to create even more problems.
I'm not convinced the impacts would be quick. Remember: most of the policy changes would only impact new construction. For an established city like Toronto, it might take decades before there were enough (cheaper) new houses on the market to drive down the value of the hundreds of thousands of existing housing stock.
Excellent article. Our cities are addicted to fees.
Im new to your substack. I really enjoyed your post. One thing, and im not a fully trained in the real estate market or pretend to hold any expertise in this area so forgive me for what may sound like a very facile question, but DC charges, from my understanding pay for the general infrastructure of either existing development infrastructure or new development infrastructure in otherwise undeveloped new neighbourhoods. Yes property taxes, water and sewer charges, transit and emergency service levies help costs to maintain existing infrastructure, but what abt rapid development that results in new cachements or completely new neighbourhoods? Wont reducing some of those DC charges risk the proper infrastructure that new developments need that would not be offset by existing property taxes and levies? The point was made above that that reduction may help new home buyers, who are probably from younger demographics while increasing the burden on existing homeowners who are probably older? Wouldnt this in essence be a weath redistribution policy? Is there something i am missing?
I agree that revenue from development charges might sometimes be used to offset larger infrastructure costs. But I would argue that they're not always *needed* for that purpose - especially for developments in existing neighborhoods. I'd hope that a well-designed set of municipal service user fees should be calibrated to cover the full life-cycle of the services - including initial construction.
When it comes to entirely new neighbourhoods where there's need to build out completely new infrastructure, I don't see why municipalities can't negotiate fees with individual developers based on the specific needs and context. That would be far better than the expensive basket of universal fees we have now.
Your wealth redistribution question is also interesting. I suppose it's possible to see it that way. But what I'm envisioning is a government that drops taxes and fees as it disengages from a sector in order to allow market forces more of a say in guiding an economy. Perhaps that would be more of a reversion to the mean than a redistribution.
Organic economic changes that favour one group over another happen all the time.
Thank you! I look forward to more intelligent posts and solutions.
I agree that the taxes, fees, permits, etc. artificially inflate the cost of homeownership and there should be fewer fees and low to no permit costs (permits in general) but one of my concerns is how do you course correct without penalizing current homeowners? There is a lot of talk about correcting these issues (especially from PP) but not a lot of details about how we approach it in a measured way as to not hinder the vitality of the current real estate market.
That's an important consideration (especially for me as a current homeowner!) I have a couple of thoughts:
1. Given the scope of the affordability and availability problem (and its many consequences), perhaps we can't afford to hold millions of Canadians hostage in deference to the (legitimate) needs of just one population subset.
2. From a practical perspective, I suspect that there's really nothing any level of government can or will do that would immediately and drastically upset the market. Changes would, at best, have only gradual and incremental impacts on prices.