Originally posted on Housing Matters.
Earlier in May, the Ontario Government tabled new legislation as part of its long-anticipated Housing Supply Action Plan. Known as Bill 108, it proposes numerous changes to several existing laws and regulations.
The preamble of the Bill makes it very clear: the Government of Ontario “believes that increasing the supply of housing will help every person in Ontario by making housing more affordable.” We at Housing Matters share in that belief. We’ve come to this belief through careful analysis of economic theory and data. And after careful study of the contents of this Bill, we believe that it will do as promised: increase the supply of housing, and, consequently, make housing more affordable.
However, the researchers at the Ryerson City Building Institute (CBI) have reached a different conclusion from their analysis of the same Bill. Indeed, CBI begins their analysis by predicting:
it is unlikely that the Housing Supply Action Plan and Bill 108 will improve housing affordability while also targeting the lack of housing options, including missing middle and family sized multi-unit housing. What is proposed may, in fact, reduce livability and affordability throughout the province — particularly in areas facing intense growth pressure…. (p. 1)
We disagree with these statements. To be clear, we believe that Bill 108 — while not a perfect panacea — will (1) increase the availability of housing options, (2) increase livability, (3) increase affordability, (4) and this will be especially true in areas facing intense growth pressures. The following post will analyze the changes to Bill 108 with respect to these areas, and we will compare our findings to that of the CBI.
Table of Contents
— The Economics of Supply and Demand
— On Development Charges
— On the LPAT and OMB
— On Heritage Protection
— On Community Benefits, Public and Private
— On Inclusionary Zoning
— Changes to the Building Code
The Economics of Supply and Demand
Cherise Burda, executive director of the CBI, had this to say upon the release of their report: “our analysis was on planning policy, not economics.”
We believe that planning policy and economics are intricately related. So before we discuss the specifics of both the legislation as well as CBI’s analysis, we think it’s important to spell out the economics of planning. We hope this will shed light on why we believe that, contrary to the CBI, increasing supply necessarily means increasing affordability.
Economic analysis depends heavily on the concepts of supply and demand. Yet despite the fact that they have reached the popular lexicon, our experience tells us that they are poorly understood by the general public. That’s why we take any opportunity to explain these concepts to help educate the public.
Demand refers to how much of a specific good a consumer is willing and able to buy at a given price. Consumers make purchasing decisions with respect to specific quantities of a specific good. (It may be useful to note that a “specific good” refers to a subjective view to every individual. To an alien who knows nothing about Canadian culture, there may be no difference between a normal Raptors jersey and one signed by Kawhi Leonard. A diehard Toronto sports fan, however, may think of them as completely different goods — like the difference between gold and a Golden State Warriors jersey.)
For a specific good, consumers will have the highest demand for the first unit of that good. Subsequent units will be incrementally less valuable. The reason for this is that each specific unit of the good will satisfy a different need — the first unit will be used to satisfy the most pressing need, and subsequent units will satisfy subsequently less pressing needs.
(And note that “unit” of a good is also subjective: a pair of shoes, a set of 4 tires, or a bowl of 500 grains of rice may all constitute subjective units. And similarly, “needs” are subjective, too: to one man, the most pressing need for a bottle of water is to drink it himself; another man may prioritize giving that bottle to his child first.)
Moving on from demand, we have supply: how much of a specific good a producer is willing and able to sell at a given price. Supply is (in some sense) the opposite of demand: at higher prices, producers are willing and able to sell more units.
Note that in our definitions of both supply and demand, prices were already given. That means to increase demand means that a higher quantity will be demanded at the same price. And to increase supply means that a higher quantity will be supplied at the same price.
How are prices determined? Through exchange between buyers and sellers. The easiest way to think about this is imagining all exchanges as an auction. In an auction with one buyer and one seller, the potential price could be anything. In fact, there could be no agreed upon price at all.
But in a setting where lots of people are trying to buy and sell the same thing, then the potential price narrows. This is because if the price is too high, and there are goods going unsold, then a seller will be there to undercut the competition by offering a lower price (and in the process, perhaps entice buyers to buy more). And if a price is too low, and buyers can’t find enough goods to satisfy their needs, buyers will offer sellers higher prices to ensure they get the goods they need (and in the process, perhaps entice sellers to bring more goods onto the market).
So how does an increase in supply relate to affordability? First, let’s define more affordable to mean lower prices than otherwise.
Let’s take it step by step. First, let’s assume that demand for a good is not changing. In this context, we imagine an increase in supply (recall: at a given price, more goods are available for sale). And if we also assume that previously the exact quantity that was supplied was precisely equal to the quantity demanded at the given market price (this assumption is also called equilibrium).
With these assumptions, we can conclude that with an increase in supply, we will now have an excess quantity of goods available for sale. This is because at the given price, the consumers have not changed how much they are willing to buy. In other words, goods will be going unsold at current prices. But as we discussed above, this will mean that producers will lower prices in order to get rid of their excess quantity.
Therefore, when demand is unchanging, and starting from equilibrium, an increase in supply will mean lower prices. Put another way, an increase in supply increases affordability. Note well that under these assumptions, it simply does not matter how much supply increases — any increase will necessarily mean lower prices.
Now let’s complicate the analysis by changing our assumptions.
First, let’s assume that demand is slowly increasing over time; meaning that at a given price, the quantity of a good consumers desire will be higher as time goes on. Second, supply is not changing. And third, at current prices, buyers can’t find enough goods to satisfy their most pressing needs. As such, buyers are bidding up prices very quickly.
What would an increase in supply mean in this context?
This time, a lot of our analysis will depend on the particulars of the size of the increase in supply. Let’s analyze three different scenarios. First, the scenario that there is a one-time increase in supply that is large enough that it covers the pressing needs of the buyers, and also supply will increase at a rate faster than the increase in demand for the foreseeable future. This will mean that both (1) prices will fall drastically at first, and (2) they will keep getting lower as the increase in supply outstrips the increases in demand. This increases affordability both immediately and over time.
Second, let’s assume that the increase in supply is large enough that it covers the pressing needs of the buyers, but does not increase after that. This will mean that (1) prices will fall drastically at first, but (2) will rise up again as demand increases over time. This means that affordability increases immediately, but gets worse over time.
Finally, let’s assume that there is no big one-time change in supply, but rather supply increases over time at the same rate as demand. While this may mean (depending on several other factors, things could be different) that the supply of the good will never be enough to satisfy all the pressing needs of buyers, it will mean that prices do not increase at the same rate as before. And since these prices will be lower than otherwise, we can say that even under these strict assumptions, an increase in supply will make goods more affordable.
In fact, taking this logic to all of its extremes is what allows us to say that increasing supply always increases affordability.
The CBI concludes that Bill 108 “supports the building of more housing supply across the region.” But they go on to say that “it is not clear how this supply will result in greater affordability.” As we have now shown, it is quite clear (once we understand economics) how an increase in supply always results in an increase in affordability. But instead of stopping here, let’s take a closer look at the CBI analysis.
On Development Charges
Development charges (also known as “DCs”) are fees that municipalities can collect for the purposes of building or maintaining infrastructure. This includes roads, sewers, libraries, and police and fire services.
Under the current rules, traditional “developers” are not the only ones who have to pay DCs. If a homeowner in a detached home with a finished basement wants to convert their second floor into an additional unit (meaning they want to add a third residential unit to their home), they too will have to pay DCs. This also applies for homeowners who are considering whether they should add as a second residential unit either by finishing their basement, or by building a new “ancillary” structure on their property (like a laneway house).
Bill 108 will eliminate DCs for such purposes. As the DCs of even small developments can cost up to tens of thousands of dollars, they can be prohibitive for many smaller property owners seeking to add additional housing supply. Even if these DCs were not prohibitive to supplying additional housing, they are still large budgetary expenses that the property owner could have used at least a portion of to make quality improvements (that is, increase “livability”) of his new units. The reality is these development charges affect both affordability (supply) and livability (quality). Thus, eliminating them will increase both affordability and livability of Ontario homes.
Although the CBI did not discuss Toronto in its report, many readers of this post will be most interested in the case of Toronto. Some may then protest that the loss of DCs for these units will mean lower quality public services that will be overused by the new population. Our argument is that many of the services covered by DCs have been underutilized already.
Consider this. Despite the fact that the population of the city has increased by over 400,000 between 2006 and 2019, the new TTC subway extensions are performing well below average in daily usage; TTC ridership decliningoverall; water consumption is declining on a per capita and absolute basis as well; as is the total in-branch library usage; and the Toronto Police Service has had declining numbers of uniformed as well as civilian staff since 2013. Fire services, on the other hand, have been growing steadily over time.
Related to water consumption declining, by some measures, wastewater consumption is declining as well. All four of Toronto’s water treatment plants have seen declines in total annual flows from 2008. From 6% at Highland Creek, to 16% in Ashbridge’s Bay and Humber, to 36% in North York (see Appendix C in all the reports).
Schools are paid for via so-called education development charges (EDCs), which are authorized under Ontario’s Education Act (as opposed to the Development Charges Act). Although it is proposing to requires school boards to get the Education Minister’s permission before acquiring or expropriating land, Bill 108 will also enable school boards to seek compensation in the form of either real estate or EDCs from any kind of development in a “localized” manner; that is, the school board (with the Minister’s approval) may cut a special deal, for either land or cash, with anyone developing land in its district.
Meanwhile, nearly 1 in 5 schools — 130 overall — in the Toronto District School Board are operating at under 65% capacity. Enrollment has been dropping overall in Ontario’s public secondary schools since 1999.
Exactly why is Toronto under-utilizing so much of its infrastructure? We’re not sure; but we speculate that increasing urbanization has increased forced efficiencies in usage for many of these areas. As well, in addition to people having fewer children than before, high real estate prices in Toronto make it that much more difficult for young families to start their lives here; instead, they’re sending their children to schools in suburbs like Halton. That, and the fact that perhaps the largest consumers of infrastructure — manufacturers — have been leaving Toronto, being replaced by residential buildings and offices.
So if infrastructure usage is indeed declining, then reducing the scope for what kind of projects must pay for development charges is only fair. This is especially true in an environment where DCs could be inhibiting new development in areas with declining population, such as much of the Yellowbelt (which is our position). Does it not make more sense for services to be responsible for dealing with their under-capacity first, before taxing residents more?
So we expect that removing DCs for additional dwelling units will not only increase the number of housing options in the declining areas of the Yellowbelt, but also it will increase the types of housing options, as well as increase affordability.
As a brief aside on the issue of infrastructure not related to DCs: Some arguethat Toronto is a “low tax city”, due to low property tax rates. However, by our analysis, Toronto collects the most in total taxes per resident out of 28 other municipalities in Ontario. This is because most other municipalities depend on property taxes as their sole revenue source. In contrast, Toronto collects many more different kinds of taxes (such as the land transfer tax), plus a lot in government grants — which are simply taxes collected and transferred by a different government bureaucracy.
On the LPAT and OMB
The Local Planning Tribunal Act introduced a tribunal known as LPAT in 2017. The LPAT replaced the Ontario Municipal Board, known as the OMB. The purpose of both is to be an opportunity for developers (and others) to challenge municipal planning decisions. The reason there could be any dispute about this is because the municipalities get their planning powers through provincial legislation, so there may be conflicts between what the province wants and what the municipalities are approving.
In addition to a name change, there were several major differences between the current LPAT system and the OMB that it replaced. While the LPAT has only been in operation for less than two years, many feel that the system is designed to be anti-development. This makes the municipalities happy, because they believed the old OMB was too pro-development. The fact of the matter is that between the years 2000 and 2006, the OMB sided with developers against the City of Toronto 64% of the time. (It should be noted that this is only for cases that could not be settled. About 41% of all cases were settled out of court.)
In addition to tightening deadlines for decisions, and increasing the budget by $1.4 million dollars to address the excess of 100,000 units in decision limbo in the court system, here are two big differences between the OMB and the LPAT that the new legislation is proposing to reintroduce, meaning the LPAT will be more like the OMB.
First, the OMB would hear arguments from both sides “de novo” — meaning as if no prior legal decision had been made. This allows new evidence and testimony from both sides, typically planners and other experts being used as witnesses. The LPAT starts with taking the prior decision as given, and requires evidence that city council had made a legal mistake in issuing the decision.
Under the new rules, the LPAT may once again take on new evidence and testimony. This allows experts to weigh in on planning decisions, instead of lawyers and politicians beholden to their nimby electorate.
Second, many of the cases that the OMB tried were with respect to municipalities that failed to make a decision on an application within the deadlines. The OMB then made decisions that were final in the sense that if the OMB ruled in favour of a developer, the development could happen right away. Under the LPAT, however, the municipality would get another six months to make a decision. If after this additional six months the development was still in limbo, only then the LPAT would make a decision. This could prove to be a very tedious and costly process.
Under the new rules, not only are the deadlines for municipalities to make a decision shortened from 10 months to 6 months, but the LPAT no longer has to give the municipality a second chance to not make a decision. This can speed up the process while reducing costs.
The CBI believes that the new rules will make the planning process “more adversarial”, which will then “encourage more hearings at the LPAT, which are time-intensive and costly for both municipalities [and] developers” (p. 3).
Our belief is that there are many reasons why the current planning process is adversarial, but the existence of a referee like the LPAT is not a significant part of them. What makes the process adversarial is all the powers vested in “stakeholders” who do not own the property that is being developed. Rather, they own nearby property, which they are worried will decline in value in the event that new development goes up.
While this concern is understandable, our position is that it is incongruous with justice and efficiency to prohibit, limit, and constrain the property rightsof the many in order to preserve speculative investments of a few. And to be clear, all investments are speculative, as the future is unknown. What those who buy property are speculating on is that the future demand for property will be in excess of future supply. Density (gentle or otherwise) threatens that future, as our analysis above of supply and demand tells us.
But the reason we want density is not to discourage investment. Quite the opposite. More people means more opportunities. More opportunities to start businesses, get a job, hire an employee, make a friend, meet a lover, or to share a moment like packing 20,000 people on the street to watch a local sports team succeed. We believe that this value is worth protecting and engendering through more supply.
To truly eliminate the adversarial nature of development, we need to radically rethink the current approach to planning that favours preserving the “physical character” of arbitrarily construed neighbourhoods, which effectively ends up simply as an excuse to oppose development for any minute reason — from having too many people living in one building, to having too many front doors.
On Heritage Protection
We agree with the CBI that the “proposed changes to the Ontario Heritage Act… may threaten municipalities’ ability to preserve and protect heritage buildings and resources.” However, unlike the CBI, we believe that changes do not pose any risk of “[hastening] the loss of properties of heritage value.”
This may strike some as a difficult proposition to follow, so let us spell out clearly. First, a little history. The first ever “heritage” legislation in the Anglo-Saxon countries was the Ancient Monuments Protections Act of 1882 in the United Kingdom. In the era of rapid industrialization of a country as ancient as the UK and population growth (greater London had increased in population from about 1 million in 1801 to over 4.5 million in 1881), it was felt necessary and proper to protect the heritage that built the country.
So what did the legislation protect? Cottages, pubs, and golf courses nary a few decades old? No; the legislation focused exclusively on prehistoric structures, from the neolithic up to the Iron Age, such as Stonehenge. Did that mean that other “heritage” buildings were to be soon destroyed? The answer, again, is no; indeed, there are lists online of pubs in London that are in buildings as old as the 1400s.
What explains this? Our answer is that true heritage has a market value of its own. If a structure is elegant, beautiful, or otherwise remarkable enough that it has value for potential buyers, then the market will have the incentive of preserving that architecture without any special government legislation.
This is not to say that there is no role in government protection of heritage properties. But we think that the current standards are too stringent, and can stand to be pared back.
On Community Benefits, Public and Private
The Planning Act is major law that governs how municipalities can legislate growth and development. It is the Planning Act that gives authority to Official Plans, which then enable zoning bylaws. It is zoning bylaws that legally limit how property owners may develop their own property.
It is also the Planning Act that enshrines the ability of city councils to collect money from developers not for the costs of development (that’s regulated by the Development Charges Act, also being changed by the new law), but instead for “community benefit” when a new development requires a rezoning application.
Note that this comes after developers have navigated through the Byzantine maze of zoning approvals. They then have to sit down with a city councillor in what are known as “Section 37” negotiations.
This is when the city basically asks for cash for the alleged community-destroying privilege of building homes that people are lining up to live in. There is also no limit to how much cash the councillor could ask for.
Under the current laws, the “community benefits” derived from Section 37 money could be used to fund anything from international conferences to documentaries to grants for local artists. This gives an incentive for municipalities to purposely have overly restrictive zoning by-laws, which gives rise to a lot of rezoning applications, which then allows for opportunities to extract Section 37 money.
Furthermore, there is a Section 42 of the Planning Act that allows municipalities to require separate payment for the development of parks on the site of a development.
But under the new proposals, the arbitrary process of Section 37 will be replaced by a formulaic approach, which will be based on a yet-to-be-determined percentage of the value of the land; as well, not only will municipalities be limited on how much they can ask for under Section 42, but the new legislation will only allow municipalities to require funds on eitherSection 37 or Section 42, but not both.
Once again, we agree with the CBI when they say “Bill 108 will likely reduce the amount — in terms of dollars, space, and parkland — that municipalities can extract from new development to offset its impacts”. But we do not agree with their concern that these proposed changes to Sections 37 and 42 will “erode existing mechanisms that are used to fund growth-related community infrastructure … and services that support livability” (p. 5).
First, we should note that Bill 108 is not eliminating community benefit charges altogether — rather, it is placing a cap on them. The cap is, as of yet, unknown. It may be end up not substantially different from what the City currently collects.
What it would do, however, is put a limit the maximum that a councilor can ask for. This removes a lot of the uncertainty during negotiations. To give a sense of what that uncertainty is like, consider this: in 2013, the City of Toronto procured 50 payments under Section 37, for a total of $59 million — an average of $1.2 million per project. In 2014, the City procured 48 payments under Section 37, for a total of $40 million — $830,000 per project. This is a 50% difference in costs per project.
Second, we’d also like to point out that developers have their own interest in providing parklands and other “community benefits” to their residents. Namely, these livability perks would increase the value of the properties, making it easier to sell at a higher price.
This is easiest to think about by imagining an extreme scenario: how much would anyone pay to live in an area with absolutely zero livability, when there are more livable options also available? Put more concretely, how much would you pay to live in the fires of Mordor if a cottage in the Shire were also available? Most people would likely pay very little; hence, creating a natural incentive for developers to create more Shire-like communities.
In conclusion, community benefits are a natural consequence of the market. Big cities, like Toronto, already offer many great community benefits like a large and diverse set of employment opportunities, a large population to support new business ventures, world-class nightlife and entertainment, and more. Furthermore, developers have their own incentives to create smaller community incentives like parks and other community spaces. This is simply because they increase the value of units in their property.
We are not advocating here to eliminate these charges altogether. Our stance is that by changing the Planning Act to streamline and, more importantly, give a predictable limit to how much developers have to pay municipalities for additional community benefits, Bill 108 will support more development. And as more development means more of an increase in supply, we believe this increases affordability and livability for everyone.
On Inclusionary Zoning
What inclusionary zoning does is to allow municipalities to require that developers build a certain number of “affordable” units in conjunction with any new development. Some might think that “affordable” means anything that people are actually choosing to pay for, and so developers already have an incentive to make their units affordable in order to have any sales.
However, “affordable” in this context is usually a euphemism for “below market price.”
The previous Government of Ontario introduced inclusionary zoning provisions in the Planning Act in 2018, and allowed that municipalities make policies for them for anywhere in the city. Bill 108 amends this to limit where inclusionary zoning provisions are allowable, to only major transit station areas and areas with expedited approval processes (known as development permit systems).
The CBI takes a negative view to this change, because “these changes may delay the implementation of inclusionary zoning.” We agree with this assessment, but believe this to be a positive from the view of increasing supply. In fact, we believe these changes don’t go far enough.
This is simply because, as they only have a limited amount of money, requiring developers to build more housing at below-market costs will deplete their resources to build market-price housing. This reduces the supply of market-price housing, and makes housing less affordable for everyone.
The only way to get more housing affordability for the most number of people is to build more housing. For the few that remain, a cash subsidy or voucher may be implemented in lieu of inclusionary zoning as a support.
Changes to the Building Code
There is a difference between a building code and zoning. Zoning refers to limiting how land and other property can be used: how tall buildings are allowed to be, how many people can live in them, what purposes they can be used for, etc. Zoning is enshrined by the Planning Act.
Building codes regulate the construction of a building in terms of safety, health, and other standards. Building codes are set provincially as well, by the Building Code Act.
The previous Ontario Government introduced changes to the Building Code Act that required new buildings to have many new “green” features, such as electric vehicle charging stations, as well as energy efficiency requirements. Bill 108 may potentially repeal many of these changes.
The CBI believes that not only does the building code, as is, help aid in Ontario’s politically-determined climate goals, but also “energy efficiency measures in the Code make strong fiscal sense for both developers and homebuyers” (p. 8).
We will refrain from taking any position on climate standards or goals. But insofar as the current building code does not affect the supply of housing because of the fiscal impacts that simply reflect what consumers want while simultaneously being profitable for developers, then repealing it will not affect either the supply of housing nor have an environmental impact.
However, if the code limits the supply of housing by imposing standards that consumers do not want, while developers find costly, then repealing it will not only increase developer profitability, but also increase consumer satisfaction because they get to pay for the features that they want. This will also result in lower housing prices, which on the margin will increase the availability (and affordability) of housing.
(As an aside, municipalities are still allowed to set their own standards above and beyond the provincial standards. For example, under the Toronto Green Standard Version 3, all new mid-rise and taller buildings must dedicate 20% of their parking space for electric vehicle charging, while the other 80% must be designed to permit future installations.)
There are several more parts to the CBI report on Bill 108, especially on endangered species protections and the importance of government-owned land, which we will not address here in the interest of focusing solely on increasing the supply of housing. To that end, we would like to reiterate two points one last time: first, that increasing the supply of housing will alwaysincrease affordability and availability. And second, that the market has the incentives already to provide the benefits to make housing more livable and desirable. What is prohibiting the market now is overly-restrictive zoning policies.
Bill 108 is a great first step towards ending the housing crisis in Toronto, and we look forward to more radical steps in support of increased supply in the future.
Ash Navabi is senior economist at Housing Matters. Send him mail email@example.com