How do expectations affect economic decisions? The recent “inclusionary zoning” imbroglio at Toronto City Hall offers an interesting case study.
On October 22, 2021, the City’s Planning and Housing Committee approved the Inclusionary Zoning amendments, which would go up to vote in City Council on November 9th.
This news was seen as a surprise to many developers, as evidenced by the flurry of activity in the three weeks leading up to the November 9 City Council meeting. Dozens of new Condominium Approvals were being submitted per week; a huge increase, as the trend had been for only a handful of these applications per week.
The new rules go into effect in September 2022. This date must also have been a surprise to developers, because the day after the vote there was an immediate drop in the number of new Condo Approval applications being submitted per week.
As part of my work with UrbanToronto.ca, I have access to all the city planning and permitting data as they come in. This lets me chart and quantify this surprise. (If you’re interested in getting a summary of this data sent to your inbox daily, check out the New Development Insider. This report was first published there!)
Before delving into the charts, a bit of background info:
“Inclusionary zoning” is a policy where some real estate developers are obligated to offer a portion of their units at below-market prices. This is in contrast to “exclusionary zoning”, which excludes certain building types from certain areas of the city.
There are also several different kinds of applications a developer must file before building something new. If they require new height allowances different than the zoning, they need a Zoning By-Law Amendment. If they need to subdivide the land, they need a Subdivision Approval. If they are building a condo, they need a Condominium Approval.
Each application also requires extra documents as well. Think of architectural plans, land surveys, and so on. There can be dozens of different documents submitted for a project. These documents can be filed either simultaneously with the application, or sometimes they are submitted later—either because of delays on the developer’s side, or because the City planners ask for more information.
These applications are all typically filed well before shovels ever hit the ground. They determine the size, shape, land site, and interior layout of the building.
On to Toronto City Council: Council meets roughly once a month, and the items on the agenda are partly determined by various committees. The Inclusionary Zoning policy proposal came from the Planning and Housing Committee.
Almost always, when something is approved by a committee, Council approves it as well. As well, both Council and the various committees share their agendas a few days before a vote takes place.
With those preliminaries out of the way, now we can understand the charts!
1. In the weeks before the Planning and Housing Committee meeting, there were about 2 or 3 Condo Approval applications submitted per week. In the lead up to the City Council meeting, that number ramped up to 40 per week. Immediately after the provision passed, it crashed again.
2. Typically, Condominium Approvals are submitted along with the necessary documentation, either simultaneously or a couple of days after. But of the 93 applications submitted in the timeframe we’re looking at, 83 of them have no documentation several weeks after the fact. This is very unusual.
3. We can track the number of applications that do not have any documentation across time as well.
4. We noticed a similar trend in Subdivision Approval applications as well.
Was This A Unique Phenomenon?
Entrepreneurs are constantly trying to predict the future: from consumer demand, to the status of the supply chain, to the regulatory environment. Announcements or commitments to something specific, like implementing a new rule, allow entrepreneurs time to anticipate what the impacts of this change will be to their business.
We see this behaviour every November and December in the application process. This is because new taxes and fees go up for applications submitted in January of the next year, so developers rush to submit their applications by the December deadline so they not subject to the higher levies.
It seems as though many developers believed that the new inclusionary zoning measures would also be implemented sooner than September 2022, perhaps either January as usual, or maybe there was concern that the rules would become effective immediately.
Of course, entrepreneurs acting in anticipation of future government actions happens with more than just development applications, nor is it localized to Toronto or the 21st century.
This is most commonly studied with respect to the effects of central bank announcements on the stock market. Thus, an entire industry has emerged which tries to interpret what the Federal Reserve chairperson means when they use “Fedspeak“.
An amusing story is that of 19th-century Swedish politician and publisher Lars Johan Hierta. In the 1830s, he was worried that his pro-republican newspaper Aftonbladet i Stockholm would upset the Swedish monarchy. He was right: in 1835, the king used an old war-time law to shut down the paper. But Hierta had pre-emptively taken out permits for setting up more newspapers, and so published (and consequently was forced to shut down) the New Aftonbladet, the Newer Aftonbladet, the Sixth Aftonbladet, and so on. In the end, there were 26 new Aftonbladets before his publication was safe from censorship.
Not all entrepreneurs will share the same expectations. The same information can result in different actions from different entrepreneurs, as they judge their own abilities of dealing with the future differently. These differences in judgment is what allows experimentation and diversity in different business processes, hiring practices, marketing decisions, and even regulatory compliance.
Economic decision making is driven by expectations about the future. The legislative process is long and sequential across time, originating from public discourse, to a proposal in various committees, to being voted on by the decision making body, to finally being implemented. At each stage of this process, entrepreneurs anticipate how these changes will affect their future business, and respond accordingly.
By the time the new legislation or regulation is finally in force, much of the potential economic impact will have already happened. This can be a pitfall for analysts who only look for differences in outcomes beginning on the date of implementation.