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Barriers to Home Building Can Stunt Canada's Economy

10/22/2015 05:29 EDT | Updated 10/22/2016 05:12 EDT
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Keep Out sign in front of a carpenter installing windows

The joint economies of the Toronto, Hamilton and Oshawa metro areas are home to more than one in five Canadian jobs. Indeed, this region deserves its reputation as Ontario's Greater Golden Horseshoe. But a prosperous history does not guarantee a prosperous future, and just as Ontario's economic dominance is waning, its largest cities face economic challenges. To grow economically, cities must also grow physically -- new jobs attract new families, who need new homes.

However, a recent Fraser Institute study finds stark differences in the regulatory hurdles property developers across the Greater Golden Horseshoe must overcome to build those new homes. These barriers can make the housing supply unresponsive, putting Canada's largest economy on a leash.

Regulatory barriers to housing construction can ripple throughout local economies, converting booming labour markets into soaring house prices as the housing supply lags behind the pace of newcomers settling into a region. As housing becomes scarce, its inflated costs can absorb the wage gains found in prosperous places.

This effect is well-documented in America's metropolitan areas; places with the most restrictive land-use regulations tend to see their economic booms followed by the largest house price growth. The most constrained places also tend to lose out on potential long-run employment gains following good times.

In short, policies affecting how quickly property developers can respond to demand for new homes have far-reaching effects. And although city planning is well-intentioned -- it helps prevent nuisance and ensure growth is supported by appropriate infrastructure -- it can add costs and complications to residential development.

These complications often culminate in months, or even years, of waiting for city hall's approval of typical housing developments. The study estimates approval timelines ranging from under 14 months in Burlington and nearly 16 months in Brampton, to almost 24 months in Georgina and 28 months in Clarington. If these delays cause the supply of new homes to lag behind demand, new housing may become scarce, driving prices higher across the region by creating a perpetual seller's market.

Prohibitive compliance costs, including development charges and legal fees, can make the economics of more affordable housing options turn sour. These costs add up to a low of $17,500 per new home built in Hamilton and a high of $57,500 per home in King Township. Such a wide gap begs questions about what development fees aim to achieve.

Responsibly set fees, reflecting new infrastructure costs, can lift the fiscal burden of new development from existing taxpayers, making it easier to accommodate. This is especially true at the urban fringe where new roads and sewers are often necessary. Yet, many cities in similar circumstances have divergent regulatory costs. For example, while Markham and Vaughan offer similar commutes to Toronto's core and have seen impressive population growth, a typical home built in Vaughan faces more than $10,000 more in regulatory costs.

Council and community groups often do important and beneficial work, but they can under-value the needs of newcomers as Canadians continue to converge on urban centres. A survey of industry professionals revealed that opposition to residential development from council and community groups tends to be strongest where homes are most valuable -- such as King Township and Oakville -- and less of a deterrent to building in places such as Oshawa and Brampton, where people have amassed less equity in their homes. One should be careful attributing a specific causal story to this correlation, as outside factors like regional land-use policies and transportation may ultimately impact prices. Nevertheless, there is clearly a cost to amplifying voices against new housing.

Cities such as Oakville and Oshawa, where survey evidence suggests red tape is thickest, can turn to their neighbours in Burlington and Whitby for examples of effective land-use regulations that impose less of a burden on building. Further, provincial policies such as the Greenbelt engulfing most of King Township should be viewed in light of their effects on new building. Smoothing out kinks in the home-building process can pay dividends to anyone looking for a new home in Canada's largest urban region.

This piece was co-written by Ian Herzog, Fraser Institute economist and Josef Filipowicz, Fraser Institute analyst.

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