Ontario housing measures—too much on demand, too little on supply

The Ontario government yesterday announced a raft of measures aimed at cooling the cost of buying or renting in the Greater Golden Horseshoe. Topping the list—a 15 per cent tax on foreign buyers (conveniently called “non-resident speculators”) and the expansion of rent control to all private rental units in Ontario.

Both of these ideas raise serious concerns.

Taxing foreign buyers may seem politically expedient, but this policy stands on anecdotal, rather than substantial, evidence. It was only a few days ago that Queen’s Park announced it would start tracking the nationality of homebuyers. It’s also unclear whether such a tax will have any meaningful effect. Last year, the British Columbia government implemented a similar tax. Sales volumes dropped (as they had months before the tax), and have since rebounded, making it hard to draw conclusions about the policy’s effectiveness.

Rent control—Ontario’s other flagship move to cool the housing market—is a discredited policy strategy that has been attempted in various jurisdictions over the past few decades, almost always with disastrous consequences. In fact, the Fraser Institute’s first major publication, back in 1975, was entirely dedicated to rent control, a policy seeking to artificially cap how much landlords can raise rents.

The problem with rent control is that it doesn’t help renters in the long run. By capping rents, governments create a disincentive for prospective builders to construct new units. This reduces growth in the rental housing supply. It also leaves less money in landlords’ budgets, as well as reduced incentives for renovating or repairing apartments over time. As a result, there’s a near consensus among economists that rent control policies reduce both the quantity and quality of the rental stock. Thus, a policy designed to help renters actually hurts them over time.

So what should be done instead?

Buried at the bottom of the list of measures proposed by Queen’s Park are glimpses of solutions to what may be the most important driver of the GTA’s housing woes—the supply of new homes is not keeping up with demand.

Ontario, and specifically the GTA, is Canada’s economic engine. As such, people move there from all over Canada, and indeed the world, to live, work and play. Between 2011 and 2016, the region grew by about 345,000 inhabitants—roughly equivalent to a city like Markham. All of these people need places to live, making it imperative to encourage the construction of new housing units.

Beyond natural barriers to the construction of more housing, such as Lake Ontario and floodplains, city governments across the region can slow down the supply of new homes by burdening developers with red tape. The Fraser Institute measured these regulatory barriers, including how long it takes to obtain a building permit, how much it costs, and the opposition homebuilders face from local council and community groups. Our research found that long and uncertain approval processes can severely restrict the supply of new homes.

Queen’s Park intends to rebate a portion of the local development charges some builders may face. There are also plans to create a new “Housing Supply Team” with the goal of identifying specific regulatory barriers to new homebuilding. Both of these moves acknowledge the importance of supply in the housing equation, but if the province is serious about affordability, it should go a lot further.

Rather than being swayed by anecdotes, or digging up failed policies from the past, the Ontario government should face root issues head on. By addressing the fundamental imbalance between the demand for housing and its supply, Queen’s Park and city halls across the GTA can go a long way towards a more affordable future.