Due to the rising costs of housing in Canada, many government policies have been initiated to try to bring the average home price back down to where the average Canadian can afford it. B.C. and Ontario have attempted to curtail the soaring costs by introducing a tax that is levied against foreign buyers.
Ottawa has instilled various types of mortgage constraints to stop home buyers from purchasing a home that will put them into financial ruin if they can’t pay. But, the real problem might not be one that can be legislated. The real issue might be the low inventory that the Canadian countryside is experiencing.
Real estate regulation has the best of intentions to slow down the rising prices of owning a house, but they actually might be creating a worse scenario and driving prices higher. All the restrictions that have been put in place, are delaying developers in their endeavor to build new homes to house Canadians.
How the cost of construction relates to health of the real estate market.
The ideal scenario for a healthy real estate market is that the cost of construction is nearly equal to the price of owning a home. But, what is going on in Canada is not so healthy.
In Canada, the expense of buying a house often well exceeds the cost of construction, which is leading to a shortening supply of affordable homes. If the trend continues, then the costs to own a home in Canada are likely going to get much higher before there is any reprieve.
In eight of the cities with the lowest housing inventory, there was an additional $230 thousand added onto the construction costs of development for every single detached home that was built from the years of 2007 to 2016. In Vancouver alone, the average price of a new home is upwards of $640 thousand, which is higher than any other area internationally.
Why prices continue to inflate.
Ontario appears to be the perfect example of what is going on and why prices continue to inflate. Most of the municipalities seek to impose tens of thousands of dollars to new development endeavors on top of the construction costs that it takes to build a new home. That puts developers in an enormous hole before they even break ground.
There are also many spaces that are zoned for agriculture, which means that the inventory to build is highly restricted. When there is more demand and a shrinking supply, home costs explode out of control, and that is what is happening not just in Ontario, but all across Canada.
The average developer in Ontario, considering all those additional costs, is spending more than $100 thousand just for the privilege of building a new home. If the zoning costs were cut alongside the development add-ons, the price of a new house would drop substantially. Estimates are that if things eased up, the average price of a Toronto home would fall as much as $70 thousand, which is an incredible difference to what the average homeowner is facing now.
Conservation a must, but why so much of it?
There is very little debate that putting land aside for conservation is a good idea and a must to preserve the integrity of a city, its ecosystem, and to keep industry pollution away from the places where homes reside.
But, some considerations should be made to the cost and benefit of conserving so much land and putting zoning restrictions to such a degree that it is out pricing the average homebuyer from being able to purchase a home in which to live.
For new developments in Winnipeg, the most significant costs are wastewater construction and water, but other expenditures can be cut back. Instead of making necessary cuts to make housing more realistic for Canadians, however, municipalities like Toronto are planning on hiking costs for new developments, not reducing them.
It appears that government regulation that was initially supposed to stop the rising costs of homes around Canada might be having the opposite effect.
New zoning laws going into effect, taxes levied against would-be foreign buyers, and land that is being put aside for conservation all combined might be a recipe for disaster and the reason that housing prices for new developments continue to be outside of most people’s budgets. Perhaps the answer is not more government interference, but less.
