A new report was just published by Urbanation and the Federation of Rental-Housing Providers of Ontario (FRPO) arguing that the Greater Toronto Area is undersupplying rental housing to the tune of about 20,000 units per year. This number considers both purpose-built rental housing and condominiums that are purchased by investors and later rented out. (Shane Dingman also covered the report in this recent Globe and Mail article.)
These findings probably won’t come as a surprise to a lot of you. It is pretty common for most big/growing cities to operate with a perpetual housing supply deficit. With all of the barriers to development, it’s often impossible to keep pace with demand. This naturally creates upward pressure on pricing. But the other factor that cannot be ignored is development costs. How much does it cost to actually deliver new supply?
Here’s an excerpt from the report that speaks to this consideration:
While the results of the infill development potential exercise are encouraging, the economics
of intensifying these sites may be too difficult for owners to ultimately move them forward in many cases even with a zero land cost, as achievable rents outside of Central Toronto are
often not high enough to offset development and operating costs.
It’s also something that we’ve talked about many times before on the blog. Even with free land, there are going to be countless sites and neighborhoods where it does not make economic sense to build anything new: development costs > potential revenues. And so to build, somebody is going to have to pay. Either the costs need to be subsidized or the revenues needs to be topped up somehow. Otherwise, supply = 0.
If you’re facing a deficit of 20,000 units per year, this seems like something you may want to consider. How might we increase supply? And how might we increase the supply of affordable housing? Many, including some of the folks interviewed in Shane’s Globe and Mail article, believe that inclusionary zoning is one such solution. Force new developments to deliver a certain percentage of affordable units (kind of like forcing restaurants to offer up 5-10% of their tables at a loss).
But again, I think it’s important to remember that whenever costs exceed revenues, somebody is going to have to pay for that shortfall, otherwise supply = 0. Something has to give, whether that be reduced costs, greater density, or higher rents on the remaining market rate units. I think part of the allure of inclusionary zoning is that it creates the allusion of a free lunch. But here’s the thing: everything has a cost.