Here is a recent chart from Mike Moffat showing how much development charges have increased in the City of Toronto from 2009 to today:

We've, of course, seen this before. Back in 2020, I shared an article that developer Urban Capital published where they did a cost comparison between a project they had done in 2005 and a project they were doing in 2020. What they uncovered was that development charges alone had increased by 3,244%! The most of any line item in their pro forma.

Development charges over the last real estate cycle have been an insidious problem. Meaning, the industry knew they were crazy high, and we were all trying to be vocal about it, but let's face it -- the general public doesn't have a lot of sympathy for developers complaining about high fees. They are also largely hidden from purchasers and renters. The charges just get lumped in.

If our industry could figure out how to be more transparent and separate out these charges, much like a sales tax, I think it would go a long way to showing consumers what they're actually paying when it comes to new housing. And then maybe something positive would happen. Because this is a major reason why new housing has gotten so expensive in this region.

Can you imagine if property taxes had increased by 3,244% over the last 15 years? I can't. Because no one would have ever allowed that to happen.

For better and for worse, the current market is going to serve as a rude awakening for municipalities. We've reached the breaking point. The housing market is, as we've talked about, in a "state of economic lockdown." And when people don't buy new homes, it means developers no longer have the money to pay development charges.

This week, Urbanation released its condominium market update for Q1-2024. And I'd like to point out two data points. Firstly, across the Greater Toronto & Hamilton Area (GTHA), there were 1,461 new condominium sales for the quarter.

This is the lowest quarterly total since Q1-2009 (the global financial crisis) and the second lowest total since the mid-1990s. (Remember when we spoke about right now being the toughest market since the early 90s?)

Secondly, during this same time period, 2,361 new condominiums began construction across the region. This represents a 52% annual decrease. So all in all, fewer people are buying new homes and fewer new homes are starting construction.

What is obvious is that the market is slow right now. What is not obvious is what happens next. It's unknowable. There’s risk. My gut is that the market will come back more slowly than many people are expecting, or perhaps hoping. There’s inventory that needs to work its way through the system first.

But ultimately it will come back. Toronto is one of the greatest cities in the world and there remains a need for more homes. Which is why I continue to believe that, if you are in the market for a new one, now is arguably a wonderful time. You get to buy when most others aren’t.

Last month we spoke about how our current economic environment is going to negatively impact housing supply in the short-term. Now here's some further evidence for this argument (via Bloomberg):

“As rates started ticking up, the faucet started to turn off,” says Jonathan Gertman, senior vice president for development at the NRP Group, one of the largest multifamily housing developers in the country. “The number of projects starting this year already has been cut significantly. Anything that started in 2022, in most of the country, comes online 18 to 24 months later. So by the middle of 2025, you see that new supply start to go down significantly.”

This is also being reflected in Federal Housing Administration (FHA) loan applications for new multi-family housing:

Or put another way: FHA multifamily loan applications are on track to total as much as $18 billion for FY 2023, compared with $29 billion for FY 2022, $51 billion for FY 2021 and $45 billion for FY 2020.

The above article is specifically talking about a looming affordable housing shortage. But these exact same headwinds are also impacting new market-rate housing. Of course, there's always a lag when it comes to development. So it'll likely be a few years until we really feel the impacts.