“How does the public sector partner with the private sector to create social impact?”
Costs, regulation and political issues are among the top economic, social and development concerns for the real estate industry in 2020. As discussions about housing affordability take centre stage in the policy landscape, governments have stepped up their efforts to respond by intervening in Canada’s real estate market.
At the federal level, debate has continued around the mortgage stress test, which has had the effect of restraining activity not only in expensive real estate markets like those in Vancouver and Toronto but also in other areas where affordability is less of a concern.
While some of the interventions can help moderate price increases by tempering demand, the real solution lies in making it easier to supply the market with new housing.
In Ontario, the government has heard the calls to address supply. In 2019, for example, it passed Bill 108, which will restore some of the procedures of the old Ontario Municipal Board at the new Local Planning Appeal Tribunal. Interviewees believe this will streamline decision making and help alleviate some housing supply issues.
In Quebec, Montreal has taken a different approach with its proposed 20-20-20 plan. Under the plan, the city would require developers to set aside certain percentages of new residential developments for social, affordable and family-oriented housing. In many cases, they can make a financial contribution in lieu of setting aside units.
The real estate industry has raised significant concerns about the cost impacts of the unintended consequences of these types of policies. While they may help create some new affordable units, the added costs will likely worsen affordability overall.
Looking at the mortgage stress test, it has helped to dampen price increases, but it has done so by taking some homebuyers out of the market. It’s time for the government to recognize that, aside from Vancouver, Toronto and potentially a few rising markets, affordability is less of a concern in most cities and provinces, which shouldn’t be subject to the same rules.
Adding to the concern is the fact that an opaque and unregulated lending market has emerged that’s creating the very risks that the stress test had tried to avoid. With traditional lending markets closed to some buyers, many have turned to private mortgage funds or the developers themselves to get the funding they need to close their homes, often at significantly higher rates. The end result is greater consumer and market risk.
Beyond the problem of unintended consequences, there’s also the issue of inconsistency in government policies. While the stress test dampens demand, for example, the government is also boosting the pool of potential homebuyers by increasing immigration.
Where governments are addressing supply issues, they’re also finding ways to benefit more directly by pursuing transit-oriented development. While transit agencies have traditionally emphasized delivering infrastructure to the public without focusing on ways to subsidize the costs, they’re now doing more to capture some of the new value created.
In June 2019, for example, the Ontario government announced it was changing the planning rules in key areas of Toronto to permit greater density along existing transit lines. The move comes as the government pursues plans to build a massive expansion through the city as part of its spring 2019 announcement of CA$28.5 billion in funding for transit.
Other options to address supply include making public lands available through long-term leases to encourage the development of purpose-built rental housing. Pursuing more of these innovative solutions to supply constraints and affordability concerns is a better way forward than current attempts to temper demand.
Despite recent Canadian progress on many trade-related issues with the United States, interviewees expressed continued uncertainty about the geopolitical environment, with several pointing to the possibility of what they called a black swan event that could disrupt the economy. Populism and the related political risks are a major concern, as seen in a reference by one interviewee to the impact of “legislation by Twitter.”
Whether it’s tariffs and protectionism more generally or more specific issues like Brexit or the US trade dispute with China (and the potential rippling effects on Canada), many interviewees see possible trouble on the horizon.
Also on the policy front, Canadians will be going to the polls in a federal election in October 2019. The real estate industry will be paying particular attention to any impacts on or changes to the mortgage stress test. In Alberta, interviewees will be watching the discussion about pipeline developments given the importance of that issue to economic prospects.
The current policy and economic uncertainty puts even greater pressure on real estate companies to be more nimble than ever. The ability to shift priorities quickly is key to business success and survival.
By building a stronger corporate brand, real estate companies can increase their standing with the public and policymakers. This can help real estate players make a stronger case for their development proposals and more effectively advocate for their positions on affordability.
Governments must recognize that increased supply is the answer to affordability. On the mortgage stress test, it’s time to heed the industry’s calls for changes to address unintended consequences and the impacts on markets where affordability is less of a problem.
It’s time for the various players to find ways to work better together. Governments can increase supply, for example, by entering into long-term leases with developers to build rental housing, with affordability provisions, on underused or surplus public lands. Many governments are already doing this, but they can do more to identify and increase the amount of land available for this purpose.
Governments have many options for being more consistent in their policy responses. With cities undertaking major transit projects across the country, changing zoning rules to make it easier to add density through development near new routes and stations will help governments better achieve their goals. The added density will create new housing supply while improving the viability and value of transit investments.
Managing Director, Real Estate Consulting Leader, PwC Canada
Tel: +1 416 687 8143