The real reason homes in Canada's big cities are unaffordable

Government taxes and charges add $644,000 to price of average new Vancouver home, study says

Canada has struggled with unaffordable housing in its major cities for years.

Between 2009 and September 2020, home prices in Toronto and Vancouver have soared 150% and 100%, respectively. Ottawa and Montreal has seen a 70% gain, while prices in Edmonton and Calgary have risen 10%.

Why the difference? It’s not just location, location, location, argues a new report from the C.D. Howe Institute.

In ‘Gimme shelter: How high municipal housing charges and taxes decrease housing supply,’ Benjamin Dachis identifies “development charges, land transfer taxes, and murky density bonus payments as partial drivers of reduced supply and soaring house prices for would-be buyers.”

In a well-functioning housing market, the market price of a home is close to the cost of construction. If prices are higher than that, Dachis says, it is often because regulations or government policy is inhibiting new construction and creating an artificial shortage.

Research has shown a persistent gap between the cost of building a new home and their market price in major Canadian cities, he said. And “restrictions on supply that drive up the cost of housing have broad economic consequences.”

In Vancouver housing regulation costs have added a stunning $644,000 extra cost to an average new house. That is not only the highest in Canada, it is among the highest in the world as a share of market prices.

In other cities – Abbotsford, Victoria, Kelowna, Regina, Calgary, Toronto and Ottawa-Gatineau – homebuyers paid an average $230,000 extra on a new house because of limits on supply driven by regulations, says the report.

The study looks at how charges to home developers and taxes on existing housing affect the operation of the housing market and comes up with four key reforms.

Perhaps the most obviously welcome to homebuyers is the recommendation to eliminate or reduce land transfer taxes.

LTTs bring in a lot of money. Toronto, the only city in Ontario allowed to impose its own land transfer tax, collected $730 million in 2018, representing more than 5% of that year’s operating budget.

But the tax dollars come with a cost, Dachis argues. Global studies have shown LTTs reduce the number of housing sales and mobility within a city. In Toronto, the addition of the land transfer tax increased transaction costs by 14% and resulted in a 16% decline in sales volume the first year of the tax.

“These LTTs have a high cost to society because the money raised by government creates a relatively large change in selling and buying behaviour.” The study estimates the economic harm amounts to $5.65 for every dollar of government tax revenue generated by LTT.

Instead, cities should rely on property taxes from housing for funding municipal government services, such as parks and fire services akin to a user fee, the report says. Reductions or deferrals on these taxes aimed at helping people in need could be replaced by income-tested supports that people can use for any kind of housing cost.

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