I’ve all but shouted from a rooftop that I believe geographic and regulatory constraints on new housing developments have had more of an impact on home prices in the GTA than the sum of all other economic factors. And guess what? The Canada Mortgage Housing Corporation (CMHC) just released a report which found that less than half of the 40% gain in average home prices between 2010 and 2016 can be attributed to economic factors in the GTA. A lesser 5% is attributed to speculation and domestic and foreign investment. The rest comes from geographic and regulatory constraints. Geographic constraints refer to the amount of land that can be developed in a region, while regulatory constraints include the red tape and costs builders face in the development stage.

In an unconstrained supply market, rising home prices should encourage more home building activity. CMHC found that in Canadian cities such as Montreal, Calgary, and Edmonton, housing starts (the key measure of new supply) increase 1 to 2 percent for every 1 percent increase in home prices. In Toronto, starts only rise 0.5 percent for every 1 percent price bump.

Most of the supply constraints in the GTA can be attributed to the Ontario Places to Grow Act. Ontario’s Places to Grow Act, which sets out land-use planning and development rules for the Toronto region up to 2031, is running seven to 10 years behind schedule in terms of the anticipated release of land for development; supply cannot keep up with demand. 23 percent of that land is at the stage in which development applications are in process; the other 77 percent is not remotely close to being designated or approved.

As such, the Growth Plan has contributed to higher land values, which in turn is meant to encourage more density. Higher land values mean that home-buyers and builders must economize on land. The municipalities and province may need a new innovative way to build density if housing affordability is actually their objective.

Download the full report here.