The headlines are hard to avoid, and by now, the words "Toronto housing crisis" come across as a mere statement of fact, rather than any sort of prognostication. And rightly so. In 2017, our city's problems with housing affordability are abundantly clear. Sharp increases in home prices and rents continue to outpace income growth, accelerating a pernicious cycle of socio-economic polarization that's making housing in the urban core inaccessible to lower and middle-income Torontonians. Amidst all the construction cranes and new density, buying or renting a home has gotten a lot more expensive.

Unfortunately, while the problem is easy to identify, diagnosing its roots proves dauntingly complex. Though the headlines are unfailingly declarative in their proclamations of causality, the seemingly eclectic disparities between them belie simple conclusions: It's definitely foreign buyers, but if not, then it's undoubtedly outdated planning policy. Or maybe interest rates? What about the Greenbelt? Speculation or globalization? Investors or NIMBYs? Is it a bubble, or a realistic reflection of economic clustering across alpha global cities? Whatever it is, it's certainly overwhelming.

Past the cacophonous discourse, however, the numerous theories explaining Toronto's crisis of affordability are predicated on a deceptively simple economic model of price determination: supply and demand. Like any commodity, the price of housing is fundamentally driven by the relationship between its availability (supply) and the desire of those with adequate purchasing power to buy it (demand). The rise and fall of prices is—in theory—a reflection of these basic factors: high supply of housing and relatively low demand keep costs down, while high demand and low supply push it up.

The Downtown Toronto skyline, image by UT Forum contributor Razz

With high rates of immigration, an innovative and flexible economy, and a world-beating livability index, there's little argument that Canada's financial capital is—comparatively speaking—in demand, since new housing supply is quickly being absorbed. All things being equal, rudimentary market theory dictates that a continuous flow of new supply would unfailingly respond to the ebbs and flows of demand, creating a balanced market where new supply is responsive to demand, and prices grow steadily but slowly. As in many global cities, it hasn't worked out that way in Toronto.

Geography and regulation means that supply is inherently scarce and at least somewhat inelastic, while the economics of speculation and the movement of global capital mean that demand for residential property in major cities is rarely an entirely accurate reflection of Toronto-based buyers' incomes. Land use restrictions, planning regulations, NIMBYism, fiscal policy, and geographic boundaries, can limit the number of units brought to market, driving up prices through lack of supply. Similarly, speculative investment, easy credit, and the safekeeping of foreign capital in relatively stable countries like Canada means that demand can be driven up by factors other than local income and purchasing power, creating unrealistically high prices and distorting the market.

The myriad theories and narratives listed above all converge on these two factors, and the sum of our seemingly unnavigable public discourse is best understood through the lenses of supply-side and demand-side economics:

The Supply Side

In the last year alone, the Canadian Real Estate Association (CREA) reports that the average GTA home price has risen by over 23%. In a regional market already gripped by an affordability crisis, the rise in prices is startling. 2016 also saw a staggering 29,186 new high-rise units and a total of 47,161 new homes sold in the GTA, breaking the previous record that was just set in 2015. Alongside the record sales numbers, it takes little more than a walk through any number of Toronto neighbourhoods to find evidence of a city rapidly densified by new development.

According to supply-side critics, it's not enough. Echoed by voices throughout the commercial real estate and development industries, supply-side arguments generally point to record shortages of new listings, and the market's extremely fast absorption of new housing. As Building Industry and Land Development Association (BILD) President Bryan Tuckey recently put it, "[w]e have a shortage of housing supply in the GTA that is approaching crisis levels."

"Housing is selling as quickly as the industry can bring it to market, and the lack of developable land that is serviced with infrastructure, excessive red tape, out-of-date zoning and NIMBYism are hindering our ability to bring more to the market," Tuckey argued.

Toronto under construction, image by UT Forum contributor yonderbean

A shortage of supply has also been cited by the Toronto Real Estate Board (TREB). According to TREB's January 2017 figures, a strong increase in residential sales compared to January of 2016 was met with a notable decrease in the volume of listings. Compared to the previous January, the number of listings was approximately halved. For TREB's Director of Market Analysis Jason Mercer, "[t]hat statistic, on its own, tells us that there is a very serious supply problem in the GTA." As quoted in the January 2017 report, Mercer adds that "[t]he result will be very strong price growth for all home types again this year."

While the general argument that it's too difficult for developers to deliver new homes to the market is practically universal among supply-side critics, the culprits—and preferred solutions—for Toronto and the GTA's housing shortage sometimes vary.

For starters, geographic and natural boundaries mean that the supply of land is inherently limited. According to some critics, the mountains and water that surround cities like San Francisco and Vancouver play an important role in hampering new supply and keeping prices very high. In Toronto's case, the major boundaries of geography and nature are Lake Ontario and the Greenbelt. And while all but the most brazen of developers—and Mayoral hopefuls—see the lake as an inherent geographic limit, the same is not true for the Greenbelt.

San Francisco, image via Flickr CC, by Andrea Schaffer

Enacted by the Province in 2005, the Greenbelt created a protected ring of land where urban development is not permitted. Designed to curtail sprawl while preserving the threatened ecology of natural environments, the ambitious land use policy has played a crucial role in transforming the scope of the region's development. Meanwhile, 2005's Places to Grow Act—a part of the Growth Plan for the Greater Golden Horseshoe—complemented the Greenbelt with a new planning policy, promoting a growth pattern that encourages urban intensification and infill development over suburban sprawl.

At face value, the Greenbelt poses an obvious limitation to new housing supply. Limiting greenfield development—which is cheaper and in many cases more easily profitable than urban infill—can therefore impact affordability. According to some critics—like Ryerson's David Amborski and economist Russell Matthews—the GTA's relatively aggressive 'smart growth' policies constitute over-regulation. As Amborski pointed out in a debate last Fall, the most drastic price inflation tends to come in metropolitan areas where strict land use restrictions have been imposed. (In the Toronto region, meanwhile, the regions surrounding the Greenbelt are experiencing aggressive "leapfrog" greenfield development).

The urban structure of the GGH, image courtesy of the Government of Ontario

At heart, it's a fairly straight-forward free market argument. Regulation controls the market, and de-regulation sets if free, ostensibly allowing a more natural equilibrium between supply and demand. The logical extension of this school of thought is most prominently expressed by American economist Edward Glaeser, who famously cited Houston, Texas—a city without a zoning code, let alone a smart growth policy—as a laudable example of flexible housing supply. According to Glaeser, the lack of regulation allows for an affordable, responsive market, where regular infusions of new supply mitigate price growth.

Of course, Glaeser's point of view reflects free-market theory taken to a somewhat extreme conclusion. Zoning and regulation are obviously valuable tools to regulate growth, since free-market conditions don't usually incentivize regard for issues like long-term livability, environmental impacts, congestion, and community-building. Indeed, few urbanists celebrate Houston—home of the 26-lane freeway—as a general paragon of progressive city-building.

In Toronto, there are many different approaches to development, but the industry as a whole is still driven more by basic economic incentives than long-term sustainability and good planning principles. If developers could continue to make money building sprawling lots of McMansions throughout the Oak Ridges Moraine, many of them would. On balance, the fact that ground-related housing starts in the 905 are declining may be a very good thing.

An overview of ground-related housing starts in the GTA, image via Ryerson University

However, there's much more to supply-side arguments than the Greenbelt. Many—if not most—supply-side critics continue to support Greenbelt legislation, and even critics like Amborski and Matthews acknowledge its benefits. Instead, much of the more convincing supply-side criticism concerns planning regulations within the 416, rather than the smart growth policies that have made much of our current urban intensification possible in the first place. In particular, the notion that Toronto's zoning is 'outdated' is fairly widely held among urban planners and market analysts.

Many of the problems with Toronto's planning policies were laid out by Metropolitan Toronto's pre-amalgamation planning commissioner David Gurin. Writing in the Toronto Star in 2007, Gurin noted that "Toronto's zoning continues to "allow one or two-storey buildings, reflecting what was here in the 1950s." And while the last decade has brought numerous—and often successful—new planning policies like the Tall Buildings Guidelines and the evolving TOCore framework, the City's zoning remains unchanged. This means that practically every new development requires amendments to zoning policy.

Gurin contrasts Toronto's zoning code with New York, where the majority of new development occurs "as-of-right," adhering to existing zoning regulations. Unlike New York, Toronto also has an Official Plan, which, like zoning, often needs to be amended in order for new development to proceed. It's a lengthy and expensive process, and one that arguably places an excessive—and wholly unnecessary—constraint on new development.

Then there's the parts of the city where intensification—even so-called 'gentle density'—is effectively prohibited. Now known as the 'Yellow Belt,' the term refers to the yellow-coloured areas of Toronto's planning maps where only detached housing is permitted. According to City Planning, these 'stable' neighbourhoods—which in many cases have experienced the highest price gains—need to be protected. Despite their proximity to the Downtown core, places like Rosedale and the Annex aren't regarded as appropriate sites for density. These areas make up about 40% of the City. In some of these neighbourhoods, like The Annex, population has been steadily declining as home prices rise out of reach.

Amidst an urgent housing crisis and a record waitlist for affordable housing, the rhetoric of 'stable' areas dictates that it's necessary to preserve increasingly expensive neighbourhoods areas as they are, even as population declines. At the very least, that's a strange definition of stability.

The Demand Side

In contrast to the supply-side arguments, there's also good reason to believe that inflated demand is the primary cause of Toronto's housing woes. According to BMO economist Robert Kavcic, breaking down the recent CREA pricing data is a good starting point for understanding the market's distortion. While the value of detached GTA houses increased by 26%, condos appreciated by a staggering 19%. "The latter is pretty good evidence that supply-side fundamentals have been left in the dust," Kavcic argues, as quoted by the CBC.

From the supply side, the price appreciation of condominiums is certainly surprising. For detached homes, the sharp increase in prices is much more understandable, since we aren't producing new land. Particularly in the 416, the supply of single-family homes is already effectively capped, notwithstanding new laneway housing. Since it's impossible to increase the supply of Forest Hill or Kingsway homes, it makes sense that the existing stock would rise relatively sharply—albeit probably quite not at the rate of 23% per year—in price and become unaffordable to all but the wealthiest buyers.

Indeed, it's a trend that's regularly played out across leading global cities. Just as very few families can afford a three-storey brownstone in Park Slope, Brooklyn, or a row house in Central London, the expectation of continued affordability in Toronto's detached market is unrealistic. Regardless of whether the market is currently overheated, the long-term trajectory of Toronto's growth will make higher density housing the norm.

By contrast, the continuing infusion of condominium supply makes the 19% price growth—not far behind the appreciation of ground-related homes—much more surprising. Even among some relatively supply-minded analysists, the price growth for GTA condominiums is regarded as unsustainable. As Fortress Real Developments' Ben Myers recently put it on Twitter, "[n]o one is saying it will last forever. There are a grand total of zero people that think prices will rise 25% annually in perpetuity." Even if many of the supply-side arguments prove valid, the state of Toronto's market is likely also the result of at least some demand-side factors.

CMHC stats of housing starts in completions in the Toronto CMA, image via Ryerson CBI

Increasingly, new housing market analyses are coming to diagnose the GTA'S recent price growth as unsustainable, with the latest quarterly report by TD Bank echoing much of the BMO viewpoint expressed by Kavcic. Among the banks, the view that Toronto's housing market has entered 'bubble' territory is becoming orthodox.

Despite the Federal Government's freshly increased mortgage insurance premiums—which come into effect today—historically low interest rates continue to make borrowing attractive. Combined with the lingering belief that housing prices will continue to rise in perpetuity, the easy availability of credit may be driving overly speculative investment in the market. At the point that owning property is seen as a very fast and very lucrative path to wealth, it's easy for housing prices to become temporarily unmoored from basic determinants like supply, income, and population growth, with the heightened demand giving rise unsustainable appreciation.

The issue of foreign buyers adds another layer of complexity to the equation. Prior to Vancouver's contentious and highly publicized introduction of a 15% foreign purchaser tax in August of 2016, the debate about the influence—and preponderance—of international investment reached a fever pitch.

Proponents of the tax argued that it would calm a speculative and overheated market distorted by the stashing of global capital in the supposed safe haven of Canadian real estate. Diagnosing a similar phenomenon in London (U.K.), the Guardian's architecture and design critic Oliver Wainwright memorably described London's "silos of luxury safe-deposit boxes in the sky." Was the same thing happening in Vancouver?

Meanwhile, opponents of the tax cited closeted xenophobia, while also arguing that the relatively unclear definition of 'foreign buyer' could impact purchasers who did not wish to merely store their wealth. With the safety, livability, openness, and strong universities in Toronto and Vancouver often cited as reasons for foreign interest, not all buyers were necessarily in it for the safe-deposit box. Complicating matters further, the exact proportion of foreign investment in both the Toronto and Vancouver markets also remains somewhat unclear.

Vancouver skyline, image by SRC Forum contributor VANCITYHOTSHOTS

Nonetheless, following the introduction of the tax, the share of foreign investments in Vancouver's market sharply decreased—though the drastic increases and decreases in investment on either side of a new tax rarely reflect long-term trends. In the months since, the Vancouver market has noticeably cooled, with Toronto now taking the title of Canada's hottest housing market.

The changes in Vancouver pricing trends following the introduction of the tax form a key part of Professor Josh Gordon's analysis in Ryerson University's newly published policy paper, titled "In High Demand: Addressing the demand factors behind Toronto's housing affordability problem." There's been a "sudden reversal in trend in Vancouver in the latter half of 2016, while Toronto rockets upward," Gordon writes.

Year-Over-Year trends in Teranet House Price Index, January 2006-January 2017, image via Ryerson CBI

While Gordon advocates for a similar tax to cool the Toronto market, he also argues that it is unlikely to be a sufficient regulatory step in combatting the affordability crisis. In addition, a "progressive surtax" on luxury homes owned by individuals not paying income tax is recommended, partially targeting properties already owned by foreign investors.

More broadly, however, Gordon's analysis of the Toronto market argues that the perceived supply shortage is likely not as impactful or severe as it is often made out to be. Comparing Toronto's recent population growth with housing completions, Gordon concludes that "housing construction has more than kept up with population growth in recent years." Based on CMHC statistics, the illustration below shows that the recent population growth is relatively low compared to housing completions in the Toronto CMA. While 2015 was a record year (since surpassed) for sales, it also represented a historically strong infusion of new housing supply compared to population growth.

Population growth vs housing completions in the Toronto CMA, image via Ryerson CBI

According to the City of Toronto, meanwhile, 2015 was also another strong year for both approvals and housing starts.

Recent trends of approvals and starts, image via the City of Toronto

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Amidst the record sales numbers, and all the glass totems of 21st century prosperity, Toronto housing prices are rising precipitously. So it a crisis of supply or demand? Despite their differences, the two viewpoints aren't mutually exclusive, and the arguments about supply restrictions aren't rendered void by the demand-side trends, or vice-versa. To what degree each individual factor is responsible is ultimately uncertain, of course, although the arguments for re-thinking regulations on both the demand and supply sides strong seem fairly persuasive.

Of course, no tweaking of factors and regulations is likely to end Toronto's housing crisis. Unfortunately, crises of affordability abound throughout the world's major cities, becoming norms rather than temporary shocks. Whatever the efficiency—or lack thereof—of the market, developers are unlikely to fix Toronto's swelling waitlist for affordable housing, or to provide shelter for low-income people. On that front, we will have to look to the City, Province, and Federal Government.

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