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Global Cities and Affordable Housing: Toronto

Image of the Toronto skyline along Lake Ontario, including the CN Tower and the Rogers Centre. Toronto, the capital city of the province of Ontario and largest city in Canada, is an exciting and desirable city, but its rapidly climbing cost of living can be an obstacle for many potential residents.

Our fourth city in the Global Cities and Affordable Housing series is Toronto. Toronto is the capital city of the province of Ontario and largest city in Canada, with a population of more than 2 million. Finance, arts, business, and cultural diversity are all a part of Toronto’s vibrancy and appeal. The skyrocketing cost of rentals and single-family homes in Toronto, however, has become worrisome for many residents as well as city and provincial government officials.

According to a recent analysis by Demographia, the median home price in Toronto is C$615,800, and its median income is C$79,700. Demographia gives Toronto an affordability rating of 7.7; any rating above 5.1 is considered severely unaffordable. Despite being severely unaffordable, Toronto’s homeownership rate, at 68 percent, is among the highest in the developed world, behind only Oslo, Norway (69%) and Calgary (74%).

The city’s high level of homeownership, however, does not mean that it is affordable. One of the main factors causing unaffordability is an influx of foreign buyers, which has caused housing prices to skyrocket. Home prices are more than 14 percent higher than a year ago, and the average rent for private apartments is more than C$2,000, an increase of roughly 11 percent over last year.

Ontario’s wait list for affordable housing exceeds 80,000 households, leaving some waiting for more than 10 years. Some residents are spending up to 65 percent of their income on housing. High housing prices have forced more low- to middle-income families to rent, causing increased overcrowding in rental units. An upcoming study by the Canadian Centre for Economic Analysis suggests that Toronto will need C$150 billion for new home construction, with much of this amount devoted to rental units, to increase housing affordability in the city.

Toronto’s Open Door Program allows developers to receive construction fee exemptions and tax waivers on affordable units that are developed and remain affordable for a minimum of 25 years. To receive federal and provincial funding under this program, maximum rents for one-, two-, and three-bedroom units cannot exceed C$888, C$1,041, and C$1,225, respectively. The program’s 10-year goal is to build 10,000 affordable rentals and 3,000 affordable homes for ownership.

The Ontario provincial government has also put measures in place to curb the continued escalation of housing costs for homebuyers. Those measures include a foreign buyers tax, Bank of Canada interest rate hikes, and tightened lending practices.

The foreign buyers tax is a 15 percent tax levied on homebuyers who are foreign corporations or noncitizens of Canada. The tax will be levied retroactively to purchases made as of April 21, 2017. The tax covers purchases in the entire area known as the Golden Horseshoe, including the Niagara region in Ontario.

In addition, the Bank of Canada raised interest rates in July 2017, making Canada only the second nation after the United States to do so since the 2008 financial crisis. The rate hikes are an effort to curb purchases. However, unlike typical mortgages in the United States, Canadian mortgages are created with 25-year amortization but 5-year terms, meaning that a new mortgage is issued to homeowners every 5 years, making them vulnerable to such interest rate hikes. Despite this instability, default rates for mortgages are much lower in Canada than in the United States.

Another measure implemented since the financial crisis to help curb home price increases is the tightening of lending standards. Canadian bank regulators have decreased the maximum allowable loan-to value ratio for mortgages, requiring borrowers to increase their down payments and making mortgages more difficult to obtain.

Although regulators and Ontario’s provincial government have stated that it is too early to determine the full effects of these measures, both home sales and prices have declined slightly since the introduction of the foreign buyers tax in April 2017.

With so many locals being priced out of the market, an older concept of laneway housing, seen mainly in Calgary and Vancouver, has been introduced to Toronto. A laneway, a popular term in Canada, Ireland and Scotland, is a narrow road or lane. Laneway housing is a secondary property built on another person’s main property that uses the utility services of the main property. Laneway housing is one strategy to capitalize on the 255 kilometers (155 miles) of unused laneways in Toronto to increase the city’s housing supply. These homes, at C$300,000 to C$400,000 to build, are both less expensive to construct than typical single-family homes and can be built at a higher density, which could increase housing affordability in the city. They can also serve as income-generating properties or as in-law homes.

Laneway homes can help people obtain housing in desirable neighborhoods with good school districts that are close to public transportation. The Toronto City Council has approved and encouraged the development of laneway homes by eliminating many of the restrictions placed on similar laneway homes in Calgary and Vancouver, such as requirements to take privacy measures and obtain a neighbor’s permission before construction.

Toronto is an exciting and desirable city, but its rapidly climbing cost of living can be an obstacle for many potential residents. The Ontario provincial government, along with local town councils and representatives, are taking the necessary steps to restore Toronto’s affordability and reduce its waiting list for affordable housing.