On July 12, Olivia Chow officially started her role as Toronto’s new mayor.
The spotlight is of course on the bold plan that she set out to address Toronto’s housing crisis.
Let’s take a look at the biggest item in her housing plan.
She wants the city to act as a developer to build 25,000 rental units on city-owned land in the next 8 years.
Would you say this is a good or bad plan?
Or is it even achievable?
I’m going to give you some context by answering the following 3 questions.
How many units do we need to relieve the housing crisis?
What’s the cost of building 25,000 units?
Where does the money come from?
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What does 25,000 units over 8 years really mean?
So we are increasing the housing supply in Toronto by 3,125 units per year.
From 2022 to 2023, the population of Toronto increased by roughly 28,000 people.
With the government’s aggressive immigration targets, we can expect to see similar population growth in the next 8 years.
Let’s assume the average household size has 2 people.
So divide 28,000 by 2, we need roughly an extra 14,000 units per year to house the newcomers.
The new mayor’s plan will supply just over 3,000 units per year, that’s only 22% of the units we need.
We still need to figure out the remaining 78%, that’s 11,000 units per year.
In Toronto, the main source of new housing supply comes from condos.
A typical 50 storey condo building has around 600 units.
So we would need 18 new skyscrapers to be completed each year in order to provide 11,000 units.
For the new condo units completed in Toronto within the past 5 years, do you know what percentage of them are owned by investors?
59%.
You see, Toronto relies heavily on investors to provide housing supply for the rental market.
If investors are not buying, developers will not be building.
That’s exactly what’s happening in the current high interest environment.
Projects are not selling well and developers cannot start construction.
We won’t see the real impact until a few years down the road because it takes a few years for the condos to be built.
At the moment, we are still enjoying the supply from the condos sold a few years back.
With the sharp drop in pre-construction sales since the second half of 2022, we are going to have a significant shortage of housing supply down the road unless the government can magically build them instead.
For now, let’s focus on the 25,000 rental units over 8 years in the new mayor’s housing plan.
How much does it cost taxpayers' money to build them?
There’s no need to pay for the land because it is owned by the government.
The development charges, levies and taxes can be omitted as well.
So the cost to construct a rental building is roughly $350 per square foot.
Let’s assume the average unit size is only 500 square feet.
Now, we multiply $350 by 500 by 25,000 units.
And that comes to almost 4.4 billion dollars.
Divide that over 8 years, we still need 547 million dollars per year.
Where can we get that money when the City of Toronto is already running a deficit of $1.5 billion at the moment?
Worse yet, the federal government just rejected a request from Toronto’s new mayor for hundreds of millions of dollars in financial support earlier this week.
They suggested she use the city’s reserved funds or ask the provincial government for funding.
All of these ways essentially come down to the same source, the taxpayers’ money.
We are all paying for this.
And it is in the new mayor's plan to raise taxes, luxury tax, vacant home tax, land transfer tax, property tax.
So all property owners in the City of Toronto will be affected.
Let’s just say we all chip in and we are able to pull together the funding to build these 25,000 rental units.
Great, so we made housing affordable for 25,000 households.
Remember what we said in the beginning, these rental units represent only 20% of the housing supply we need.
What about the 80%?
Investors will be discouraged from investing in the City of Toronto.
Developers can’t sell, they can’t build and we get significantly less housing supply.
We all know what’s going to happen, prices will go up.
So housing is going to become less affordable, well, except for the 20%.
You see, they are fixing the 20% at the expense of the 80%.
They had the 80-20 rule the wrong way.
Shouldn’t they be focusing on the 80% and not the 20%?
Worse yet, they are actually damaging the 80% to fix the 20%.
When they realize their mistake, they will have to do all they can to invite investors to come back to the market because private funding is the only way you can build faster and build more.
Would that be too late by then?
Maybe we would already be approaching New York City prices at that time.
What do you think?
Comment below and let me know.
If you are a property owner in the City of Toronto, I encourage you to hold onto your property because it is going to become a scarcity.