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Excellent video breaking down how housing costs have increased over the last 20 years.
It basically breaks down to 4 items:
1. Land
2. Regulation
3. Construction Costs
4. Taxes
1. Land costs are up about 1000% from 2004. The podcast gives an example of suburban development land in London, ON in 2004 - it cost $100,000 an acre. Today it is $1,000,000. This is mostly attributable to tightening land use regulations, particularly anti-sprawl measures. So on a detached home on a standard 100'x36' lot, that's about $105,000 in additional costs once you account for net development area losses in a typical subdivision (usually about 70% from what I recall).
2. Regulation - as alluded to in the land cost input, regulation is a huge cost driver. limited zoning permissions drive land costs sky high, and delays in permitting cause interest to rack up on development loans, leading to higher costs for end buyers. Most of this cost comes out in land cost, but also in extra interest payments. A permit process of 3 years (aggressive for new subdivisions) with an initial $100k in land and $100k in soft costs (engineering, etc.), carried on a 7% construction loan means about $40,000 in additional costs to a home buyer vs. "instant" approval. In 2004 approvals were a bit quicker, maybe 2 years - but lower land costs meant the impact was smaller - perhaps $10,000. So a net increase of $30,000.
3. Construction costs are up around 125% since 2004, instead of 50% for inflation. This is partially attributable to higher development standards discussed on this board related to better energy efficiency, etc., but also base labour and material costs. While this component has experienced the slowest increases in costs on a percentage basis, it is the single largest line item for a developer so can have an outsized impact. Finding ways to increase productivity in the construction sector is important to try to break this pattern. A 125% increase in housing construction cost vs. an inflation-adjusted 50% increase would account for about $230,000 in additional costs for a 2,000sf detached home compared to if construction costs had increased at inflation (~$175/ft construction cost in 2004 vs. ~$300/ft construction cost today for base-level suburban housing).
4. Taxes. Development Charges are also up around 1000% since 2004. In 2004, the DC for a detached home in London was $5,000. Today it is $47,000. This number is apparently approaching $200,000 in some parts of York Region. Not only that, but developers pay interest for several years on this cost and then end buyers pay HST and Land Transfer Tax on it as well, meaning that for every $50,000 DC London gets, the end buyer can be paying as much as $75,000 for it in their end sale price. End price impact from a DC charge for a detached home in London over 2004 is about $50,000.
There is also increased land transfer taxes from 2004, as well as GST rebates which have not increased with inflation. New homes purchased for less than $450,000 get a GST rebate, but almost no new homes are sold for that price any longer which means it's effectively a tax increase. Land Transfer and HST on a new home in London today is about $100,000 - about $85,000 more than paid in 2004.
They briefly discuss developer profits in this as well, identifying that profit margins remain largely the same as 20 years ago, albeit on a larger base cost. They identify that there is not much room to reduce developer profit as banks will deem projects too risky and not provide loans and that investors will direct capital to other investments if a minimum return cannot be earned.
These costs break down roughly as:
1. $105,000 in additional land costs
2. $30,000 in additional regulation costs
3. $230,000 in additional construction costs
4. $135,000 in additional tax costs
Total: $500,000 in additional costs. Which is why a $200,000 detached home sold in London in 2004 sells for $700,000 today.
Really interesting and I think shows a way forward on many items:
1. liberalize zoning and entitlements to reduce land costs. IMO, this also means walking back many "anti-sprawl" measures. The Ford government has walked many of these back now with the deletion of the Growth Plan at the provincial level, but many municipalities seem deadset on continuing to enforce very strict urban boundary regulations which heavily hurt housing affordability. Zoning liberalization within cities will also be helpful.
2. Reduce regulations and permitting time. Streamline approvals processes - progress is already being made on this front but there is much more work to do to liberalize zoning and simplifying site plan approval timelines.
3. Finding ways to increase development productivity is critical. Modular housing is suggested as one option to be explored. I'm not sure how much room there is to increase productivity in housing production to be honest though, I wonder if we would be better off at strategic reviews of building codes to reduce construction costs.
4. Reduce DCs and other taxes. The introduction of HST exemptions on rental housing is identified as a great policy - exempting new homes in general from HST as well would be a massive help as would shifting DCs to be payable at occupancy to reduce interest charges without impacting capital flows to municipalities for infrastructure.
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