Opinion: Inclusionary zoning’s hidden costs

Opinion Editorial
Originally published in Financial Post
February 22, 2022

Ensuring affordable housing for some should not result in less affordable housing for everyone else

In November of last year, the City of Toronto approved an inclusionary zoning (IZ) by-law that will go into effect in September of this year. IZ mandates that a percentage of residential space in new housing projects include affordable homes for low- and middle-income households. IZ can be a valuable zoning tool but there are problems with how it is being implemented in Toronto. Although it may well result in some new affordable housing units being developed, it will come with a cost for the city as a whole.

IZ will apply in large swathes of the city divided into three tiers of “strong market areas,” based on land values, proximity to transit, and locations with the greatest need for affordable housing, as determined by city planning staff. Within these areas, developers will have to provide affordable units in projects built within 500-800 metres of “Protected Major Transit Stations Areas,” of which 16 have been defined, with many more to come. The intent is to ensure there are affordable units near subway and light rail stations, where they are most needed. This requirement will only apply to projects with more than 99 homes.

For condo projects that qualify, the regulations make it mandatory, starting in September, that five to 10 per cent of the gross floor area (GFA) of residential buildings be provided as affordable housing. That requirement will increase each year so that by 2030, up to 22 per cent of new residential GFA must be affordable — and remain so for 99 years.

To encourage the development of purpose-built rental projects, the city has given developers of rental stock a delay until the end of 2025. After that, however, three to five per cent of the GFA in new apartment buildings will have to be in affordable units. For both condo and apartment developments, the percentage of GFA required to be affordable depends on which “strong market area” the site is located in.

There’s no doubt we have a housing affordability crisis — across Canada but especially in Toronto. Government action can help and IZ policies usually do produce some new affordable units. But big rule changes invariably have unintended consequences. Somebody has to pay for IZ policies.

IZ represents another new tax on developments and, as such, will eventually be paid by home buyers and renters. Government fees and taxes already account for 20-24 per cent of the cost of a new home in the greater Toronto area. As in a game of whack-a-mole, securing affordable homes for one segment of the population will create a new surge in prices for other segments, all while reducing developer interest in building homes in key transit-supported neighbourhoods.

The worst-case scenario is that IZ will render some planned projects unprofitable and lead to their cancellation, resulting in zero new units where there would have been at least 99. The regulations will also encourage developers to turn more units into luxury accommodation by adding design features, finishes and amenities that will allow them to raise rents high enough to subsidize the required below-market rate units. The result will be a squeeze on mid-market units as their construction is discouraged. And because the definition of “affordable housing” targets families in the 40th to 60th percentile of household income, IZ does nothing to create housing for the city’s poorest and most vulnerable families.

There are workable alternatives to IZ. An effective way to reduce housing costs would be to tackle construction and labour costs. Prioritizing immigration by skilled tradespeople and expanding education in the trades would expand the construction labour force, increase job site efficiency, extend capacity, and reduce labour costs.

Developers would also welcome initiatives from governments to fix broken entitlement approvals, eliminate spurious heritage requirements, and prioritize the need for housing supply over questionable design regulations.

Cities could also provide density bonuses as well as discounts on development charges so that the costs of the affordable units are not borne by those acquiring market-rate housing. As it stands, Toronto offers nothing to developers in exchange for the affordable housing mandate.

More boldly, Toronto could open single-family housing zones to intensification. Such neighbourhoods cover more than 70 per cent of the city. Allowing mid- and high-rise density in these areas, especially near transit, would materially reduce land costs. Toronto does not have a shortage of land; it has a dearth of political courage.

Other municipalities appear ready to follow Toronto’s IZ lead. They should take a closer and more critical look at the pros and cons. Ensuring affordable housing for some should not result in less affordable housing for everyone else — the outcome we may soon see happen in Toronto.

Randy Gladman is senior vice-president, development advisory, at Colliers in Toronto.

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