Selected Issues


Selected Issues

How to Improve Housing Affordability in Canada’s Dynamic Regions?1

A. Introduction

1. Housing affordability is becoming an increasing social and economic concern in Canada. While Canada’s overall affordability rankings2 are not among the worst in its peer group, its most dynamic regions, particularly around Vancouver and Toronto are severely unaffordable (Table 1). Moreover, some smaller housing markets are also becoming unaffordable, as demand pressures are spreading from the major markets to nearby markets. Deteriorating affordability raises not only important social concerns, but also economic ones, as it works against attracting and keeping talent in Canada’s most dynamic urban centers. Thus, it can have a negative effect on growth, productivity, and innovation. This note focuses on the housing markets in the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA) where demand pressures have been the most acute.

Table 1.

Canada: Selected Countries: Housing Affordability Ratings by Country: All Markets

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Source: 14th Annual Denmographfa International Housing Affordability Survey, 2018.

2. Driving the deterioration of affordability has been the significant imbalance between housing demand and supply in the most affected regions. House prices nearly doubled between early 2010 and spring 2018 in Vancouver and Toronto as demand from domestic and foreign buyers outstripped the supply of homes. House price appreciation has been slower in other parts of the country, with virtually no appreciation in the resource rich areas in the same period.

B. Demand-side Measures Focusing on Housing Market Imbalances

3. The main drivers of housing market pressures in the GTA and GVA from the demand side included: (i) robust economic growth; (ii) population growth from both international and interprovincial migration; (iii) low interest rates; (iv) ample credit supply; (v) increasing investor demand, both from domestic and foreign buyers; (vi) some tax incentives for investment in housing (e.g., expenses, including mortgage interest are tax deductible if rented out) for domestic buyers.3

4. Numerous measures have been introduced to tackle housing market imbalances from the demand side. These measures had two intertwined objectives: (i) macroprudential measures by the federal authorities to address direct financial stability risks and indirect macroeconomic risks related to high household indebtedness,4 and (ii) tax measures by the provincial authorities to address rising unaffordability, most notably the introduction of hefty property transfer taxes for nonresident buyers in British Columbia and Ontario. In addition, some tightening of tax treatment of home sales has also been introduced at the federal level: capital gains exemption can only be claimed by Canadian residents. Current measures appear to be containing housing-related financial sector risk, but continued vigilance is needed as the banking system remains highly exposed to household debt and vulnerable to a sharp reversal in house prices.

C. Tackling the Main Constraints to Housing Supply

5. A broad set of supply-side policies is needed to durably improve housing affordability in addition to the already implemented demand-focused policies. Most importantly, complementary strategies are needed for infrastructure and public services, immigration, and housing supply policies. Both the GTA and GVA have experienced significant demand due to immigration and interprovincial migration, as well from nonresident buyers. Upgrading the transportation infrastructure has not kept up with the demand on roads and on various forms of urban and suburban public transportation.

6. The authorities at all levels of government are cognizant of the importance of increasing housing supply and improving housing affordability. In 2017, the federal government announced a National Housing Strategy, a 10-year, C$40 billion plan focusing mostly on improving social housing. Ontario’s Fair Housing Plan of April 2017 includes several planned actions to increase affordable housing supply and purpose-built rental housing. British Columbia’s Homes for B.C., introduced in February 2018, is a 30-point plan to improve housing affordability which was identified as the single biggest policy challenge in the province.

7. Basic economics of housing supply suggest that the housing market is well-functioning if the market price (roughly) equals the cost of producing the housing unit. Glaeser and Gyourko (2018) employs a cost-based approach to gauge whether housing is being delivered at an appropriate price. In cases where housing prices are above the production cost,5 the gap between the price and production cost can be understood as a regulatory tax. Land regulation is often aimed at reducing negative externalities such as urban sprawl and the loss of green areas or agricultural land. This regulatory tax may or may not be efficiently incorporating the negative externalities of new housing production. As Figure 1 illustrates6,

  • a) in lightly regulated housing markets with growing population and economies, the supply curve for housing is relatively flat;

  • b) in a housing market where housing demand declined sharply, the supply curve for housing has a kink at the existing level of built housing. This is because housing is durable and does not diminish quickly when demand falls. As a result, a reduction in demand leads to lower prices for housing and minimal new construction.

  • c) in heavily regulated housing markets with growing economies, the supply curve for housing slopes up. As a result, additional demand for housing translates into prices that are substantially above the minimum profitable production cost, with rising land values driving up total costs;

Figure 1.
Figure 1.

Canada: The Supply Schedule of Housing

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003

Source: Glaeser and Gyourko (2018)

8. Highly inelastic housing supply, in a rising demand context, limits the effectiveness of macroprudential and tax-based policies to target demand for housing. Without an adequate supply response, tighter measures aimed at demand will lead to more and more buyers being squeezed out of the housing market, with the strongest negative impact on first-time buyers in general.

9. The supply response in the GTA and GVA housing markets has been inadequate as indicated by the divergence in the trend of house prices and permits.7 The time path of house prices in the Toronto area is representative of a common pattern: cities with inelastic housing supply and high demand generally experienced more extreme run-up in house prices (Figure 2).8 The supply response in the Vancouver area was more elastic after 2014, but fell between 2015–16, while increased demand led to an upsurge in prices from 2014.

Figure 2.
Figure 2.

Canada: Trends in House Prices and Housing Permits

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003

Source: CREA, Statcan.

10. Not only has the overall supply response been insufficient, but the mix of new supply has also not been supportive of affordability. A common complaint in both Vancouver and Toronto is that new supply has been tilted toward higher-end one- and two-bedroom condominiums, often catering to demand for investment property, and not enough units have been built at the affordable end. Nevertheless, the recent robust price increase in the condominium market, particularly in Vancouver, indicates that the elasticity of supply of condominiums remains low overall. Demand for rowhouses and medium-density housing also seems to be unmet.

11. The reasons behind insufficient housing supply can be manifold. They can include natural barriers that restrict land development, urban containment, zoning restrictions, inefficiencies in permitting, extensive specification requirements for approval and construction, mismatch in the type of housing supply and demand, construction labor shortages, bottlenecks in infrastructure that obstruct the delivery of serviced land, roads, public transportation, or public services.

12. Both the Toronto and Vancouver regions have some natural barriers and urban containment policies that limit the fully flexible expansion of land supply, but the main bottleneck seems to be the shortage of serviced land ready for development and other supporting infrastructure.9 Toronto’s downtown area borders on Lake Ontario, while Vancouver is surrounded by the sea and mountains. In addition, with the Agricultural Land Reserve around Vancouver and the Greater Golden Horseshoe Greenbelt, both the GVA and GTA have had urban containment policies in place that restrict or bans development in urban fringe areas (Figure 3). Despite the urban containment policies, there seems to be sufficient land useable for future development, particularly in the GTA.10 A major constraint to further urban expansion is that the delivery of land prepared with the necessary infrastructure for development and other public infrastructure (e.g., roads, public transportation, public services) have not kept pace with the rapid rise of demand for housing. Assessing the reasons behind the shortage of serviced land ready for development and accelerating its delivery would be important measures to improve housing supply. Data availability on land supply and serviced land also seems to be inadequate in several municipalities.

Figure 3.
Figure 3.

Canada: Urban Containment Around Vancouver and Toronto

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003


13. Increasing urban density in Toronto and especially in Vancouver is widely recognized as key to improving affordability. Canada is one of the world’s most urban countries, but the urban density of its major cities is in the low-to mid-density range compared to major cities in high-income countries (Figure 4). This suggests significant scope to further increase density. Increasing density, however, has some cultural implications as well, as it requires some adjustment in expectations by buyers and increasing acceptance of condominiums and rental apartments as opposed to low-density housing for raising families.

Figure 4.
Figure 4.

Canada: Population Density in Major Cities Around the World

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003

Source: Filipowicz (2018)

14. In housing markets with significant imbalance between supply and demand, developers can be incentivized to delay construction and release of units to keep prices high rather than meet demand. They may also engage in land banking so that other developers cannot build on the land. If this type of behavior is prevalent, the authorities may consider ways to introduce public land value capture policies. Public authorities could explore the legal means to purchase land at existing use value, so that the uplift in land value is captured for the public good. In addition, local authorities can play a significant role in bringing land to market, and bank significant tracts of land to maintain a healthy supply of potential construction sites. In Germany, for example, “urban development measures” allow local authorities to assemble land for development by paying private owners the existing value of the plot, and then sell it on after redevelopment at the final value. In the Netherlands, local authorities can purchase land at existing use value which is then developed cheaply for social housing, and some of it is sold off to commercial developers at a profit.

15. Determining development charges can also slow down the construction process.11 As there is an uplift in land value from granting permission for development, municipalities capture some of this uplift by imposing development and other charges. Determining the increase in land value and the development charge is not necessarily straightforward and can significantly extend the time before the actual development can take place. 12

16. The lengthy and non-transparent approval process for building permits is frequently cited as a major obstacle to ramping up the supply response. Building approval, particularly of multiple family residences is a complex process, involving many stakeholders and regulatory agencies. Regulatory inefficiencies such as excessive restrictions on design specifications and intra-regional variations in codes and requirements are also likely to slow development approvals. Building approval for high-rise buildings can take 1.5 to 3 years in the GVA and GTA.13 Insufficient staffing at municipalities, lack of clarity on standards, expectations and process, conflicts between different agency requirements are potential reasons behind the lengthy approval process.

17. The slow and unpredictable re-zoning process in particular is a major impediment to increasing density in the GTA and GVA. The current zoning map of the City of Vancouver is especially striking, with the city overwhelmingly zoned for single-family dwellings (Figure 5). Re-zoning areas for higher density buildings on a case-by-case basis is a particularly slow and cumbersome process both in Vancouver and Toronto.14 The process is often delayed by extensive consultations with residents of the affected area, with NIMBYsm (“not-in-my-backyard) towards higher density buildings being a common obstacle slowing down the re-zoning process further.

Figure 5.
Figure 5.

Canada: Zoning Map of the City of Vancouver and City of Toronto

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003

Source: City of Vancouver and City of Toronto

18. Several measures could be considered to shorten the re-zoning and approval process for building permits:

  • Conducting a comprehensive assessment of the bottlenecks in the process;

  • Exploring ways to re-zone larger areas at a time given the long process of re-zoning on a project-by-project basis;

  • Improving the transparency and certainty about the timelines of the different steps involved in the development approval process;

  • Providing greater certainty to developers by guaranteeing that if an application meets the conditions of the designated zone where planning permission is being applied, the permission would be granted;

  • Considering making development plans time-limited after the building permit is granted (sunset clauses) to give a strong incentive to pursue development and help avoid construction delays;

  • Modernizing the technology of the permitting system, particularly in Ontario, to allow files to be more easily transferred between municipal and provincial agencies.15

  • Increasing human resources dedicated to the approval process.

D. Increasing the Supply of Rental Housing

19. Like the owner-occupied segment, the rental market has become increasingly tight in the GTA and GVA (Figure 6). The rental vacancy rate has hovered below 1 percent for years in Vancouver and recently fell below 1 percent in Toronto.16 Low vacancy rates have pushed rents higher and led to lower rental turnover rates.

Figure 6.
Figure 6.

Canada: Vancouver Rents and Home Prices

Citation: IMF Staff Country Reports 2018, 222; 10.5089/9781484368398.002.A003


20. The rental market is an important part of the housing supply mix, and a healthy rental market is particularly important for labor mobility. Affordable rentals are key to retaining and attracting the workforce dynamic labor markets need. Many young households are not able to purchase their first homes due to the price increases in the GTA and GVA. The rental market also provides a viable option for households who fail to meet eligibility criteria for social housing.

21. The composition of the rental housing also matters. A mix of purpose-built rentals and secondary rentals (rentals provided by individual owners)17 is desirable to achieve a degree of professionalism in the management of rental properties. Landlords of secondary rentals may lack the necessary knowledge or skills to responsibly manage their properties. Larger property portfolio managers might also achieve economies of scale in management.

22. Despite the low vacancy and turnover rates, the supply of new purpose-built rental housing has not taken off in GTA and GVA. The new supply of purpose-built rental buildings has been low for decades, both compared to demand and to some other advanced countries, e.g., US and Germany. Fast rising prices in the condo market incentivized the construction of condo units with higher profit margins for developers.18 The surge in housing prices incentivized investment in real estate, condominiums in particular, for individual buyers who often found it profitable to rent out these additional holdings as secondary rentals. Investor demand has been tilted for properties supplying higher-end rental properties to the market. According to CMHC’s most recent Rental Market Surveys, about a quarter of the condominium apartments in Vancouver and one-third in Toronto are occupied by renters.19

23. There is renewed interest in reviving the purpose-built rental market to provide an alternative to secondary rentals. Ontario’s Fair Housing Plan and British Columbia’s Homes for B.C. both emphasize the need for incentives for purpose-built rental:

  • Ontario’s plan includes that property tax for new multi-residential apartment buildings should be charged at a similar rate as other residential properties. This is to apply to the entire province. It also includes introducing a targeted $125-million, five-year program to further encourage the construction of new rental apartment buildings by rebating a portion of development charges. Working with municipalities, the government would target projects in those communities that are most in need of new purpose-built rental housing.

  • In British Columbia, qualifying purpose-built rentals are eligible for the waiver of municipal property taxes. The province will match these waivers by eliminating provincial property taxes.

24. Municipalities in the GVA and GTA already have a host of incentives for purpose-built rental housing, but a comprehensive assessment whether these incentives are effective would be useful. The existing incentives include density bonuses, various forms of property tax breaks, reductions in development costs such as development charges and building permit fees, and expedited processing.20 However, the incentives appear insufficient or not well targeted in light of the scarcity of new purpose-built rental construction. Thus, the provincial and municipal governments of British Columbia and Ontario could usefully assess whether the current funding and tax incentives for purpose-built rental developments are effective in achieving their objectives, and whether expanding them would contribute to greater supply.

25. The role of rent control policies in rental property supply should also be evaluated to ensure that it does not constrain new supply. Both British Columbia and Ontario have had rent control policies for a long period of time.21 Ontario’s Fair Housing Plan expanded rent control to all private rental units in Ontario, including those built after 1991. If the limits for rent increase are set too low, they can have several adverse consequences, including inhibiting new rental supply.22 Reviewing the limits and modalities of these rent control policies is especially important in the tight rental market environment.

E. Conclusion

26. Addressing housing supply constraints is a complex exercise. It will require complementary transportation, immigration, and housing strategies at all levels of government. Some of the constraints and bottlenecks can be addressed relatively easily e.g., by streamlining and modernizing processes, establishing databases and information sharing. Others, such as accelerating rezoning and the delivery of serviced land are more difficult issues, as they reflect deeper structural constraints. Nevertheless, addressing housing supply issues should be handled as a matter of urgency as the social and economic costs of deteriorating affordability are increasing.


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  • Clayton, F. (2017). “Countering Myths about Rising Ground-Related Housing Prices in the GTA: New Supply Really Matters,” Centre for Urban Research and Land Development Ryerson University.

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  • CMHC (2018). “Examining Escalating House Prices in Large Canadian Metropolitan Centers

  • CMHC (2017). Rental Market Report. British Columbia and Ontario Highlights.

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  • Green, K. and Filipowicz, J. (2017). “New Homes and Red Tape in British Columbia”, Fraser Institute.

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  • Ryerson University School of Urban and Regional Planning (2015). “Promoting Rental Housing in the Greater Toronto Area”.


Prepared by Zsofia Arvai.


This analysis uses the “Median Multiple” (median house price divided by gross pre-tax annual median household income) to assess housing affordability. See the Demographia 2018 survey for the coverage of markets.


See CMHC (2018) for a detailed analysis on the drivers of housing demand across Canada.


For a comprehensive list of macroprudential and other regulatory measures aimed at insured and uninsured mortgages, see Annex III of the Staff Report for the 2018 Article IV Consultation.


In Glaeser and Gyourko (2018), the underlying land price is included in the production cost based on land values in a relatively free market with few restrictions on building.


In Figure 1, P, Q, and D denote house price, housing supply, and the demand curve, respectively.


Estimates for long-run supply elasticity of housing starts are particularly low for Toronto and Vancouver, see CMHC (2018), “Examining Escalating House Prices in Large Canadian Metropolitan Centres”, p7.


See e.g. Bellisario et al (2016) for a discussion on San Francisco’s affordability crisis and policies to address it.


A recent study analyzing the cost of barriers to housing supply in Canada found that restrictions and extra costs on building new housing – such as zoning regulations, development charges, and limits on housing development in urban containment areas – are dramatically increasing the price of housing. See Dachis and Thivierge (2018).


Ontario’s Fair Housing Plan states that as part of the implementation of the Growth Plan for the Greater Golden Horseshoe, 2006, enough land was set aside in municipal official plans to accommodate forecasted growth to at least 2031.


In Vancouver, determining the Community Amenity Contribution (CAC) also seems to be a relatively opaque process. CACs are developer contributions triggered when a site being developed requires rezoning. CACs are negotiated agreements aimed at funding off-site community amenities such as public art.


Arriving at the final amount of development charges can take some amount of time. There is a multitude of charges municipalities can levy for various services. Pricing the value of these services involves judgement and negotiation with developers.


A study by the Centre for Urban Research and Land Development at Ryerson University (2017) found that average approval times in Ontario for more complex buildings, such as condominiums, is 28 months.


E.g., according to a survey in Green and Filipowicz (2017), the average time for re-zoning was around 10 months in the City of Vancouver. A similar survey for Ontario in Green, Herzog and Filipowicz (2016) found re-zoning adds on average 7 months to the approval timeline for the City of Toronto.




See CMHC (2017) Fall Rental Market Reports for British Columbia and Ontario.


Moreover, a run-up in investment properties with the intention to rent them out can worsen affordability further. These investors affect the broader housing and mortgage markets as they compete to buy the same pool of properties as primary home buyers. They can also add to financial stability risks, since in a housing market downturn, investors selling secondary properties into an illiquid market could amplify the fall in house prices, potentially raising losses for all mortgages. This could be a particular concern in a rising interest rate environment, if renting out properties becomes unprofitable given higher debt-servicing costs.


There are also structural differences that incentivize condominium development (e.g., developers can pre-sell condos, reducing their upfront financing needs, but cannot do so for rentals).


See E.g., Ryerson University School of Urban and Regional Planning (2015). “Promoting Rental Housing in the Greater Toronto Area”.


See details for Ontario’s rent increase guideline and British Columbia’s rent increase rules on the provinces’ websites.


By forcing rents below the market price, rent control reduces the profitability of rental housing, directing capital to other more profitable markets. By reducing the return on investments in rental housing, rent control can also lead to a decline in the quality and quantity of existing rental stock.

Canada: Selected Issues
Author: International Monetary Fund. Western Hemisphere Dept.