Private real estate developers aren't too greedy to build attainable housing. In fact, if Toronto can get out of its own way and reform zoning they're too greedy not to.
Most people agree that Toronto needs more housing. As we hash out where to put it, the idea that we need many more homes in our low-rise neighbourhoods is getting mainstream attention.
Whether private developers could or would build the attainable housing we need continues to be debated. The topic pits people against each other who otherwise agree we need more housing.
Using the auto industry as an example, I hope to illustrate why private developers currently respond to piecemeal increases in permitted density by building luxury housing.
Better understanding this dynamic helps, I think, refocus the conversation on a systematic approach to making decisions about housing policy that produces housing abundance and affordability.
Two quick caveats: (1) I use the term attainable housing to mean housing built by private developers without government assistance and sold at prices that broadly reflect middle-class household incomes and (2) The private market isn't capable of housing those with no or very low incomes. An essential role of government will always be to provide these people with places to live. How best to do that is a different conversation.
The way we build new housing sucks
The way we currently build new housing in Toronto doesn't just fail to meaningfully lower home prices, it spawns resentment among would-be supporters of more housing density.
Since developers typically respond to approvals for more density with luxury housing, it can feel as if allowing the private market to build more moves us further away from an affordable city. It feels as if developers are too greedy to build anything but luxury housing because it produces the largest profit margin.
The reality is developers are no more greedy than any other industry. They build luxury homes because that's exactly, consciously or not, what we've told them to do.
When zoning bylaws limit the number of homes that can be built, developers behave as we would expect any industry to respond to a limit on production volumes. They focus on selling fewer products at higher prices.
Lessons from Japanese automakers
Artificial limits on supply don't exist in the same way in the auto industry. Automakers decide on models and prices based on how they can best meet demand given their business model.
In 1980, however, there was a period when the number of vehicles that Japanese automakers could export to the U.S. was limited. The ways in which companies like Toyota responded to the export limit, and its subsequent removal, provides a useful example to better understand Toronto’s housing industry.
In response to the 1979 Oil Crisis, U.S. consumers flocked to Japanese vehicles for their fuel efficiency. Recognizing the U.S. government was under pressure to protect domestic automakers, Japan imposed a Voluntary Export Restraint (VER) that temporarily limited the number of auto exports to avoid a more punitive trade agreement with the U.S.
Between 1980 and 1981, the first year of the VER, average prices of Japanese vehicles increased by nearly 20% and sales growth was highest for the most expensive models. The Big 3 Japanese automakers Toyota, Honda, and Nissan also launched Lexus, Acura, and Infiniti to capitalize on luxury models.
Today the limit on supply is long gone and car sales tell a different story. In 2020, Toyota sold 12 times as many Corollas and Camrys than they did the Lexus ES, their most popular luxury sedan.
Greed wasn't stopping Toyota from exporting more affordable vehicles, their focus naturally shifted towards luxury vehicles to generate profit from fewer sales.
Zoning reform makes building the Toyota Corolla of housing make sense
In the same way Toyota responded to a limit on vehicle exports with Lexus, private developers respond to zoning bylaws that limit the number of homes that can be built with luxury housing.
The unintended consequence of zoning has been the creation of conditions in which luxury housing is the best, and often only, viable option for developers. Greed isn't stopping them from building attainable homes, they're responding exactly as we should expect.
Toronto can lower home prices through zoning reform that increases permitted housing densities city-wide, particularly in areas designated as Neighbourhoods.
Zoning reform would also make the housing industry more profitable, lower the barrier of entry for new and smaller developers, and encourage more competition between developers.
Luxury housing is relatively niche and demand is limited. Boosting permitted housing densities across the city will require developers to move down market to serve middle-income households. Otherwise new developers will spring up with business models better suited to these market segments, the same way automakers sell cars at different price points.
Newly permitted building types, like fourplexes and walk-up apartments, would offer viable multi-family alternatives to small and mid-size developers who otherwise can’t build condos.
Zoning reform that’s city-wide is key. We can’t continue to approve more density on a site-by-site basis and expect a few new homes to put meaningful downward pressure on housing prices.
Private developers can’t provide attainable housing for everyone but they would build a lot more of it than they do now, if we just get out of our own way.
If you enjoyed this post, check out “Why Aren’t We Building Middle Income Housing” by Rick Jacobus which inspired me to dig a bit deeper into the auto industry example.