The City of Toronto’s recently adopted and well-intentioned Inclusionary Zoning (IZ) policy will result in some new “affordable” housing units being developed, but at what cost? If it results in even higher housing costs across the city for everyone other than the few of us lucky to get an “Inclusionary Zoning” unit, is this new regulation actually what is best for the city as a whole?
In November 2021, the mayor and council approved an IZ by-law that will go into effect in September 2022. IZ is a controversial and much discussed planning tool used by some North American cities to harness the forces of development to facilitate construction of affordable units within projects delivering market-priced homes. It mandates that a percentage of residential space in new housing projects (of particular size and within specific areas) include affordable homes for low- and middle-income households.
IZ can be a valuable zoning tool and has been shown to be an important component of healthy housing ecosystems. But there are issues with how it is being implemented in Toronto.
IZ will apply in Toronto in large swathes of the city in three tiers of so-called Strong Market Areas; within these vast areas, affordable units will be required to be contributed by developers in projects that are within 500-800 metres of Protected Major Transit Stations Areas (PMTSA). The intent is to ensure there are affordable units near subway and LRT stations, where they are most needed. This requirement will only apply to multifamily projects with more than 99 residential units.
For condo projects that qualify, the regulations make it mandatory that 5-10% of the gross floor area (GFA) of residential buildings be provided as affordable housing, starting September 2022. That requirement will increase incrementally each year so that by 2030, up to 22% of new residential GFA must be secured as affordable. The tenure for affordable units in Toronto will be 99 years.
In order to encourage the development of purpose-built rental projects, the city has given developers of rental stock a delay in implementation until the end of 2025. However, starting January 1, 2026, 3-5% of GFA in new apartment buildings will be required as affordable units in new developments. For both condo and apartment developments, the percentage of GFA required as affordable is dependent on which Strong Market Area of the city the site is located.
It is clear that we have a housing affordability crisis across Canada, especially so in Toronto. This problem is not isolated to Canada and is being seen in desirable urban areas around the world as housing prices skyrocket. Government action has a role to play, and it is clear that IZ policies do result in the development of some new affordable units. However, broad-brush efforts are usually accompanied by unintended consequences. The costs of IZ policies must be borne by someone and these are most likely to be spread throughout the markets in which they are implemented.
IZ presents new challenges
IZ, in essence, represents another new tax on developments that will eventually be paid by home buyers and renters.
Government fees, taxes and charges already account for about 20-25% of the cost of a new home in the GTA, due to requirements over development charges, parkland dedication, application and permit fees, community benefit contributions, land transfer taxes, HST, and more.
Like a game of whack-a-mole, securing affordable homes for one segment of the population, IZ will simultaneously create a new surge in prices for other segments, all while reducing developer interest in building new homes in key transit-supported neighbourhoods.
With IZ required in PMTSAs, incentives arise to build multifamily projects outside of transit hubs, resulting in less mobility and more dependence on vehicles. Some projects currently slated for advancement in PMTSAs may be terminated if the effects of IZ render the project no longer profitable, resulting in zero new units when there would have been at least 99.
These regulations also encourage more residential developments in PMTSAs to seek luxury status through design, finishes, and amenity provision so that they can achieve rents high enough to subsidize the required below-market rate units, at the cost of mid-market units never being constructed. And since the definition of “affordable housing” targets families in the 40th to 60th percentile of household income, IZ does nothing to create housing for the most vulnerable families in the city.
Has IZ worked elsewhere?
There have been studies on the effects of IZ. The Bento study in California found that it resulted in prices increasing 3% faster than in jurisdictions without IZ. A study by Tom Means and Ed Stringham found that IZ reduced the supply of new homes by 7%, and prices increased by 20% in California.
In Boston, another study showed that IZ reduced the rate of production of housing and caused higher prices. And in the San Francisco Bay Area, the same study found that inclusionary zoning corresponds with higher house prices during periods of rising rent prices, but that it also contributes to lower rent prices during times of falling average prices.
In Portland, Oregon, we've seen IZ stall the multifamily development pipeline while creating perverse incentives to underuse available land.
Leaning into alternatives
Apart from IZ, there are many other initiatives governments can consider. Perhaps the most effective way to reduce housing costs would be to tackle construction and labour costs. Prioritizing immigration into our big cities by skilled tradespeople and expanding education programs focused on trades would both contribute to growing the building industry’s labour force. This approach would accelerate job site efficiency, extend capacity, and reduce overall labour costs caused by human resource shortages.
As in so many other facets of the global economy, construction costs are being affected by supply chain issues resulting from the ongoing pandemic. As the incredible logistical problems currently being experienced in the largest ports work themselves out over the next two years, it is expected some of the cost impacts on building materials and components will decrease.
While developers wait for those macro effects to balance out, they would welcome initiatives from provincial and municipal governments in areas they can control such as fixing broken entitlement approval processes, eliminating spurious heritage requirements, and prioritizing the need for housing supply over questionable design regulations, like “angular plane” requirements, that result in less density and slower projects, all of which lead to higher costs for end users.
In locations where IZ is required, cities could provide developers with density bonuses and development charge discounts so that the costs of the affordable units are not borne by those acquiring market-rate housing. While this is common in American jurisdictions where IZ has been implemented, the City of Toronto offered nothing to developers in exchange for the affordable housing mandate.
Perhaps most controversial but potentially effective, Toronto could open the single-family housing zones of the city to intensification. Coined “yellowbelt” because of the yellow label these areas are given in zoning maps, these stable neighbourhoods cover more than 70% of the land area of the City of Toronto. Allowing mid- and high-rise density in these protected areas, particularly those proximate to transit, would materially impact the value of one of the main cost inputs into development, namely land. Toronto does not have a shortage of land; it has a dearth of political courage.
Other municipalities in the GTA are also taking steps to implement IZ policies. In doing so, it appears that the concept of “market strength” as put forth by the City of Toronto may also be adopted by other GTA municipalities. Hopefully, as Markham, Brampton and Mississauga advance their planning towards implementing IZ, they will take a more holistic view of how this policy tool results in both good and bad effects. Regulatory care must be taken to ensure affordable housing for some does not result in less affordable housing for everyone else, as we may see happen in Toronto.
Randy Gladman is Senior Vice-President of Development Advisory at Colliers in Toronto.
A version of this article was published in Financial Post.