Like The Hub?
Join our community.
Join

Chris Spoke: Inclusionary zoning might not be the free lunch we’ve been promised

Commentary

There’s a solution to the housing crisis and it’s not going to cost you anything. Nor is it going to have any additional adverse impact to the character of your neighbourhood.

It’s called inclusionary zoning and Toronto’s city council has really committed to those first two sentences.

I’m afraid I’m here to pour some cold water on this idea.

Let’s start with a bit of background.

Inclusionary zoning refers to a legal requirement that a given percentage of a new development project be priced below the market rate according to a predetermined formula, either as a fraction of average market rents or in relation to local incomes, and for a set amount of time.

Ontario’s Liberal government introduced legislation allowing municipal governments to set inclusionary zoning requirements in early 2018.

In 2019, the Progressive Conservative government amended that legislation to limit inclusionary zoning to so-called Protected Major Transit Station Areas (PMTSAs), or within 800-meters of a new or existing major transit station.

These PMTSAs were designed to encourage transit-oriented development by establishing density targets that municipal governments need to work toward in their land use planning.

Now, Toronto’s planning department, with direction from city council, is drafting policies that would establish the city’s inclusionary zoning requirements. These will be tabled and voted upon when council reconvenes in the fall.

Let’s now take a broader view of the issue.

Housing in our big cities is expensive because there’s not enough of it. The way out is through development and increased supply. We need more homes for more people.

Inclusionary zoning is in effect the provision of new subsidized homes paid for by a tax on real estate development, the very activity that we want to encourage and scale.

First order effect: a greater percentage of the homes being completed every year will be priced below the market rate.

Second order effect: there will be fewer homes completed every year.

But that’s not how Toronto’s city council is thinking about it. Much of the rhetoric coming from the most outspoken councillors doesn’t get past the first order effect.

As the thinking goes, we’re seeing approximately 20,000 units completed every year in the city. If we could require that an aggressive 20 to 30 percent of these units be priced well-below the market rate, we could see our stock of capital-A Affordable housing increase by 4-6,000 units every year. Not bad!

To the extent that some thinking has been applied to the second order effect, it goes something like this.

Landowners within PMTSAs have benefited from the land value appreciation that comes from close proximity to major transit stations. If the incidence (or burden) of the inclusionary zoning requirement falls mostly on landowners, and it does, then inclusionary zoning could be thought of as a partial clawback of that unearned value.

In the long run, land prices will reset at a lower point as they “absorb” the policy change and development activity will proceed uninterrupted. Maybe.

And what about the short run? Worsening housing affordability has become a particularly acute problem, after all. Here comes the cold water.

Housing in our big cities is expensive because there’s not enough of it.

The economic feasibility of a development project is evaluated by the amount of money it returns over the amount of money it costs. Simple enough. For a rental project, this is expressed as a capitalization (or cap) rate.

If it costs $100M to develop a rental building that returns $3.5M in rental income net of all operating expenses in its first year, that’s a cap rate of $3.5M over $100M, or 3.5 percent.

Below a certain cap rate threshold, the project is not worth pursuing.

An inclusionary zoning requirement impacts the cap rate directly by decreasing the amount of money the project returns. Pricing some units below the market rate leads to a decrease in the net operating income.

To maintain an acceptable cap rate, developers will have to find proportionate offsets in project costs.

Project costs include land costs, soft costs (design fees and taxes, for example), and hard costs (construction costs). The latter two categories are what they are. The city has indicated that it’s not willing to pair inclusionary zoning with any tax incentives. The proportionate offset will have to come from land costs.

An inclusionary zoning requirement reduces the amount of money developers are able to pay landowners for their land.

And here’s where the gap between the long run and short run appears.

In the short run, many landowners will not be willing to accept any material reduction in the value of their land. They’ll hold onto it until the market catches back up to their expectations rather than sell it for a depressed price.

As inclusionary zoning becomes law, we should expect to see less land being sold to developers, less development activity, and less new housing being completed every year.

In fact, this concern was articulated very clearly in a report the City commissioned from urban planning and market research firm N. Barry Lyons Consultants Limited (NBLC). From the report, under the “Impacts on Affordability” heading:

“As discussed in prior sections and our previous reporting, an impact of an IZ policy would be to cap a portion of project revenue, (increasing costs as a proportion of total revenue) placing downward pressure on residential land value. If land prices decline significantly, landowners may be less likely to sell property for the purposes of redevelopment. This could result in reducing the supply of housing entering the marketplace until demand increases pricing sufficiently to trigger development. In broad terms, constraints on housing supply can affect affordability. The key to a successful IZ policy will be to strike a degree of balance so that the supply of new market housing does not contract. “

Inclusionary zoning might not be the free lunch we’ve been promised.

So, what’s the alternative?

First, we should update our land use rules to allow for much more development overall. This would place downward pressure on market prices and make housing more affordable to more people. I’ve written a bit about that in my last few pieces.

Second, if we do want to provide below market rate units for our lowest income residents — if we think that this is a broad social responsibility — then we should pay for it broadly through our property taxes. As mentioned earlier, this could take the indirect form of tax incentives for development projects subject to inclusionary zoning.

I think that this money would be better spent on more older, less expensive units than fewer newer, more expensive units, but in either case, it should be done in a way that doesn’t introduce a disincentive to new development.

Rob Leone: Conservatives face a monumental challenge to stay relevant

Commentary

Ken Boessenkool recently reflected in The Hub on the need for Conservatives to appeal to their finer sensibilities in terms of the policy suite they offer to each of the movement’s different camps, while avoiding the other elements that turn off many others to the cause.

While I share these thoughts, I would also like to go a few steps further. Here are a collection of lessons from years of being an academic, a party activist and even becoming an elected provincial conservative.

Challenge 1: Leader vs Followers

In a blog post earlier this year, I made the claim that the Conservative Party itself was ungovernable. In that post, I claimed that the Conservative Party elects a leader, and the very next minute, that leader is expected to follow the followers — followers who will ruthlessly guillotine the leader for non-victory while themselves escaping any blame for the cataclysmic failure.

It is a Conservative form of Marxism, where the proletariat collection of members control the bourgeois party elites. It is the most perverse form of organization, and honest questions never arise to analyze whether it is working.

Until Conservatives figure out that this backward organization is untenable, the party will never move forward. A leader needs to have the opportunity to lead. He or she needs to be true to self, believe in the policies being advanced, and have the latitude to figure out where to go.

Instead, our leaders want to fight an election on a particular policy agenda and scorn arises because it isn’t doctrinaire enough. This brings conflict, and rather than members seeing themselves as a dominant part of the conflict, they simply maintain that the leader wasn’t listening. It happens every time a Conservative leader loses.

Challenge 2: Solutions in search of problems

Let’s have a chat about the Conservative Party’s penchant for standing policy documents. This was brought to my attention again last week when members of the Conservative Party voted for their national policy committee.

Imagine writing a policy document for a political party years before an election. In fact, some of the Conservative Party of Canada’s standing policy provisions were written two decades removed from today.

It’s never great fighting the policy battles of yesterday when confronted with an election where voters are preoccupied about the here and now. But, there we have it: every time there’s a policy conference, there’s an avalanche of controversies over policy initiatives that would never make an election platform.

To make matters worse, members will insist that those standing policies are followed. Failure to adhere to yesterday’s standing policy book is seen as an indictment of today’s leadership. Nobody seems to see a problem with this.

This pet peeve is an example of the second major challenge: Conservatives tend to have a policy solution without defining a policy problem. It’s just too easy to brand conservatives as grandpa’s party just by the very nature of its institutional set up.

Surely the suggestion of blowing up the policy process will be seen as radical and controversial inside the tent. However, unless conservatives are talking to people about what they’re concerned about right now, then how will voters ever be convinced that their life will be better under a Conservative government?.

I might well support liberalizing gun laws and know it is important for the base, but it’s not even on the agenda for all but the hardest core of voters. This is a solution for a non-defined problem and while it appeals to a small subset of voters that by and large already vote Conservative, it is not speaking to average voters concerned about their more important life problems who are not voting Conservative.

Policy ideas need to be attached it to a current problem. If Canadians do not see the problem the same way, then it shouldn’t be a priority. This should be an ironclad rule, but one conservatives never seem to follow.

Challenge 3: Every good story must have a happy ending

If an election were like telling a story, we need to talk about the characters, the setting, the conflict, and the resolution when building the plot. Conservatives seem to like to talk about the characters and the conflict, but they struggle to provide a satisfying resolution to that conflict that calms, soothes and gives people hope.

Fear is a great motivating factor for people. Fear of reckless spending. Fear of nanny statism. Fear of governments making decision that ordinary folks should make on their own. Fear speaks to conflict, highlighting the fact that the opponents’ policies and ideas would be bad. That appears to be where conservatives end their narrative.

Hope speaks to a view of life four or ten years from now. How will Canada be better? How will we measure our collective prosperity? How do we turn that small, pocketbook thinking into a grander vision of tomorrow?

Unless a campaign talks about that and sounds authentic about its vision, it will continue to fall off the edge of the election cliff.

Challenge 4: Urban Canada needs a reason to vote Conservative

Have you ever been in a conversation where the person you’re speaking to is talking but not listening? That’s what Conservatives sound like.

There’s an echo chamber in the party that tends to have a loud voice, but it doesn’t reflect what ordinary people are worried about.

I’m a 40-something, educated, dual-income earning, upper-middle class, homeowner in Ontario. Obviously, this doesn’t apply to a vast swath of people, but it increasingly defines the people who live in vote-rich suburban parts of the country. To my dismay, most people like me don’t vote Conservative. Life is good for the most part. However, even though life is good, it’s not like such people don’t have their concerns.

Here are a few based on conversations I have recently had that are not so Covid-specific:

  • Worry about kids getting jobs
  • Don’t know how kids are going to afford homes
  • Work-life balance stress
  • How to care for mom and dad if they were to get ill
  • Personal and family mental health and well-being
  • No time to do anything because we’re shuttling kids to a million things again
  • Traffic and congestion
  • Distress over treatment of Indigenous people
  • Noisy neighbours

The funny thing is that proposing solutions to these urban problems do not have to come at the expense of the rural base. Worrying about kids getting jobs is as much a rural problem as it is an urban one. Affording homes in urban Canada requires a plan to build more homes in urban Canada.

The sorts of things on this list will not appear on the most important issues on a poll. They come out in conversations we should be having with ordinary people.

These are things that if you can tackle them in a neat package of real solutions, it signals to people that there is hope for a better future for them and their children.

Erin O’Toole can win the election if he starts focusing on the things that matter to people, but he and the party need to address its shortcomings before that becomes possible. Time is running out.