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Mike Moffatt: We need more than big promises to solve our housing crisis

Commentary

Despite heightened political rhetoric and ambitious housing targets from both the federal and Ontario governments, housing starts are not going to be increasing any time soon. In fact, the CMHC is forecasting that they are far more likely to fall over the next couple of years. Ontario’s situation appears particularly dire.

We should recognize both federal and provincial housing targets for what they are: an expression of need, rather than what is likely to occur. Ontario has set a target for 125,000 housing starts this year, 150,000 in 2025, and 175,000 every year thereafter. Yet the provincial government’s own budget forecasts only 88,000 starts this year (roughly 70 percent of the target), and less than 95,000 in both 2025 and 2026 (not quite 55 percent of the target). And given current conditions, if I were a betting man, I’d be taking the under in terms of the government even meeting its own inadequate projections.  

There are solutions, though: our Blueprint for More and Better Housing has dozens of them. At a high level, the province needs to fix broken regulatory processes, enact a strategy to lower land costs, and reduce the high taxes and charges that are crushing new development.

Housing starts can be broken down into three distinct markets: rental apartments (also known as purpose-built rentals), condominiums, and non-condo ownership housing. In recent years, condo and rental starts have been rising, while ownership starts have been in freefall. While Ontario’s rental apartment market might trudge on, the outlook for both forms of ownership housing looks exceptionally bleak.

CMHC data complied by Mike Moffat. Graphic credit: Janice Nelson.

Let’s start with non-condo ownership housing. Starts in this market are down 35 percent over the past two years and are less than half what they were twenty years ago. High land costs, along with development charges that have risen by as much as 2000 percent over the past 20 years, make these expensive to build, even before a shovel is in the ground. When they do get built, they’re typically at the edge of cities, or in smaller communities, and as such tend not to attract mom-and-pop investors who would prefer properties that are easier to rent out (either on a long-term or short-term basis), such as those closer to downtown or near a college or university. At current prices and interest rates, only the most well-off owner-occupiers can afford to purchase these homes. That will not change unless there is a significant drop in interest rates or a significant drop in land prices or taxes on development. Expect starts in this market to continue to fall.

Unlike non-condo ownership housing, condo starts are currently at record highs in Ontario, which is normally indicative of a strong market. However, the starts represent strong pre-construction sales during the pandemic and before the rise in global interest rates. Since the interest rate spike, pre-construction condo sales in the Greater Toronto Area have dropped to levels not seen since the 2008-09 financial crisis and are at levels more associated with the 1990s. 

This crash in sales will inevitably be reflected in new starts, mostly likely in the next six to 18 months. Potential first-time homebuyers cannot qualify for mortgages at today’s prices and rates, and high taxes and land costs create a price floor on how low condo prices can fall. Unlike newly constructed non-condo ownership housing, the pre-construction condo market does attract high numbers of mom-and-pop investors. With high interest rates and weak potential price appreciation, it simply is not an attractive investment, as shown by a recent blog post by Steve Saretsky. Condos will not get built without a buyer, and there are few to be found.

Unlike the other two markets, it is possible to make a bullish case for Ontario’s purpose-built rental market. All of the people who are shut out of the ownership market need to live somewhere, creating a need for rental. A suite of new housing policies, from eliminating the GST on purpose-built rental construction to the reintroduction of the 10 percent accelerated capital cost allowance to enhanced access to low-cost financing, has positively altered project economics by lowering both taxes and interest costs. These factors should help Ontario’s rental starts continue to grow. 

However, it is also possible to make a bearish case for rental starts as well. Development charges continue to rise in Ontario, and the eventual passage of Bill 185 will remove the requirement for municipalities to phase in those increases. Financing can still be difficult and expensive to obtain, and municipal approval processes still slow development. Canada has the second slowest speed in the OECD to obtain construction permits (just ahead of the Slovak Republic), and cities in Ontario lag behind their counterparts in other provinces when it comes to approval times.

Some developers that I have spoken to believe that Canada’s plan to reduce international student enrollment may have the intended effect of reducing rental housing demand, making new supply a less attractive investment. But the biggest factor may be global interest rates. Why engage in a risky activity like apartment construction when you can simply buy a risk-free 10-year U.S. Treasury that yields nearly 5 percent a year?

We’ve seen a lot of great action this year from the federal government, but if we want to see developers build even during this challenging economic environment, we need the province to step up and make it easier to do so.

Scott Taymun: How to strengthen Canada’s state capacity

Commentary

Much has been written over the past few months on the state of the country and the sense amongst many that “everything is broken,” including the federal government itself.  From the ArriveCan mess to evidence of foreign interference in our elections to the astonishment of Canadians witnessing 30 percent mark-ups to manage “supply contracts” under our procurement system to the immigration-housing trainwreck, the calls for an “overhaul” of the system are growing louder by the day.  

As former mandarins Mel Cappe, Kevin Lynch, and Jim Mitchell recently wrote for The Hub: “an overhaul is needed for reasons manifold and obvious to most Canadians. ” The issue, in other words, “is not whether the government of Canada needs to do things differently, but how to structure the change.”

Before we debate what and how needs to be fixed, however, I would argue we need to be more precise on what is and is not working.  

Let’s start with the positive. The vast majority of the federal government is not broken and is working quite well. While many would argue the federal government has become too big, that does not take away from the fact that there are several hundred thousand dedicated public servants doing their jobs, every day, across the country and internationally, very well. As a former CBSA executive, I remain very proud of the work my colleagues at the agency do every day to keep our border running. And, the story of effective delivery of government services on the ground extends to just about every facet of government operations—from the work our intelligence service does to food inspection to policing.

So, what is not working?  

Unfortunately for those in the “Ottawa Bubble,” it is the “machine” inside the bubble itself that appears most dysfunctional. Recent policy failures, operational failures, and management failures all appear to be rooted in Ottawa not working well. In particular, results rarely match commitments and we repeatedly see issues associated with an inability—or poor ability—to design, develop, and deliver policy, program, and operational solutions to the challenges of the day in a timely, effective manner. Whether it is the failure to properly assess and plan for the downstream impact of immigration on housing or the inability to deliver just about any major project on time, in scope, and on budget, it is important to recognize that it’s not the front-line public servant that tends to over-commit and under-deliver. 

This ability to bring together the expert resources of the federal government in support of ministers to address public policy challenges is the job of our central agencies and senior civil service. If we are facing institutional, system-level challenges in the federal government’s ability to “get things done,” both the root of the problems as well as the design and implementation of solutions must necessarily implicate our central agencies.  

Within this context, the Hub’s Sean Speer and Andrew Evans recently prompted quite the debate on how to reform the federal government to improve its capacity to deliver, making the case for a “Do Tank” attached to the Prime Minister’s Office that would involve

the establishment of a National Economic Council and Domestic Policy Council comprised of relevant cabinet ministers, public servants, political staff, and possibly non-elected appointees, and supported by a dedicated PMO staff, with the mandate to strengthen policy capacity and implementation oversight on behalf of the prime minister.

Cappe, Lynch, and Mitchell critiqued the idea, noting that “it would contribute to a further centralization of the federal government and in turn undermine the principles of cabinet government and ministerial responsibility.” They further argue that if we want more effective government, the federal government needs to address five key issues:

  • Political short-termism
  • Excessive centralization in the PMO
  • Improving Government operations
  • Fixing procurement
  • Strengthening policy capacity

In reviewing this list, I found it hard to disagree with most of the various arguments and observations put forward. I also found myself asking, could the system operationalize the advice put forward, and, to the extent it tried, would it fix the core of the problems hindering effective development and delivery of key initiatives? On both of these latter questions, I remain sceptical because I am not convinced these “fixes” address the core driver of what’s not working. 

PSAC workers and supporters walk a picket line in Halifax on Monday, April 24, 2023. Darren Calabrese/The Canadian Press.

As Speer notes, “A major impediment to progress on these ideas and various others is the inherent structure of the federal government and the challenge of centralized coordination on multi-departmental initiatives”. That, there, is the crux of the core problem and a longstanding issue. I recall Jocelyn Bourgon talking to middle managers in the 1990s, noting “We are all vertically accountable and horizontally challenged.”

Yet my own experience managing big, tough files is that Ottawa does not do horizontal integration well, neither across government departments, nor agencies within the same portfolio, or even, quite frankly, across different branches of the same department. It is an inherent weakness inside the “Ottawa Bubble.” 

A related yet separate problem is that Ottawa does not prioritize well. It is rare to see a government or department focused on a discrete set of clearly defined “must-do” priorities. The net result is that the “siloes” focus on their slice of the agenda and the system as a whole gets bottlenecked, particularly within central agencies (managing cabinet, decision-making, Treasury Board authorities) as well as in enabling areas such as staffing, procurement, and IT.  

Which brings me back to the idea of a “Do Tank.” Cappe, Lynch, and Mitchell argue that (1) “under the model proposed by Speer and Evans, ministers would be sidelined, while the PM’s political staff would be enormously empowered and yet entirely unaccountable,” and (2) “strikingly absent from their desired model is almost any reference to ministers or the public service”. Another approach, which Cappe, Lynch, and Mitchell advocate, is “going back to Westminster basics and having a cabinet of strong and empowered ministers.”

I personally do not see the two lines of thinking as mutually exclusive. It is perfectly conceivable to build a “Do Tank” in the PMO (or PCO for that matter) to help catalyze integrated policy development, planning, and prioritization across the broader system, working with PCO, Treasury Board, and others within the federal government to help “focus” the system on effective development and delivery of a discrete set of government priorities.  

The work of such a “Do Tank” would be to force the “system” to work in a more integrated, timely manner to address big problems and deliver. This could include, but not be limited to:

  • Bringing internal and external stakeholders together to do initial front-end policy and planning work on options, authorities, and delivery mechanisms;
  • working with the PMO and PCO to designate lead ministers and supporting machinery;
  • working with PCO to catalyze due diligence assessments within central agencies and across supporting departments, including work on cabinet authorities, legislative authorities, costing, timing, and implementation planning; and
  • maintaining line of sight and oversight of progress against plans and intended results.

Within government, the Do Tank concept and lead ministers could further be supported by the development of SWAT teams, by priority, built on an interdepartmental basis. The intent would be to ensure that the right civil servant players were assigned to the priority to facilitate effective coordination and delivery across and within supporting departments.

In short, we need to be precise on what needs fixing and find executable ways to implement the proposed solutions. Neither “Do Tanks” in the absence of supporting machinery on the civil service side of the equation, nor a return to an era of strong cabinet ministers is likely to do the trick. What is required is to fundamentally improve the system’s ability to effectively design, develop, and implement integrated solutions to complex public policy challenges within reasonable time frames.  

Wouldn’t it be great to see a four-year initiative designed, developed, and delivered in…four years?