Why Middle-Income Families Are Leaving Toronto

What will happen to Canada when most Canadians can no longer afford adequate housing in our largest and most innovative cities? We are in the process of finding out. $1,500 a month is what CMHC describes as an “affordable” rent based on Toronto’s median annual income. The average one-bedroom apartment in Toronto now costs nearly $2,500 a month. That average monthly cost places a one-bedroom apartment out of reach for a nurse or a teacher. Two-income households aren’t faring much better. Most two-income households in Canada do not earn enough to cover the price of the average two-bedroom apartment in Toronto.?

CMHC defines “affordable” housing as costing less than 30% of pre-tax income. If you are like many Torontonians you make do by spending much more than 30% of your income on housing. One in four Toronto households now spend more than 50% of their pre-tax income on housing, a situation economists call “severely cost-burdened”. Being one of urban Canada’s “severely cost-burdened” is no longer a predicament for the poor or the few. It has become the norm. It's the norm for professionals and non-professionals alike. But mostly it's the norm for the young, for those starting families, and for those living in Toronto and Vancouver.?

Increasingly, many are alleviating their housing stress by picking up and leaving our largest cities. In 2023, Toronto saw outmigration at five times the historical rate. While high-income earners can afford to stay and low-income earners don’t have the flexibility to uproot, many in the middle are leaving in record numbers. This is concerning because the “middle” in Toronto is made up of some rather important people. The “middle” are our young knowledge workers. They’re also our teachers, nurses, and civil servants. They’re the people that are starting families. Economist Mike Moffat jokes that the median age of a person fleeing the Toronto housing market is zero. Zero because once couples who can afford to uproot find out they are expecting, they leave. We all know people who have done this or will do it. But it's not just anecdotal, we see it in the data. Toronto is losing its kids. The population of 0 to 4 year olds in Toronto has been declining since 2014, including a net loss of nearly 15,000 in the past 12 months.?

Finding a solution to this exodus of young families and middle income earners needs to be a national priority. When Canadians can’t afford to live in the places with the most economic opportunity, national productivity falls, and the rest of the country suffers. A survey by KPMG polled 534 business leaders and "revealed a staggering 94 percent consensus that soaring housing costs and inadequate supply represent the most significant risk to economic stability.” Our failure to build housing in our most innovative cities is draining billions from the Canadian economy.?

The Missing Middle

If you have an opportunity to fly over Toronto, choose a window seat and look at the increasingly dramatic skyline. Start at Toronto Island and then look northward. Rising out of the lake you see an impressive wall of glass towers. Thousands of condominium units occupy the former railway yards that separated the lake and the financial district. Look past the glistening financial district to the east and the west and suddenly the altitude drops and the glass disappears and you look down on the roof tops of old Toronto's single-family homes. To the north, high rises ascend to midtown before, once again, suddenly dropping off. This visual is repeated again and again. Prairie-like expanses of single family homes punctuated by pockets of tall glass skyscrapers. There are currently 49 buildings with 50 or more storeys just in Toronto; more if you include the Greater Toronto Area, and dozens more at various stages of development. Of these 49 towers, 43 are residential, not including a new 105 storey mega-tower under construction on Yonge Street.?

This visual is not just dramatic, it is the “Missing Middle”: the absence of mid-rise structures in Toronto. The dramatic image reflects a political reality. Most of the city has been protected from densification, causing intense bursts of sky-high development along the few corridors of the city where we have allowed it. Toronto’s development seems almost tectonic, where pressure builds until it buckles along the fault line of a major thoroughfare. We give way to 50 storey glass marvels to temporarily relieve some of the built up pressure. But it isn't working. We don’t have enough housing supply to meet demand. And for all our growth and development, Toronto isn’t that dense of a city by global standards. With just 4,200 people per square kilometre, we pale in comparison to European cities where skylines are dominated not by skyscrapers but by four to ten storey mid-rise structures. London has a population density of 5,800 per square km, while Geneva is over 12,000. Paris has over 20,000 people per square km, nearly five times denser than Toronto.?

Policy choices got us here

Those of us who follow the housing market in Canada understand that it is in a very bad place. We have failed for decades to build adequate housing to meet the needs of our growing population. What is less understood is that the crisis we have today is the product not of financialization, speculation, or foreign buyers, but rather it is the consequence of policy choices made over decades that have shifted housing from an affordable commodity product to a scarce investment product. While these policy choices were deliberate, very few were taken with the intent of restricting new housing supply; but when is the result of a policy ever really a product of its intent??

Over the past two years, Canadians have seen a blizzard of new federal and provincial housing initiatives. The result of this legislative activity is that the housing market is further snowed under. Housing starts in the first half of 2024 are down, including a 44% year-over-year decline in June. With just around 250,000 housing starts projected for 2024, we have little chance of building the 3.5 million new homes required by 2030 to restore affordability.?

Counterproductive results from noble intentions are still counterproductive results. To fix our housing crisis, we need to focus on the measurable and predictable economic effects of policy decisions and not merely on their stated aims. We need to focus on the incentives we are creating for developers and not on rhetoric or top down targets and goals. Admittedly, this is a far more difficult task than it seems but as a Toronto Councillor recently put it, "we need to stop bringing stuff forward that doesn't work."

Economics or French?

Economic ignorance in the realm of politics is nothing new. In 1976, the then-new leader of the Tories, Joe Clark, sat for an interview with the Financial Post. When a question about free trade was put to Clark, he “immediately fell apart. Frankly he said, he didn’t know anything about economics (...) and his exhausting schedule wasn’t helping. ‘You see’, he added, ‘when I went into politics I had to choose between learning economics and French, and I chose French’ ” (The Patriot Game, 1986).

This exchange came to mind as I listened to Prime Minister Justin Trudeau speaking to the Globe and Mail earlier this year. While promoting his government's new initiatives to address Canada's housing crisis, Mr. Trudeau commented, “housing needs to retain its value… it’s a huge part of people's potential for retirement and future nest egg... we need to keep housing stable and valuable, but we have to make sure more people can get into it to build that kind of stability”.

Trudeau’s comments reflect what Derek Thompson labeled “magical thinking about housing”. In short, the thinking goes like this:?

1. We want housing to be a good investment, to fund retirement, and even to help build generational wealth
2. We want housing to be affordable so that most people can have an opportunity to own a home

The problem is, you can’t have both of these things at the same time. A good investment, by definition, increases in value faster than the rate of inflation. Something that consistently increases in value faster than inflation cannot remain affordable. We want housing to be two irreconcilable things at once; we want it to be magical.?

Magical thinking is sustained because of the underlying tension between those already on the housing ownership ladder and those trying to get onto it. Those on the ladder have an increasingly large portion of their net worths tied to this single asset, and therefore a strong incentive to maintain the status quo. Those left off the ladder must contend with an increasing share of their incomes going towards rent, putting ownership perpetually further out of reach.?

Ok so what are we going to do about it?

With few exceptions, Canada’s housing stock is provided by private developers. Small- to mid-sized projects are often funded by independent builders who shoulder significant risks to get projects to market. Typically small developers are personally liable for project financing. For adequate housing to be built, builders need confidence that they can earn a reasonable return on their investment. When that return is eroded with higher fees and taxes, fewer developers are willing to shoulder the risk.

Until 1972, from an investment perspective, housing was treated very differently from today. Significant changes at the federal level shifted rental apartments from one of the most tax efficient investment classes to one of the least.?

One of the most impactful changes was the decision to end a long standing policy that allowed real estate investors and developers to defer taxes on recaptured depreciation upon sale of a project, if they reinvested the proceeds into a new property or development. This policy incentivized developers to build by encouraging them to recycle capital into new projects. Its reversal in 1972, along with the introduction of capital gains taxation, has made investing in real estate much less attractive.

The combined effects of the 1972 policy changes had a dramatic impact on the rental market in Canada. In 1970, two years prior to the changes, Canada produced over 60,000 new urban apartments. A decade later, we produced only 25,000; by 1997, only 5,000 new units across 26 urban centres. This year, the federal government again made the environment for investment in rental housing less attractive by increasing the amount of capital gains subject to taxation from half to two-thirds.?

Since the federal government now acknowledges that we are in a housing crisis, they should consider serious steps to make the investment environment for rental housing less punitive. I would propose a return to the pre-1972 policies on tax deferment for recaptured depreciation, and I would include deferment for capital gains, so long as capital is reinvested into another rental property. While this may sound radical to some, it would align Canada with the United States, where 1031 exchanges allow full deferment for capital gains for all investment properties. Canada can retain its modesty by merely applying these changes to rental housing, where we need them most.?

The least controversial topic in housing economics

Rent control is one of the most politically attractive and popular policy proposals to address rising housing costs. It is especially attractive because its aim is desirable, and it has an immediate positive effect. The negative consequences, while ultimately disastrous, can take years or decades to play out (Sowell, 2004). Rent controls perfectly illustrate the principle that the goal of a policy and the result of a policy may be so unrelated that they are hardly even distant cousins. Ontario has had some regime of rent controls on housing since 1975. Currently Ontario caps annual rent increases at 2.5%. Rent can only be reset to market upon vacancy.?

The fact that rent controls remain a popular policy solution is surprising if you’ve looked at the mountains of evidence for their deleterious effects. Rent control, as Paul Krugman said, is “among the best understood issues in all of economics, and - among economists, anyway - one of the least controversial.” In a normal market, a landlord would like to see a tenant stay forever, receive consistent rental cash flow, and avoid the cost and hassle of vacancies. However, when housing supply isn’t keeping up with demand, market rents quickly exceed the annual rent control cap. This creates perverse incentives for landlords, placing them in a position where they want tenants to leave so that they can reset rent at market levels. In 2024, we’ve seen this playing out in Ontario. There has been an 85% increase in ‘own-use’ evictions by landlords, which housing advocates fear are used as a means to generate tenant turnover rather than for genuine personal use of the property.?

The added irony of rent control policies is that they appear to be a more attractive solution over time. When implemented, they increase demand for housing, while slowly reducing the quantity and quality of supply. Over the long run they lead to higher market rents, emboldening support for further rent controls. Getting out of this cycle is very painful for tenants, but with an already broken rental market, and a generational gap in rental development, we have no choice. In Ontario, the Ford government removed rent control on residential builds after 2018. This was a positive move. They should go further and remove it from all rental housing. We should consider a temporary expansion of the Ontario-Canada Housing Benefit subsidy, to provide relief to renters during the transition.?

The government nearest to you governs best… until it doesn’t

While the federal government sets taxation and immigration policy, and the provinces and municipalities govern housing policy, final say for whether or not housing is built is often a hyper-local decision. It's not just municipal governments that have a say, but community groups and neighbours.?

Community consultation is integral to the process of housing development. And we want a process that gives voice to those that are most affected by a new building. Gone are the days when top down decisions could result in the relocation of whole neighbourhoods to make way for new infrastructure without giving residents a say in the process. We should be thankful that Jane Jacobs triumphed over Robert Moses. However, today, we have new problems.

The manner in which we conduct community consultation has a democratic appearance, but in practice it is biased toward existing homeowners, and toward those with the time and knowledge to attend hours-long hearings. Building homes is a popular idea in the abstract. But once it becomes a real project, local residents can weaponize consultation processes to prevent new rental developments. A few months ago I wrote about 91 Barton Ave, Toronto - a small urban infill project in midtown Toronto. The developer of this site has now been rejected twice at the Committee of Adjustments. The fault here does not lay entirely with the CofA. If zoning bylaws were not so limiting in the first place, more project types would be able to be built “as-of-right” and would be less subject to community grandstanding.?

Our zoning and consultation systems protect the status quo. We are very effective at giving voice to the costs and concerns that arise from new housing. Our processes allow for near endless debate on parking, or shadows, or impacts to ‘neighbourhood character’. And yet we haven’t incorporated any processes that facilitate a discussion of the costs of failing to build new housing, let alone the potential benefits to a community of a growing and diverse set of residents.

Local decision makers do not have an incentive to be attuned to the interests of renters or people who can’t yet afford to be constituents. Hyper-local decision making for housing is proving itself to be harmful. When thousands of local decisions are biased towards protecting the status quo, each may only affect a neighbourhood, but in the aggregate the effect is seen in the national housing data. It’s not the wealthy that are left worse off by these decisions, it’s the poor and the middle class - the people that local consultation was meant to protect.

We need to continue with efforts to reform our zoning bylaws to allow for added density where important non-housing infrastructure already exists. Toronto’s Major Streets initiative is a step in the right direction but far more needs to be done. If we allow local residents to gatekeep against new apartment buildings, then they will do just that.?

We need much more aggressive zoning reform that recognizes our cities are growing, and that enables economically fair and productive outcomes. Oddly, when you look at the organizational chart for the City of Toronto, you might come to the conclusion that there is little connection between economic development and housing, with each function siloed under a separate deputy city manager. Compare that to the org chart of Austin Texas, which despite being the fastest growing city in the United States, has been able to build and actually reverse the trend of rising costs. For Austin, and other cities like it, planning and housing fall under the same authority as economic development.

Along with zoning reforms, we need to better incorporate long-term economic goals into our decisions around urban planning and housing.

Our over-engineered, hyper-complicated, and often self defeating building code

While we debate Missing Middle housing in Canada, in European capitals, 4 - 10 storey structures are the predominant form of multi-residential building. One driver of this difference are the building code standards that we impose on ourselves that make many missing-middle projects financially unfeasible. I doubt many Canadians spend much time thinking of elevator standards, and neither did I until I attended a presentation by Stephen Smith of Market Urbanism at Toronto’s annual Missing Middle Summit.?

The first thing Stephen Smith points out is that elevators in North America are massive; on average 85% larger than those in Europe, requiring at minimum the accommodation of an ambulance stretcher laid flat. The second point, and perhaps the most arresting, is the incredible diversity of standards and regulations. Not only do elevator standards differ between the United States and Canada, but individual states and provinces have their own standards. Smith identifies “nearly 100 boards and jurisdictions that regulate elevator safety in North America.” This complexity compounds existing challenges with the shortage of specialized and skilled tradesmen in Canada.

What this adds up to is that elevators are extremely expensive to build in Canada, and therefore we have far fewer of them than in Europe and Asia. In Canada, we have 4 elevators per 1,000 people. In Japan, they have 7 per 1,000 people. In Germany, 10; in Spain, 23; and in Greece, 41. Elevators are essential to any project over six storeys. When a mid-rise project's financial viability is already questionable, the expense of elevators can be the final blow. Housing advocates suggest reasonable changes, including allowing for smaller elevators in smaller buildings, and eliminating our patchwork of bespoke regulations by adopting the European standards (Elevators, Smith).?

If you hadn’t been thinking much about elevators, I'm going to guess that you’ve been thinking even less about stairs. Canada requires two separate exits from any multi-unit building over two storeys. This policy gives Canada the distinction of having the second most restrictive stairwell requirements of any country in the world (second to Uganda). This requirement originates from the 1800’s when deadly fires engulfed New York and Chicago’s wooden balloon-frame housing stock. Updates to materials and building design over the past century have greatly reduced the risk of conflagration; however in Canada, the two-exit stairwell has remained as both a requirement and a reminder of how rarely we revisit a policy once it's been put in place.

The floorspace required for two separate stairwells and a connecting corridor on each floor make many mid-rise projects financially unfeasible. Updating these policies to permit taller single-access buildings—such as those up to eight storeys—would allow for a wider variety of building configurations and sizes. And at eight storeys, our requirements would still be amongst the strictest in the world.?

These proposed changes to stairs and elevators are reasonable and should be adopted immediately. But, they are merely two examples of how even if we reform our zoning bylaws, our tax code, and our rental statutes, we are still standing in our own way with a highly complex list of standards and requirements, written by special interests, and divorced from economic realities, that stand to kill whole categories of housing that could alleviate this crisis.?

Real solutions are necessary, and not just for the sake of affordability

We find ourselves where we are because of decisions taken at every level of government over a 50 year period. So when we look for solutions, we can’t just look in one place. No single change will be a panacea. If we remember that our problems stem from failing to build then hopefully we can avoid short sighted political answers and focus on solutions that drive results. We can set the next generation up for a brighter future in Canada.?

Housing is a basic necessity that, if we don’t get right, will vanquish all other policy priorities. Do we want to solve Canada’s anemic productivity growth? Do we want to attract the best people from around the world to Canada? Do we want a less polarized and xenophobic political culture? Do we want rising living standards? Do we want younger Canadians to have hope for a better future? If we want all or any of this, then first, we must solve the housing crisis.?