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Hi Livio, would it help if the total housing starts is also plotted? A rough calculation of the total housing starts based on your plots appears to suggest a relatively flat trend of it. A document from CMHC also confirms the relatively flat trend of the total housing starts in Toronto (https://www.cmhc-schl.gc.ca/odpub/esub/64319/64319_2016_B02.pdf).

If these data patterns are right, then the implication would be that, the total housing starts have been roughly flat in the recent decade, while a larger portion of it is shifted from freehold to condo. This would reduce the supply issue to two questions: why the total housing starts does not go up? why builders shift from freehold to condo. These would be the specific context to think about the role of Greenbelt legislation. My guess at this point would be that, the Greenbelt legislation might increase the cost of freehold and hence be a factor for the shift from freehold to condo. But does the Greenbelt legislation also contribute to the flat trend of total housing starts in Toronto?

Thanks for the suggestion Frank. Have plotted total starts.

Livio: interesting. Two things especially surprise me:

1. The peak in 2001/2. Why then? Interest rates are lower now than then.
2. Just how volatile housing starts have been since 2006. I could see a big drop then rise immediately following the financial crisis, but the volatility has continued.

There's no obvious macro demand-side explanation for those facts. Supply-side regulation??

If I were a political partisan - and I am - I might suggest that clearly electing the Harris Tories was the best thing that ever happened to the Ontario construction industry/new home market. :)

I don't know to what extent it explains the trend, but you would probably want to consider developments in the mortgage market both in terms of product development and regulatory change. I would be surprised, for example, if the big drop off in hew home starts in 2013 didn't have something to do with the elimination of the 40 year mortgage in the summer of 2012 (do housing starts have a seasonal component - if they happened in the spring, a change in June wouldn't show up until the next year). Similarly, the rise of the 40 year mortgage probably goes a long way to explain the run up in new home starts in Toronto from 2010 to 2013 (at which time, every one and their dog was buying condos - looking like nothing so much as the US in 2006). Those sorts of changes are going to have more dramatic effects on "affordability" (which probably drives buying decisions more than more macro factors like interest rates).

Just as a follow up on the importance of mortgage regulations, I just saw this story about the Toronto rToronto al estate market : https://www.thestar.com/business/2017/02/15/toronto-housing-called-bubble-as-new-listings-fall-rapidly.html

Much of it is industry bumpf that I take with a grain of salt, but the comment that changes to mortgage regulations last year has driven people to the suburbs rings true. I've been tying to figure out why houses in my little bedroom community on the outskirts of Toronto has seen property prices skyrocket in the last year (e.g. 20-25%)' despite being a good hour or more from downtown by train or car. To give some sense, for what my fairly average detached home in a nice neighbourhood with a nice lot might have gone for two years, you can now buy a smaller townhouse, in a cramped neighbourhood, squished between a mall and a highway. This would explain that otherwise ridiculous result.

@Nick Rowe:

It looks like the volatility of starts has been almost entirely in condominium starts. Toronto condominiums are predominantly high-rise (2011 NHS data), and new development there will have the strongest impacts from regulation. We could be seeing the impacts of either single large approvals (how many units are in a typical high-rise?) or of periodic zoning changes to allow for high-rise development.

@livio,

I was going to denounce your characterization of San Francisco's housing costs, but am forced to admit that the linked reference is a really interesting and well thought out paper.

The reason, initially, why I was going to argue against the 500K regulatory figure is that the fees are nowhere near that on a per unit basis. However, the larger regularly constraints, such as building limits, also have a "cost". This cost is in some sense impossible to estimate except by modeling supply and demand curves which the paper does. For example, what would a house cost if there was no zoning restrictions at all, and no EIR requirements? This is good stuff -- thanks!

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