Will “use-it-orlose-it” policy speed up housing development?
By David Gargaro
All levels of government have implemented policies, regulations, and incentives to address Canada’s housing shortage. Ontario’s provincial government has also employed different strategies to help with meeting its goal of adding 1.5 million new homes to the housing supply by 2031. For example, the Ford government is currently considering implementation of a “use-it-or-lose-it” policy to force developers to accelerate construction once all the required permits have been issued. However, this approach might not support the goal of increasing housing inventory, and may actually add to the bureaucracy that hinders property development in Canada.
What is a “use-it-or-lose-it” policy?
On December 13, 2023, the Ontario Ministry of Municipal Affairs and Housing announced, following feedback from municipal and community partners, it would be taking steps to help meet its goal of building at least 1.5 million new homes in the province by 2031. One of these steps includes reviewing existing ministerial zoning orders (MZOs) made under the Planning Act, and proposing revocations and amendments to support a new “use-it-or-lose-it” (UILI) approach to the MZOs. The goals of this new policy are to increase transparency, support improved municipal planning and resourcing, and hold builders to account for not meeting development deadlines.
To determine whether to revoke or amend an MZO, the provincial government will evaluate whether a project passes the “substantial progress” test. The developer must have made substantial progress on all or part of the lands under the MZO with respect to both:
• Additional downstream approvals needed for project development and implementation
• Addressing water and wastewater servicing within a reasonable timeframe
To date, of the more than 100 MZOs issued, 22 project sites have been deemed as not having made significant progress. Fourteen housingrelated projects that are subject to MZOs have been deemed as making limited progress, and will be monitored over the next 18 months to determine whether they make significant progress. Under the UILI policy, the provincial government may forfeit the developer’s entitlements, make amendments to the MZOs or add an expiry date in the future. There is also the possibility of imposing financial penalties, such as an ongoing tax or one-time charge.
The UILI approach excludes certain MZOs, including those that were:
• Requested by provincial government ministries to deliver on provincial priorities (e.g., transitoriented communities, long-term care facilities, hospitals)
• Made to fulfill contractual obligations
• Made since December 1, 2022 (due to time constraints)
The province is also engaging in consultations to develop a go-forward framework for dealing with
future MZO requests. The goal is to make the new process more open and transparent, while also maintaining the tool to reduce delays due to red tape and help to shorten the timeline to getting shovels in the ground.
The numbers don’t add up
As usual, there are at least two sides to any story. And people can use data to tell their own version of a story. For example, the Regional Planning Commission of Ontario (RPCO) estimates that there are 1.25 million approved and proposed units/lots in the approval pipeline. This would mean the provincial government should be on track to reach its goal of building 1.5 million new homes in Ontario by 2031. Implementing a UILI policy might help to push developers to build more quickly.
However, Keleher Planning & Economic Consulting (KPEC) conducted a study that determined that only 331,600 of these units (about 26 per cent) are ready for construction. The rest of the units or lots are in different stages of the development process, do not meet the standards for immediate development or do not have adequate servicing. Many of the remaining units are being appealed by the Ontario Land Tribunal or have been rejected by municipal councils.
“Ten years ago, we planned for a one per cent population growth rate in my region, but we’re currently increasing at a three to four per cent growth rate,” said Phil Masschelein, Senior Vice President, Neighbourhood Developments, Sifton Properties Limited. “This is another reason the approvals process needs to be done quicker. We won’t be able to do things as we have in the past when the population is increasing this fast. Millions of new Canadian’s immigrating to Canada are here now. That decision has been made. Stakeholders in the local approval process need to
be focused on measurable results here and now. A development cycle that can takes, 5, 10 or even 15 years won’t help the current situation.”
This significant difference between municipalities’ and planners’ estimates of the number of units ready for construction demonstrates the sizable gap in how these groups track data and evaluate stages of development. Also, overestimating the number of approved units for building can cause other issues. For example, it distracts the government and other stakeholders from addressing more pressing concerns, such as the availability of land, the construction approval process, and infrastructure limitations.
Some experts on the side of imposing UILI guidelines claim that developers are lagging behind in the construction of new housing, which is contributing to the housing shortage. However, the construction and development industry is operating at a rate not seen in more than three decades. According to a study jointly commissioned by the Building and Land Development Association (BILD) and the Ontario Home Builders’ Association (OHBA), homes are being built at the highest rate in 33 years. There are more than 160,000 new homes currently under construction in Ontario, and it is difficult to see how developers can build any faster than they already are.
“I’m working on 100 different projects, with more than 10,000 homes in our pipeline from now until 2031,” said Masschelein. “This is more than I’ve ever planned for in my 25-year career in the development industry. We are planning much larger than ever before, so the concept of us holding back inventory just isn’t true. I’ve been working on some projects for 15 years that are still not being built today. Project and consumer financing is also harder to obtain today than for at least a generation. House starts should directly improve once interest rates start to drop and that confidence returns. Once these two issues are resolved, there would be no reason for developers to maintain inventory.”
Reasons against UILI policy
One key argument in favour of the UILI policy is that it will discourage the practice of land banking. This means developers purchase and hold land approved for development until the price of the land increases or zoning changes in their favour. Examples of land banking including purchasing undeveloped land near a city’s boundary before it is designated for uses other than agriculture or buying a number of lots on one block to support a larger infill project.
Some proponents of the UILI policy claim land banking is making the housing supply shortage worse. The land, and the approvals to develop
residential properties, is inventoried until a future date. Since it would take too long to reach the development stage, land banking weakens the province’s ability to increase the housing supply. The UILI policy would penalize developers who bank lands, thus encouraging them to either sell the lands or start building the approved developments within a timely manner.
However, land banking is a common practice. Governments regularly bank parcels of land to support development of future infrastructure and public amenities (e.g., rail and transit corridors, parks, community centres). Governments also purchase land at relatively low prices (and then bank the land) before an area is developed to protect against higher land prices that follow growth.
Developers earn income from banked land in the form of rental income (e.g., agricultural land leases in rural areas, rent from current residential and commercial tenants). They must account for this potential lost income when deciding whether to move forward with a development. If the development costs are too high, or there is insufficient income from future rents, then it does not make financial sense to proceed with a development until the economics change.
Several studies question the effectiveness of the UILI approach. A report from the United Kingdom’s Competition and Markets Authority (CMA) found land banking has not contributed to Britain’s shortage of housing. Land banking is a symptom of the problem with the country’s complicated planning system and the amount of speculation by private developers. A separate report by Altus Group supported this conclusion, stating land banking enables developers to hedge against planning risk that can arise due to the complicated planning approvals system.
Developers need a steady stream of projects in their system to maintain operations and ensure profitability. Delays in building approvals, changes in the economic environment, and other factors can slow down or stop development. If operations cease, then companies must let employees go. And when factors change to make development more profitable, developers will have to move quickly to submit building plans for approval, which can get stuck in municipal planning departments. Land banking enables developers to build consistently, and provides a hedge against these types of circumstances.
“The challenge is this is an approval milestone, not an actual construction milestone,” said Masschelein. “Permits and approval are needed from many different regulatory bodies and government institutions in order to issue a building permit today. Just because a Municipal Council has approved a project, with conditions, doesn’t allow that project to build immediately. Clearance of these conditions can take many years to satisfy. This is why it’s important that the milestone is maintained at the construction level, rather than an approval with conditions milestone.”
As evidenced by many other examples of government redundancy, some municipalities already have UILI policies in place with respect to servicing allocation. The Ontario Planning Act provides municipalities with similar powers as they relate to development and new housing. Therefore, not only are these new provincial powers unnecessary in some cases, improper targeting in the policy’s scope and application could negatively impact the province’s future housing supply.
“A number of municipalities in the GTA already have UILI as it applies to servicing water and wastewater allocation,” said Justin Sherwood, Senior Vice-President, Communications and Stakeholder Relations, BILD. “The inventory of approved lots in Ontario does not support the new policy. Any new or expanded UILI policy should be approached with caution and could actually undermine future housing supply.”
Building Construction Price Index, Residential Buildings, Ontario,Q1 2017 to Q4 2023, Toronto CMA and Ottawa-Gatineau CMA
Source: Altus Economic Consulting based on Statistic Canada Table 18-10-0276-01
The UILI policy does not consider the impact of external factors on the speed of development. A number of issues can delay development projects, such as poor or delayed communications between multiple parties, delays in permit approvals, and postponements in the construction of infrastructure. Penalizing developers for these types of delays may create ill will between the respective parties. Imposing UILI penalties could also spur developers to engage in litigation within and outside the planning development process should either party fail to find a solution within existing mechanisms (e.g., Ontario Land Tribunal). This would lengthen the time required to develop these properties, thereby worsening the housing shortage even more.
Figure 5 shows the labour productivity for residential building construction as expressed in dollar per hours worked, chained at 2012 dollars for Ontario between 1997 to 2022. Overall productivity remains generally flat, which is a major issue for the industry in its ability to scale construction levels. Without improvements in long‐term productivity, the cost for housing construction will continue to rise, especially under conditions of labour shortages.
UILI policies could have a negative financial impact on municipalities as well. There could be decreases in parkland dedication cash in lieu and related financial contributions, as they are calculated by extracting part of the total land value close to the building permit stage. Municipalities and developers could engage in court disputes over how to include UILI penalties into valuations, which would affect these contributions and slow down construction.
Labour Productivity, Residential Building Construction, Ontario,1997
to 2022
“(Penalizing developers or removing permits) could actually undermine future housing supply by lengthening the approval process or requiring re-approval if a UILI policy is applied to projects that are simply delayed or progressing a little slower due to market conditions,” said Sherwood.
Adding new UILI legislation could conflict with existing provincial and municipal policies. For example, there might be minimum designated land requirements that would need to be addressed during planning. New zoning by-laws might be adopted to satisfy the municipality’s newly instituted official plan. This would require landowners and developers to ensure their site conforms via site-specific rezoning requirements. Under these circumstances, the province would have to provide clarity on how zoning would revert to conforming with official plans or provincial policy.
Note: Chained 2012 Dollars Per Hour
Property tax assessment also depend on land assessment, as well as the valuation of development permissions. The Municipal Property Assessment Corporation (MPAC), which assess land values for property tax purposes, would have to track and incorporate entitlement losses into their valuations. Since it would be difficult to properly track penalties and update assessments, there could be an increase in taxation disputes, which would negatively affect municipalities financial planning.
Conclusion
Source: Altus Economic Consulting based on Statistic Canada Table 36-10-0480-01
Building developers and home buyers welcome government strategies and policies that will help to increase the housing supply. More housing is good for the economy and will help to address the housing shortage. However, implementing policies that force developers to stop land banking or to build more quickly than is economically feasible will not solve the housing shortage – in fact, it could make the situation worse. Increasing the supply of land, shortening approval timelines, removing infrastructure constraints, and reducing development costs will help the provincial government to meet its housing targets.