Improving Housing Affordability in Montreal by Reducing Construction Regulation

Economic Note showing how the City of Montreal exacerbates the housing affordability problem when it blocks or delays construction projects or adopts costly regulations like the “20-20-20” by-law

The City of Montreal’s housing policies drive up construction and housing costs in the area, shows this MEI publication. In particular, the study targets the City’s “20-20-20” regulation mandating the kinds of housing units to be built as well as certain financial contributions to the municipal government.

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City of Montreal partly to blame for lack of affordable housing (Montreal Gazette, February 24, 2023) Coût des logements – La Ville de Montréal doit se regarder dans le miroir (La Presse+, February 24, 2023) Montreal regs drive up housing, construction costs: MEI (Source: The Suburban, March 1st 2023)		Interview with Célia Pinto Moreira (CTV News Montreal at Noon, CFCF-TV, March 7, 2023)

This Economic Note was prepared by Célia Pinto Moreira, Public Policy Analyst at the MEI, in collaboration with Emmanuelle B. Faubert, Economist at the MEI. The MEI’s Regulation Series aims to examine the often unintended consequences for individuals and businesses of various laws and rules, in contrast with their stated goals.

The issue of housing affordability is increasingly present in the public debate, both nationally and locally. Rents increased an average of 10.9% in 2022 across the country,(1) and the situation is much the same in Montreal. Even back in 2016, it was estimated that over 260,000 renter households in the metropolitan area devoted more than 30% of their incomes to housing.(2)

There is no doubt that we are facing a housing crisis. However, we need to ask the right questions and determine the cause of the problem in order to know how best to address it.

The case of Montreal is relevant, as the City plays a direct role in the affordability crisis by inflating construction costs through a multitude of regulations and arbitrary decisions, which has the effect of increasing the prices of housing, for sale or for rent. Montrealers are unfortunately the main victims of the barriers to housing construction erected by the City.

Housing Prices Deemed Too High

When it is observed that housing prices are too high, it is normal to consider the role of supply and demand in the market. Very often, there is talk of a housing shortage,(3) namely a situation in which demand exceeds supply.

To determine if there is a housing shortage, the vacancy rate is often used. This indicator “corresponds to the number of unoccupied dwellings compared to the entire rental stock in a residential sector.”(4) Some consider the market to be unbalanced when the vacancy rate is below 3%.(5)

Even back in 2016—when the vacancy rate was almost 4%—over 260,000 households lived in unaffordable dwellings.

Montreal experienced such a situation in the early 2000s, hitting a record low of 0.6% in 2002 (see Figure 1). The situation is different today, with the rate gradually increasing of late. Looking at Greater Montreal, the vacancy rate was an estimated 3% in 2021, which corresponds to over 26,200 unoccupied dwellings.(6) This rate even reached 6.3% in the downtown core.(7) However, the vacancy rate in the metropolitan area has now fallen again to reach 2% in 2022 according to the latest data from the Canada Mortgage and Housing Corporation (CMHC),(8) and it does consider supply to be insufficient in Montreal.(9)

This helps keep prices high, exacerbating the affordability problem. The CMHC deems housing to be unaffordable when it costs more than 30% of a household’s income.(10) By this measure, even back in 2016—when the vacancy rate was almost 4%—over 260,000 households lived in unaffordable dwellings in Greater Montreal.(11)

Several other factors help explain these prices considered high by officials, including the inflation of construction and housing maintenance costs observed in recent years.(12) Restoring affordability requires a reduction in construction costs, which would improve the profitability of real estate projects and thus enable price reductions. When municipalities erect hurdles for developers by increasing regulatory costs, it is difficult for affordability to improve.

To understand current housing prices, the role played by the City of Montreal must be taken into account, notably its numerous regulations (urban plans) and arbitrary decisions, which raise construction costs. These costs inevitably get transmitted to housing prices. Therefore, Montreal’s housing shortage is really a shortage of reasonably priced housing.

The Regulatory Costs behind High Prices

The By-law for a Diverse Metropolis, commonly called the “20-20-20” bylaw(13) (20% social housing, 20% affordable housing, and 20% family housing) is a City of Montreal urban plan that came into effect in 2021.(14) The stated goal announced by the Plante government is to ensure a better supply of affordable housing and to guarantee diversity in the city.(15) But what does it really involve?

The bylaw applies to any entity undertaking a construction project of over 450 m2, equivalent to five dwellings.(16) The builder must reach an agreement with the City and is obliged to include three kinds of dwellings in the building: i) social housing, ii) affordable housing, and iii) family housing.(17)

• i) A housing unit is considered social if its construction is subsidized by a municipal or provincial social housing program. A developer can contribute to the social housing component in three ways:
  • by directly adding such units to the construction project;
  • by transferring the land or building in exchange for a financial contribution from the City;
  • by making a direct financial contribution of a sum calculated by the City.
• ii) For the affordable housing component, the City designates “affordable housing zones” in which 10% or 20% of such units, depending on the zone, must be included in every construction project. If a project is not within an affordable housing zone and is over 4,500 m2, a financial contribution is calculated. A housing unit is considered affordable if it is sold or rented for 10% below its market value. As with social housing, a developer can instead choose to pay a financial contribution.
• iii) As for family housing, this is defined as having at least five rooms and a surface area large enough to accommodate a family—between 86 m2 and 96 m2 depending on the area. All projects of 50 units or more are subject to this requirement. Unlike the other two types of housing, a developer cannot opt to pay a financial contribution and is obligated to build them.