In a recent piece, economist Mike Moffatt argues that a true human-rights approach to housing means ensuring “incomes grow faster than construction taxes.
It sounds intuitive, but only if you assume housing taxes work like taxes on gasoline or alcohol, where lowering a tax reliably lowers the price consumers pay.
Housing doesn’t work that way.
And that misunderstanding leads to a very misleading conclusion.
Housing prices aren’t determined by costs; they’re determined by what the market will bear
If a city cuts taxes on new homes, homebuyers don’t get a discount.
Developers price homes based on market demand, not cost.
Everything else (labour, materials, taxes, margins) simply gets deducted backward to determine what they can afford to pay for land.
This means that in normal markets, lower taxes don’t lower home prices.
They just enable developers to bid more for land.
A simple example shows why
Consider a typical rising market:
What happens?
Do developers pass on the cost savings to consumers by selling condos for less than what buyers are willing to pay?
Do they pocket enormous margins?
Neither. They bid more for land, & landowners capture the difference.
This is why development taxes don’t work like sales taxes.
In rising markets, savings are capitalized into land values, not lower prices.
Today’s market is different, but for unusual reasons
In today’s distressed environment, resale prices in many markets have fallen 20–25%, in most cases dropping below replacement cost.
In this kind of market, where developers cannot sell new homes at a price that covers their costs, lower taxes might lead to lower new-home prices, but only because prices have fallen so far that builders are now forced to meet the market, not because taxes normally drive prices.
This is an extreme and historically rare situation, not a justification for generalizing about how development fees work.
The real issue isn’t taxes, it’s that home prices rose far faster than incomes
Mike frames the problem as:
incomes vs. construction taxes
But the real affordability crisis emerged because:
home prices rose far faster than incomes
When home prices are rising rapidly, arguing that development taxes should grow only at the pace of incomes is effectively arguing that landowners should capture more of the appreciation, and cities should capture less.
That’s not a human-rights framework.
That’s a land-value windfall framework.
Development fees pay for the infrastructure new residents need. Tying them to income growth while land values explode simply shifts wealth away from the public and toward landowners.
If we’re serious about a rights-based approach to housing, the central issue is:
Fixing the gap between incomes and housing prices, not tying municipal fees to income growth in markets where land values outrun everything else.
John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
Have questions about your own moves in the Toronto area as a buyer, seller, investor or renter? Book a no-obligation consult with John and his team at a Realosophy here: https://www.movesmartly.com/meetjohn