In this episode of The Missing Middle, Sabrina Maddeaux and Mike Moffatt explain why the small starter home has all but disappeared, even as larger, more expensive homes and McMansions continue to get built. They break down the development economics behind this paradox, looking at how land costs, municipal fees, setbacks, and other rules can make a modest home surprisingly difficult to build profitably, even when demand from middle-class families remains strong.
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Below is an AI-generated transcript of the Missing Middle podcast, lightly edited.
Sabrina Maddeaux: If you drive through some of the most populated parts of Canada, like Southern Ontario around the GTA, you start to notice a trend. It’s hard to find a single detached home built in the last 15 years that isn’t absolutely massive. You will see smaller homes like townhomes, and we all know how many shoebox condos popped up in the last couple of decades. But there’s a real absence of small detached homes, raising the obvious question: Are we just imagining this, or have small detached homes really gone extinct?
Mike Moffatt: You’re not imagining it at all. There are parts of the country where you still see a fair bit of size diversity when it comes to ground-oriented homes—single detached, semi-detached, townhomes, things like that. But in much of Southern Ontario, small detached homes have gone extinct. That really didn’t happen all that long ago; it has been in the last 15 years or so that we’ve stopped building them.
Sabrina Maddeaux: Right. It’s a bit strange on the surface given how much shrinkflation is going on in our economy today and how high-rise condo units keep getting smaller and smaller. But when it comes to detached homes, they’re mostly massive and haven’t shrunk down at all.
Mike Moffatt: It really is counterintuitive that while everything else in our economy gets smaller, detached homes seem to get larger. Most of what’s going on is not so much that small detached homes have become big detached homes, but rather that we’ve continued to build the big ones like we always have. Those small detached homes have either been replaced by townhomes, high-rise condo units, or in many cases, nothing. It’s not so much that things are going up in size, but those small detached homes have shrunk in size to the point where they’re no longer detached homes.
Sabrina Maddeaux: That leads to another obvious question: Why don’t developers build those homes anymore? Clearly people want them, and there is a market for them, but developers simply aren’t building them. Why?
Mike Moffatt: It really isn’t a lack of demand. I know so many young, middle-class people who would kill for one of those homes, but they’re not being made. That seems like a bit of a paradox.
The short answer is that the project economics for small detached homes just don’t work in much of the country anymore. When it comes to building a detached home, a lot of costs are largely fixed, so they don’t vary with the size of the home. It’s the same cost whether it’s a small detached or big detached home, or at least they don’t grow proportionally. If you’re going to build a detached home, you’re much better off building a really big one than a small one.
To give you the long answer, we’ve got to look into the data and examine each individual cost.
Sabrina Maddeaux: The Missing Middle initiative has been doing a fair bit of work lately drilling down on the cost of homebuilding, which differs by housing type and community. You’ve got an example for us today.
Mike Moffatt: We have a fair bit of cost data on building family-sized homes in smaller communities near Ottawa. Not within the city itself, but nearby, we’ve got detailed information down to the price of roofing shingles for a variety of home types, from townhomes to detached, both small and large.
Over the next few minutes, we’ll use this data to show why it’s hard to build a small detached home. To be clear, the Ottawa market is still a place where it’s somewhat feasible, but even in a somewhat affordable market like Ottawa, it’s really tough. Trying to do it in the broken housing economics of the GTA is just not viable. But we can show why, even around the city of Ottawa, it’s difficult to build a small detached home.
Sabrina Maddeaux: What do these homes look like, and how much do they cost?
Mike Moffatt: As a warning, this is an episode where we throw a lot of numbers at you. I wish that wasn’t necessary, but it’s unavoidable. We’re going to limit this as much as possible and focus on the big picture.
When we look at this Ottawa area data, it includes all kinds of family homes: townhomes, duplexes, and detached homes, including single detached under 1,500 square feet, which really aren’t getting built in much of Southern Ontario.
Price-wise, we’re talking about detached homes in the market of about $600,000 on the low end to $1.1 million on the high end, ranging from about 1,200 square feet to 3,000 square feet. The profit margin right now is just large enough so that a bank will give a builder a construction loan. Developers are making money, but not hand over fist because it’s not a great market right now. Even so, we’re still talking $600,000 for a detached home, making it hard for young middle-class families to get into the market.
To understand why these homes cost so much and why developers favour large homes, we’re going to break down the costs of homebuilding one by one. Sabrina, I’ll let you take the lead on this.
Sabrina Maddeaux: The first thing you need to build a single-family home is the land, obviously. For a fully serviced lot outside of Ottawa, the ballpark figure is $6,000 for every foot of lot width. That means a 30-foot-wide lot would cost around $180,000, although actual prices vary greatly based on market conditions and location.
Mike Moffatt: You used a really important term there: “fully serviced lot.” It’s not just the raw cost of land paid to a farmer, but also the cost to bring direct access to utilities, roads, sewer, electrical, and streetlights. Both the land and servicing costs are proportional to the size of the lot, not the size of the house. At $6,000 per foot of lot width, you’re looking at $240,000 for a 40-foot lot or $180,000 for a 30-foot lot. This is one of the reasons townhomes have become so popular: because they’re side by side, individual lots are much narrower. Shrinking that land footprint to 20 feet saves about $100,000 relative to a detached home. That can make the difference in whether someone qualifies for a mortgage.
Sabrina Maddeaux: $180,000 feels really expensive given that it’s just the land and we haven’t even put a shovel in the ground yet.
Mike Moffatt: It really is expensive. To put that in context, $180,000 is more than I paid for my entire home 20 years ago on a 30-foot lot. Back in 2004, I got the lot, house, servicing, and everything for under $180,000. Today, all that gets you is the serviced lot. Some of that growth is inflation, and some is infrastructure costs increasing faster than inflation, but a lot of it is just that land prices have gone up so much.
Sabrina Maddeaux: A bigger detached house is going to require more land than a smaller one, though. So land getting more expensive shouldn’t necessarily give a cost advantage to building McMansions—or should it?
Mike Moffatt: That’s the conventional wisdom: bigger house, bigger land, so it should all even out. But that’s not entirely true. First, many municipalities have minimum lot width rules for detached homes. Even if your design only needs 25 feet, you might be required to build on something larger, forcing you to pay for land you don’t necessarily need. You can’t build a really small home on a really small lot in many places. The more important issue is side setbacks, the area between the edge of the house and the edge of the lot.
Say you need five feet on either side; that’s 10 feet of width you can’t build on. If you have a 30-foot-wide lot, you only have 20 feet of usable building space, two-thirds of the total width. On a 40-foot lot, you can build 30 feet wide, taking usable space up to three-quarters. You get more bang for your buck on land costs. When land prices are as high as they are now, this dynamic matters because developers would rather utilize three-quarters of the lot width than two-thirds.
Sabrina Maddeaux: How do we get the price of serviced land back down?
Mike Moffatt: Most of it has to do with creating more competition for development land. It’s about being realistic about urban growth boundaries and population growth so land prices don’t skyrocket. It’s also about allowing more options on existing land, like building multiplexes or residential over commercial. It boils down to supply and demand for land. Governments impact both sides of that equation, and for the last 20 years, they’ve limited supply while increasing demand. It’s no wonder land prices have gone through the roof.
Sabrina Maddeaux: Let’s get back to adding up costs. Next, you have soft costs and site overhead costs. These include development charges, legal fees, engineering fees, portable toilets, and office salaries. Your data shows these add anywhere from $100,000 to $130,000 to the cost of a detached home outside Ottawa. Is that right?
Mike Moffatt: That’s about right. The biggest cost component is development charges. This data is from before recent federal-provincial agreements to lower development charges. Before that action, depending on the community outside Ottawa, you were looking at $40,000 in one area and $65,000 in another for development charges, just for permission to build a house. The crucial point here is that this cost doesn’t change regardless of the size of the detached home. You could build a 1,000-square-foot detached home or a 10,000-square-foot McMansion; either way, the development charge is $65,000. It doesn’t change at all.
Sabrina Maddeaux: That obviously encourages building a larger home. Why wouldn’t you? If you can build a bigger home and get more money for it while development charges stay the same, it makes complete sense.
Mike Moffatt: Exactly. The tax doesn’t grow proportionally to the size of the home. Imagine if sales tax on cars worked that way. If HST on a new car were a flat $5,000, whether you bought a Hyundai Elantra or a Rolls-Royce. That would obviously encourage buyers to spend a bit more and buy something nicer because there’s no additional tax burden.
Sabrina Maddeaux: It would be super regressive, since middle-class families would pay a higher percentage of tax on their purchase than the rich. What about the other costs in this category? Do those change much depending on the size of the home?
Mike Moffatt: They really don’t. Closing costs and architecture costs are roughly the same. In some communities, building permits are charged by the square foot, so those go up slightly, but we’re only talking about a few hundred dollars. For the most part, it’s a fixed cost that doesn’t grow proportionally with the size of the home.
Sabrina Maddeaux: So soft costs also favour building McMansions. How do we fix that?
Mike Moffatt: The obvious place to start is by addressing development charges. We’ve put out research on ways to reduce those and how to exempt development charges from HST to avoid double taxation.
Beyond that, we could make development charges proportional to the size of the home so larger detached houses pay more and smaller ones pay less. Many municipalities already do this for apartments, charging more for a two-bedroom than a one-bedroom, but generally don’t for detached homes. Doing so would create a level playing field.
Sabrina Maddeaux: Let’s review what we have so far to build our detached home outside Ottawa. Land, site overhead, and soft costs (including development charges) bring us up to $300,000, and we haven’t even built anything yet.
Next are construction costs, which include the house, driveway, and landscaping. Unlike other costs, these grow proportionally with the size of the house. However, a home twice as large doesn’t double construction costs. Why is that?
Mike Moffatt: Think of it this way: a home twice as big doesn’t require buying twice as much of everything. You don’t buy two furnaces or two water heaters; you buy larger ones, which aren’t twice as expensive. There are economies of scale.
Much of what you buy with a bigger home is floor space rather than additional items. Actual costs depend on finish quality; if you want solid gold toilets, it costs more. For a 1,500-square-foot home, construction costs run around $300,000. For a 3,000-square-foot home, twice as large, costs go up to about $450,000. That’s a 50% increase, not a 100% double.
Sabrina Maddeaux: So for a smaller home, the land, soft costs, and site overhead might total more than the actual construction cost of the home.
Mike Moffatt: Exactly. For a 1,500-square-foot home, pre-construction costs are about $300,000 and construction costs are about $300,000. The actual structure is often less than half the total price. In high-cost areas like the GTA, 70% to 85% of what a homebuyer pays covers everything except the house itself; the structure might account for only 15% to 20%.
Plus, there are additional fixed costs: construction loan interest, land carrying costs, financing, property taxes paid during construction, warranty expenses, and a 2% to 3% contingency buffer for material price spikes. That adds another $30,000, which also doesn’t scale with house size.
Sabrina Maddeaux: You’ve left out something pretty important, though, and that’s profit. Developers aren’t charities.
Mike Moffatt: We can’t forget profit. In current Ottawa market conditions, there is about $60,000 to $100,000 built in, depending on home size. At a consistent percentage margin, larger homes yield higher total dollar profits, keeping developer returns in that $60,000 to $100,000 range.
Sabrina Maddeaux: Have we got it all yet?
Mike Moffatt: We’re missing one big item: HST. Before recent rebates, HST added another $60,000 to $110,000 to the cost of a home, coincidentally about the same as the developer’s profit. The government collected roughly as much in HST as the builder made in profit for constructing the home. Adding all these costs together brings the total to $600,000–$1,100,000, depending on location, lot size, and finish quality.
Sabrina Maddeaux: This is probably more than anyone ever needed to know about why homes are so expensive, but it really explains why project economics favour building McMansions.
Thank you to everyone for listening, and thanks to our producer Meredith Martin and our editor Sean Foreman.
Mike Moffatt: If you have any thoughts or questions about the price of a solid gold toilet, send us an email at [email protected].
Sabrina Maddeaux: We’ll see you next time.
Additional Reading/Listening that Helped Inform the Episode:
Development Feasibility Analysis: Updated Methodology and Baseline Findings
Funded by the Neptis Foundation
Brought to you by the Missing Middle Initiative
