Winston Churchill once remarked, "Attempting to tax oneself into prosperity is akin to a man trying to lift himself up by the handle of a bucket." This analogy resonates deeply with the current state of development charges (DCs) on new housing in Canada.
Municipal governments are imposing these fees on new developments to cover the capital costs of infrastructure such as roads, water supply, sewage, and electricity services necessary for supporting urban growth.
Unfortunately, this approach often proves counterproductive, as new homeowners find themselves burdened with excessive fees that inflate the overall cost of housing.
Over the years, the scope of these charges has expanded significantly. Funds collected through DCs are being allocated to a variety of unrelated projects, ranging from public transit systems to community centers, and even, in one instance, a cricket pitch.
In regions like the Greater Toronto Area (GTA) and Ottawa, the situation has spiraled out of control. For instance, in Toronto, the DC on a two-bedroom condo skyrocketed from $8,000 to $88,000 over just a decade. Such dramatic increases make homeownership unattainable for many prospective buyers.
It's essential to understand that while developers pay the DCs upfront when they secure building permits, these costs inevitably get passed down to homebuyers, ultimately inflating the price of new homes.
DCs are typically adjusted each year by municipalities to account for inflation and the rising costs of infrastructure projects. However, these fees now represent a significant portion of the tax burden associated with new housing.
A recent report by the Canadian Centre for Economic Analysis highlighted that taxes, fees, and levies on new housing in Ontario have increased to nearly 36%, up from 31% just three years prior.
This rise in DCs is a primary factor contributing to the unaffordability of housing. While intended to help fund necessary infrastructure for new developments, the lack of regulation allows municipalities to misuse DCs for unrelated expenditures.
The initial concept of DCs was well-intentioned, but they have since spiraled out of control, turning into a revenue source for municipalities without the need for raising taxes.
The consequence? New home prices and rental costs have surged, effectively creating a hidden tax burden on buyers.
A significant issue is that builders are required to pay development charges upfront instead of at the time of closing. This requirement forces them to finance these costs during lengthy construction periods, ultimately inflating housing prices.
The math is straightforward: the higher the development charges, the harder it is for people to afford housing. This leads to fewer housing projects being initiated, further limiting availability and driving prices higher.
Current housing start and sales data reflect this troubling trend. Builders are struggling to construct homes that remain affordable for the average buyer.
Recently, the provincial government introduced legislation known as Bill 17, or the Protect Ontario by Building Faster and Smarter Act, which allows developers to defer the payment of DCs until the property is sold to the final buyer. This change is expected to reduce costs for developers and streamline the process.
While this is a positive step forward, a more comprehensive reduction of DCs is necessary to truly invigorate the housing market. The province must regulate these fees and prevent municipalities from exploiting them.
Fortunately, some municipalities are taking corrective measures. In Vaughan, for instance, development charges were halved following proactive steps by Mayor Steven Del Duca, as property sales had stagnated. Similarly, the City of Mississauga significantly reduced its DCs earlier this year.
Currently, Ontario municipalities are sitting on significant DC reserve funds, with data indicating that they hold approximately $10 billion. Toronto accounts for $2.8 billion of this total, while Durham Region has $1.1 billion and Ottawa holds $800 million.
The Ford government has urged municipalities to utilize these funds to reduce the costs associated with building new homes. Meanwhile, the federal government’s stance on DCs remains to be seen.
Prime Minister Mark Carney has expressed support for municipalities that lower DCs, and there is hope for substantial measures to be introduced in the upcoming federal budget to bolster homebuilding.
To address the housing crisis, controlling development charges is imperative. The province has initiated progress with Bill 17, and now it is time for the federal government to take action.
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