RESCON: Have development charges lost their relevance?
Article content
Reviews and recommendations are unbiased and products are independently selected. Postmedia may earn an affiliate commission from purchases made through links on this page.
Controversial method of funding infrastructure and services unfairly places costs on backs of new home buyers
In times of turbulence, the greatest danger is to act with yesterday’s logic. Those are the words of the late Peter Drucker, one of the most widely influential thinkers on management theory and practice.
Recommended Videos
tap here to see other videos from our team.
RESCON: Have development charges lost their relevance? Back to video
tap here to see other videos from our team.
If we apply this reasoning to today’s housing supply crisis, we must therefore change our old mindset about development charges (DCs), as they hinder our ability to build homes people can afford.
DCs are paid when a building permit is issued. Developers front the cost and carry the financing. Eventually, when the home is completed and sold, the developer can recoup the cost.
The levies largely evolved in the post-Second World War era when housing was in great demand and municipalities needed funds to build supporting infrastructure. By the 1960s, agreements began requiring developers to contribute to municipal costs outside the subdivision.
Today, they are a controversial method of funding infrastructure and services on the backs of new home buyers.
DCs have risen to near-astronomical levels. The tax burden on a new home or condo represents 36 per cent of the purchase price. DCs account for a significant portion of that levy.
Ontario and British Columbia now have the highest DCs across the nation, according to a research study done by Altus Group for the Canadian Home Builders’ Association.
In Toronto, for example, high-rise building charges were $125 per square foot (psf.) in 2022, lower than $157 psf. in Vancouver, but much higher than $4 psf. in Winnipeg and $2 in St. John’s.
Based on an 800-square-foot high-rise unit, which is the average size of an Ontario condo built in 2017, DCs can add $100,000 to a Toronto unit.
By contrast, low-rise building charges in Toronto were the highest in Canada, averaging $85 psf., compared to $28 psf. in Vancouver, $8 in Winnipeg and $2 in St. John’s.
These DCs significantly add to the price of a new home in Toronto. And they keep going up.
The City of Toronto increased DCs for single and semi-detached homes by 464 per cent from 2014 to 2024. In May 2024, the city increased the levies on condos by 20.7 per cent and by another 17.6 per cent in June 2024, while Ottawa raised general DCs by 11 per cent in May 2024.
Meantime, builder profits have dropped.
In 2024, the profit on a 500-square-foot condo for a builder in Toronto was $9,584, down from $29,1000 in 2014, a 67-per-cent drop.
Politically, DCs are attractive as they enable municipalities to build infrastructure on the backs of new home buyers. However, as noted in a recent comprehensive report by the Conference Board of Canada, they create inequalities because it shifts the cost of new housing development and new home buyers end up paying for infrastructure used by existing homeowners.
The report recommends that DCs be used only to provide new physical subdivision infrastructure, they should not flow into general revenue, and reserve funds should be monitored.
Ontario’s 1997 Development Charges Act permits municipalities to use DCs to pay for such items and services as water supply distribution and treatment, wastewater sewers and treatment, storm water drainage and control, highways, transit and more. However, they’re often diverted to non-infrastructure expenses because, as the Conference Board report indicates, the categories can be broadly interpreted.
Childcare, for example, is one of the items on the list, which “hardly seems like infrastructure spending,” the report states. Such “mission creep” impairs the case for development charges.
Importantly, the Conference Board points out there’s a relationship between home prices and DCs. Levies are being passed on to new home buyers in the form of higher prices, thus reducing housing affordability.
DCs now represent significant financial pressure to new home construction and housing affordability. Over the last decade, municipalities have increased the charges at an exponential rate, adding costs that are unrelated to new housing growth or residential infrastructure.
The rate hikes are inconsistent with the realities of the market and have significantly raised the cost of new homes.
RESCON is part of a coalition of industry stakeholders that is calling for a 75-per-cent decrease in DCs, to the level they were at in 2015. We also want the Ontario government to implement legislation provisions to govern DCs and tie future increases to the rate of inflation.
The cities of Vaughan, London, Mississauga and Burlington are making inroads to lower DCs. We are hopeful that more municipalities will follow their example.
The journey of a thousand miles begins with a single step. It is critical that we start heading in the right direction.
Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at media@rescon.com.
Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.