RESCON: Should new home buyers foot the bill for roads and sewers?

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Building municipal infrastructure requires a new funding model

The country’s rapid population growth along with myriad other issues like high interest rates, exorbitant taxes, fees and levies, and bureaucratic red tape are putting builders and developers under tremendous pressure to find ways to construct housing people can still afford.

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Add to the fact that the Canada Mortgage and Housing Corporations says up to 5.8 million housing units must be built by 2030 to restore affordability to 2004 levels – about 3.5 million above projected levels – and it quickly becomes evident that it’s a problem of significant proportions.

But that’s only part of the problem. We must have the necessary municipal infrastructure – water and wastewater lines, roads, sewers and other amenities – in place to support the new homes.

The Federation of Canadian Municipalities (FCM) estimates that, on average across the country, the cost of infrastructure required to support new housing is in the range of $107,000 per home. Using the 5.8-million figure as a baseline, that means the infrastructure gap is $600 billion.

How do we pay for that, you ask?

Good question.

Presently, we pay for that growth using revenue from development charges, taxes and other levies. In effect, new home buyers are footing the bill for essential infrastructure that benefits the entire tax base. The charges are paid up-front by the buyer when they take possession of a new home.

This makes no sense. Think about it. When somebody buys a new vehicle, they aren’t required to fork out on extra funds to pay for the upkeep of roads. The entire tax base pays for that.

The taxes, fees and levies on new homes is exorbitant, accounting for 31 per cent of the purchase price. On a $1-million home, that’s $310,000 that is often added to a mortgage and amortized.

Presently, the GTA has government fees, charges and taxes that are three times higher than North American cities like San Francisco, Miami, Boston, New York City, Chicago and Houston.

It is difficult enough for an individual or family to afford the cost of a new home these days. First-time buyers are in an even tougher predicament. The cost of municipal infrastructure should not be funded on the backs of new home buyers. We need a new, more equitable funding model.

The problem stems from the fact that municipalities have limited tools to raise money for infrastructure and must rely on development charges and senior levels of government for funding.

To build the infrastructure, municipalities need a steady and secure flow of funds from the higher levels of government. This would provide certainty, enable them to lower development charges, and ensure they have adequate funding to pay for the necessary infrastructure.

To some extent, the call is being heard.

The federal government, for example, has launched a $6-billion Canada Housing Infrastructure Fund to support the construction and upgrading of water, wastewater, stormwater and solid waste infrastructure in municipalities across the country, and is adding $15 billion to the Apartment Construction Loan Program to support building new rental homes.

In Ontario, the government is investing $1 billion for a Municipal Housing Infrastructure Program, and another $625 million for the Housing-Enabling Water Systems Fund (HEWSF) which will help municipalities repair, rehabilitate and expand drinking water, wastewater and stormwater infrastructure. This is in addition to $200 million invested earlier in the HEWSF, and a $1.2-billion Building Faster Fund that rewards municipalities on target to meet their provincial housing targets.

But in the scheme of things, it is a drop in the bucket. More action is needed.

Transfer payments to municipalities should be significantly increased from the federal taxes that are collected from the construction sector to reduce the cost pressures on municipalities.

We should also extend the exemption or rebate on the collection of the HST beyond just rental housing, to the construction of all residential buildings, including condos.

The FCM has rightly called on the federal government to get provincial, territorial and municipal leaders together to discuss a new municipal growth framework that better aligns municipal revenue with economic growth and population projections.

A report by the Canadian Urban Institute, meanwhile, suggests that a Municipal Services Corporation (MSC) model be set up that would enable municipalities to collect user rates and development levies – and then pay an agreed amount, to cover the amortized cost of the infrastructure.

Across Canada, new home construction is expected to be 50,000 less this year than in 2023 – at a time when we are supposed to be ramping up production. New home sales have plummeted.

Three out of 10 Canadians now say they are seriously considering leaving their provinces due to high housing costs. Of those who are thinking about moving, 42 per cent say they are thinking about going to another country. It will cause economic chaos in our big cities if this continues.

We must reduce the cost of housing. Changing the municipal infrastructure funding formula would help.

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.