‘Policy of the Year’ is part of STOREYS' annual editorial year-end series. You can find the rest of our 2024 selections here as they're released throughout the week.
As another year closes, the key message remains more or less the same: Canada needs to build more homes – ASAP.
While that seems like a natural solution to the country’s relentless housing supply crisis, it's no secret that the barriers to this feat have been plenty in 2024. These include high interest rates, pricey construction costs, a labour shortage, and – perhaps most notably, especially in places like Toronto and Vancouver – incredibly high development charges.
In fact, fees and taxes seem to dominate discussions in the development and pre-construction industries (and beyond) as of late. “Development fees have been a major topic, but I think the most notable thing is that the conversation has shifted outside of the industry,” says Brad Jones, Senior Vice President of Development at Wesgroup Properties, which led a letter-writing campaign this fall against the forthcoming rate increases for the development charges collected by the Metro Vancouver Regional District. “There is more public discourse than ever about the extreme burden of government fees, charges, and taxes on new housing – it’s in the news, it’s being discussed in the House of Commons.”
The Reality
Municipal fees and taxes have been increasing at an unsustainable rate, one that the market simply can’t absorb.
“If you think of it as an ordinary house; you’ve got the cost of land, cost of materials, cost of labour, all the professional costs that go into building the home, and then you have your government fees and taxes, which includes municipal fees and charges,” Justin Sherwood, Senior Vice President, Communications and Stakeholder Relations at The Building Industry and Land Development Association (BILD). “Municipal fees have been rising astronomically. When you’re in a situation when you have lower house prices – because we’re in a softer market right now – while all of your other costs are elevated, including these municipal fees, it becomes a challenge to finance your project and make it economically viable.”
The current climate is one where sluggish sales have lead to slow starts and to an eventual stall in new homes on the market.
“As the market slowed last year, I think the industry finally woke up and realized the system has progressively been breaking but was hidden behind low interest rates,” says Matt Young, President and CEO of Republic Developments. “As rates went up, and demand slowed, we realized pricing needed an adjustment but to do that, so did the costing model. With taxes at nearly 30% of an average condo, that was the obvious place to look.”
BILD’s GTA Municipal Benchmarking Study, released in September, highlighted some shocking figures. Not surprisingly, it reveals that application submissions have dropped dramatically over the past two years in the GTA, since peaking in 2021. While things like high interest rates, long timelines, and delay costs have contributed to this, rapidly climbing development fees certainly don’t help. As the report highlights, municipal fees in the GTA rose by a tough-to-swallow $42,000 per unit on a low-rise development and $32,000 on a unit in a high-rise development since the 2022 study. Meanwhile, apartment fees have climbed $32,000 to $122,387. Total municipal fees per unit ranged from approximately $102,000 in Bradford West Gwillimbury to a high of just over $195,000 in the City of Toronto (Toronto) on a low-rise development.
Source: BILD
The situation isn’t much better in the notoriously pricey British Columbia (BC). Wesgroup's Jones points to the combined impact of the Federal Capital Gains Tax and Metro Vancouver development cost charge increases. In Vancouver, development fees have climbed by 20.5% for single-family houses, 20.4% for townhouse units, and 20.4% for condominium units since 2023, according to a recent report released by the Homebuilders Association of Vancouver (HAVAN). Notably, Langley Township’s development charges have been hiked a dramatic 81.2% for single-family homes, 79.2% for townhouse units, and 46.1% for condominium units.
“As a result of these changes, many existing, underutilized commercial properties in the region are now worth more in their current state than as redevelopment opportunities under the new Provincial TOD policy,” says Jones. “This discourages landowners from pursuing redevelopment, limiting the land available for new housing. For sites a developer already owns, the market is weak, so it’s hard to move forward. But if you don’t, the project faces potentially millions in new fees starting in 2025 if you don’t get a building permit, so it is forcing a lot of projects into challenging conditions.”
Jones says that development fees only add to challenges that include a12-month pre-sale window in BC, declining construction employment, reduced capital investment in housing, and a weakening Canadian dollar, all of which makes launching new projects even more difficult. In BC, developers also often have to pay development charges to multiple levels of government.
“Housing construction is high-risk and low-margin,” says Jones. “A mere 5% drop in home prices slashes developer margins by 40%; a 10% drop eliminates them entirely. If we want more housing built, we need an environment that encourages investment, not one that taxes it into stagnation. Other markets in North America have removed barriers and incentivized new housing construction and have seen a market response. Our governments have the tools to do that too.”
Currently, housing starts are down across the country, thanks largely to development fees. “They’ve crippled the industry. It’s hard to believe it but when we have a housing shortage, and interest rates are at historically normal levels today, housing shouldn’t be as weak as it is,” says Republic's Young. “Costs to build are out of control and that starts with onerous development taxes and fees.”
New figures released earlier this week by the Canadian Mortgage and Housing Corporation (CMHC) revealed that November marked the third month of an increase in housing starts across the county, however, the figures remain too low to move in the direction of restoring housing affordability. This followed a drop of 22% in August, undoing an unexpected gain in July.
Source: BILD
Why It Matters
Sky-high development fees mean that homes won’t be built; plain and simple. It’s become economically unviable for developers to build homes in this climate, with 2024 suffering no shortage of cancelled or paused new housing projects. An Urbanation report released in October revealed that a total of 33 condo projects in the GTA and Hamilton area that were actively selling have been converted to rental, put on hold, or placed under receivership. To put this into perspective, had these projects materialized as planned, this would have added 6,796 condos to the market.
Furthermore, with the projects that do move ahead, despite the hefty fees, the end-user is the one who essentially has to pick up the tab via higher home prices. “It's the impact on consumers that hits the hardest,” says RESCON president Richard Lyall of high development fees. “It should not be forgotten that the terms ‘development charges’ and ‘growth pays for growth’ are entirely misleading. The new home buyer and renters have been saddled with massive increases in the taxes, fees, and levies that they ultimately pay for. For builders, this means new projects are largely not ‘pencilling’ because the costs have moved well beyond the range of affordable.”
The problem may not seem too dire to the average city dweller, who sees no shortage of glassy new condos appearing on city streets in the midst of the construction of many others. But most of these condos were planned, proposed, and sold in a different time – one when interest rates were blissfully low and development fees remained at reasonable rates. So, it may appear that cities like Toronto or Vancouver aren’t doing too shabbily on the supply front.
The ramifications of today’s climate, one that saw 2024 housing starts practically grind to a halt – won’t be glaringly obvious to the average city dweller for four to five years from now. Then, we’ll see a clear lack of new builds. Of course, the population won’t stop growing in the meantime, especially in Canada’s busy urban centres. BILD’s GTA Municipal study clearly shows that the region already isn’t building enough homes to accommodate population growth. In fact, the number of new units started for every new person added to the population in Ontario and the GTA is the lowest it’s been since the data began in 1972.
“We essentially have a massive failure managing growth and building supporting infrastructure including new housing,” says Lyall. “The fact that immigration policies were created absent housing and health care considerations is almost beyond comprehension for a developed country.”
This is a problem for everyone – even the long-time homeowners who have seen their houses appreciate greatly in recent years. Mike Moffatt, Economist and Senior Director of Policy and Innovation at Smart Prosperity Institute (SPI), drove this point home to STOREYS last month when he highlighted the stark reality associated with a drop in new builds and its impact on overall housing affordability.
“On one hand, I live in a single-family, detached home, so some may think people like me benefit from housing scarcity and high prices,” says Moffatt. “But, I want my daughter to also be able to afford a home and she won’t be able to do that if housing is scarce. You may like housing scarcity as a homeowner, but you’d probably like to have a teacher at your kids’ school and nurses in the hospital. So, we can’t price the middle class out of our cities.”
new home buyersstoreys.com
A Page From Vaughan's Book?
Last month the City of Vaughan gave the building industry something to talk about when it announced it would dramatically drop its development fee rates to encourage more development in the region. Prior to the move, the rapidly growing Vaughan region had some of the highest development fees in the GTA. According to the City, Vaughan’s development charge rates increased by a whopping 229% between 2009 and 2021, and another 66% since 2018. Enough was enough for city council.
“Development charges have become an unfair tax burden on homebuyers. Too many of our residents, in particular young families in our community, have seen their dream of buying a home close to where they grew up disappear completely as housing prices have spiralled out of control," said Vaughan Mayor Del Duca in a news release. "We have a housing affordability crisis and it’s time for us to get real about the solutions needed to solve it. Today’s decision by Vaughan Council to dramatically reduce our development charges for the foreseeable future is a strong step in the right direction. I urge other municipalities to follow our lead and do the right thing.”
According to the City, the development charge rate for a single low-rise home (single- or semi-detached) has been nearly cut in half from its previous rate of $94,466 to $50,193.
“This move will benefit homebuyers, as the savings will be passed on to consumers,” says Lyall. “Some (largely on the left) have said builders will pocket the money. Not true – the industry is very competitive. Some key construction costs are falling with the market. Supply is falling as existing projects reach completion and very few new projects are starting (numbers don't lie!). Outside of Vancouver, central Ontario in particular has by far the highest impact fees in North America. The ratio of incomes to housing costs has moved far beyond comparable ratios elsewhere.”
Sherwood says that the industry is paying attention to Vaughan and is appreciative of the positive steps city council put into place. “I think you’ll start to see a differentiation in those jurisdictions that have lowered development fees because it will help make the projects more financially viable,” he says. “So, you’ll start to see construction increase in those jurisdictions. In a matter of months, you’ll start to see more development activity in Vaughan. Projects that have been struggling may all of a sudden become much more financially viable and will progress.”
Vaughan "Dramatically" Drops Development Charge Rates
Vaughan City Council Meeting
What's The Alternative?
When it comes to climbing fees, the industry is demanding action, saying – in no uncertain terms – that this needs to end. “Cut taxes and fees,” says Young. “Give the development industry the room to bring new construction pricing in line with resale pricing. That’s it.” Young’s CANT coalition of over 30 home builders have committed to cutting prices dollar-for-dollar with any tax savings. “So, if governments and the industry work together on implementing solutions, we will solve this crisis together,” says Young.
Sherwood makes the point that development fees are some of the only policy factors that can be changed quickly. “Governments can decide to lower fees and do so in the course of a couple of weeks," he says. "Everything else is market-dependent and takes a lot longer to adjust. This is the easiest lever you have as it can be changed in a matter of weeks and have a meaningful impact.”
When it comes to short-term solutions, Jones says three things need to happen. Large fees, such as Development Cost Levies (DCLs) — the City of Vancouver's name for development charges — and Community Amenity Charges (CACs), should be payable at occupancy rather than upfront; fee increases should be frozen for projects already in-stream; and charges should be itemized separately on closing statements, so buyers don’t pay GST or Land Transfer Taxes on top of these fees (they’re currently embedded in the home price).
The justification to climbing development fees, of course, is that the funds are directed to creating and improving needed infrastructure to accommodate growing urban density. But this shouldn’t fall on the shoulders of developers, say passionate industry voices. What it comes down to is the need for an alternative means of funding local infrastructure. “As Canada’s urban markets continue to attract new residents, it has become clear the funding model for new infrastructure has outlived its usefulness,” says Jones. “It’s no longer sustainable to place these costs solely on new homebuyers.”
So, what’s the alternative? Longer-term, Jones highlights the need for a new growth funding model for urban markets. “Over 40% of recent immigrants to Canada settle in Metro Vancouver or the GTA, making this growth essential to Canada’s economic strategy,” he says. “However, without proportional investment in infrastructure, these regions face mounting challenges. The federal government benefits the most from taxes on new housing but doesn’t reinvest adequately in infrastructure. A better funding partnership is critical.”
It's time to spread out the infrastructure tab, he says. “Reducing development fees and spreading infrastructure costs out, as they benefit everyone, whether through property tax or a utility model, will more appropriately apportion costs than the regressive model of charging new home buyers,” says Jones. “Additionally, reducing fees and spreading infrastructure costs across all beneficiaries – whether through property taxes or a utility-based model – creates a fairer system. This approach avoids the current regressive model, which disproportionately burdens new homebuyers.”
Similarly, Lyall says we need to roll back the massive increases we’ve seen in recent years in taxes, fees, and levies that have “exploded in an uncontrolled manner well beyond incomes.” Secondly, he points to the perpetual problem of red tape and long approval times on new projects. Finally, Lyall too points to the need for an “entirely new growth management system with a predictable funding formulae to support growth related infrastructure” that should be shared between the province and federal governments.
Sherwood says homebuyers are being asked to pay more than their fair share and shouldn’t have to bear a disproportionate burden to pay for the services that everyone in the city enjoys. “The only two jurisdictions in Canada that make use of development charges are BC and Ontario, and they have the two highest average property values in the country,” says Sherwood. “Other jurisdictions have other means of funding public infrastructure.” He points to Quebec’s use of a municipal utility model when it comes to their wastewater, and to the United States, where they use a community-drive development (CDD) model. “The fees are a fraction of what they are in Ontario and, yet, they have the growth infrastructure that’s required. So, clearly there’s something wrong with how the fees are structured and collected in Ontario,” says Sherwood.
The bottom line is that the current situation isn’t sustainable for anyone. “It’s time to recognize that we need the homebuilding industry,” says Young. “It contributes significantly to GDP and jobs, and is critical to solving our housing crisis. We can’t afford to have it stalled any longer. We need to build and we need to build now. Significant cutting of taxes and fees is the single biggest and fastest way to bring the market back. Let’s get it done.”
