A December report from the Canada Mortgage and Housing Corp. found that Toronto had the most expensive development fees, making up 9 per cent of the total cost of a detached home in the city.Sean Kilpatrick/The Canadian Press
In cities that rely on development charges, an unquestioned dogma underpins the debate over funding levels for the infrastructure needed to support new housing. This is the notion that “growth pays for growth,” meaning that new residents ought to pay for the water pipes, roads, transit, and community centres – to name a few examples – that one must often build when one adds new homes.
That’s the justification for imposing a wide array of municipal fees on the construction of new homes. In Toronto, where development charges have risen by almost 600 per cent in a decade, they now add more than $100,000 to the price of a newly built home, in some cases.
Both city administrators who defend the status quo and critics – including the federal government, builders and some housing advocates – who argue the fees are too high generally accept the premise that growth must pay for growth.
But it is a shaky idea at best.
The origins of it date back to the post-war period. High housing demand and bare municipal coffers meant cities across North America began to rely on builders to construct the infrastructure that would support new homes. Later, those arrangements morphed into municipalities simply charging developers for those capital costs.
Development charges in their current form date back to 1989 in Ontario. They are also common in British Columbia. In both provinces, developers routinely pass on those costs onto home buyers.
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What started as a makeshift solution became an entrenched policy that today adds to already sky-high construction costs, constraining housing supply just as cities desperately need more of it. It is neither a fair nor an efficient way to raise revenue for new development.
For one, existing city dwellers also enjoy new infrastructure such as wider roads and new libraries, particularly when building occurs within existing urban boundaries, as is often the case. In fact, they benefit even future residents, as cities – sensibly – plan for extra capacity for new projects.
That’s not to mention that larger cities translate into more local jobs and business opportunities for everyone.
Cities could borrow much more cheaply than new homebuyers to finance new infrastructure. While provinces impose strict caps on municipal debt, many cities that raise significant revenue through development charges are nowhere close to those caps.
To pay off the bill, cities would likely have to raise property taxes. But those per capita costs would be diffused when spread out across all residents and, possibly, the next generation as well. (Also, turning those municipal fees into taxes would subject them to much greater public scrutiny, helping to keep waste in check, as this space has argued before.)
Besides spreading the burden of high costs over a very large pool of payers, taxes also make sense when one can’t easily and precisely track who will benefit from public spending and to what extent, or exclude those who haven’t paid.
But there are also solid arguments for turning some development charges into user fees. As the C.D. Howe Institute and others have suggested, for example, cities could transition to that model for water and wastewater projects. Canadians, after all, already pay for the cost of new natural gas or electricity infrastructure via fees baked into their utility bills.
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There have been some departures from the dogma. Earlier this month, Vancouver cut development fees by 20 per cent. But that is a temporary reduction, prompted by worries over a construction slowdown rather than a philosophical shift.
As it stands, development charges effectively work as a distorted, opaque user fee on new homebuyers, who are often saddled with the cost of infrastructure that will also benefit long-time residents. It’s like paying a water bill with no meter to measure actual usage and a good chance of subsidizing the neighbours’ showers, too.
Whether one thinks of the municipal fees as steep taxes on the few or warped user fees, the concept that “growth should pay for growth” does not stand up to scrutiny.
This space has championed curbing development charges, an obvious, short-term step that would help lower home prices and boost construction in today’s slow real estate market.
But in the longer term, the way cities generate revenue to pay for new housing infrastructure needs to be rebuilt from the ground up.