Are We Plucking the Wrong Goose?
The Greater Toronto Area’s (GTA) benchmark home price for June 2024 was $1,110,600.
Land is a major part of that cost. We have looked at ways to reduce this burden through leasing and for low-income housing leasing under-utilizing government-owned land. What is not widely discussed is how our tax system makes housing unaffordable. A study last year by CANCEA showed that the tax burden on new housing in Ontario is 31 percent of the purchase price. Another key finding is that the tax burden in Ontario is twice that of the rest of the country.
A significant portion of the tax on new homes comes from municipal fees charged to developers. These Development charges (DC) – also referred to as off-site development levies, or development fees – are imposed by a municipality when a developer builds on a piece of land within its jurisdiction. These fees cover the cost of additional municipal services and infrastructure needed for the new development, such as water, waste management, roads, libraries, parks, or recreation centres.
These charges can be upwards of 20 percent of total capital costs for residential projects. Municipalities justify these high fees by arguing that “growth should pay for growth”. While this principle has merit, it becomes questionable when you see $126.2 million of DCs being used to fund a $144 million indoor recreation complex or in 2021, when GTA municipalities had over $5 billion sitting in reserve funds. This approach starts to look like being the easiest way to pluck the goose.[i] Although these charges are presented as fees on developers, provincial and municipal governments have overlooked the economic harm they cause.
Who bears the burden of these fees is a fundamental question. It’s not easy to determine who ultimately pays the tax. Municipalities claim that the developer pays the fee. Economic theory predicts that burden falls on the less flexible factor which is land, implying developers pay. However, Enid Slack and Richard Bird in 1991 found that in Ontario and BC new home buyers usually paid the cost, especially when the fees are similar across municipalities and there is a strong demand for housing.[ii]
The knock-on effect of this fee regime is that it not only increases the price of new homes it also pulls up the price of existing homes. Homes are valued not on an absolute but relative basis – valuation is typically based on comparable. This process has had the effect of raising the value of all homes in the region. If governments really want to help with housing affordability, they need to find a different way to fund these charges.
The alternative to raising infrastructure funds from development charges is for municipalities to borrow. Different municipalities have widely different borrowing practices for capital funds – this is why we have seen provinces create municipal finance authorities in the past. Borrowing practices would have to change for many, and perhaps provincial legislation would need to be amended.
Interest rates can obviously go up or down. If the worry is the potential increase borrowing rates for municipalities, we should have similar concerns about the exposure of new homebuyers and the portion of their mortgage payments to fund these development charges. Borrowing is less risky for municipalities, yet we put the burden of these development costs on new homeowners.
We have seen many new tax proposals to help with affordability – foreign buyer’s tax, vacant home tax, and underused housing tax. These taxes are not going to solve the affordability problem, rather this is political theater to create the appearance that something is being done. If we truly want to address this affordability issue, we need to look at more fundamental problems and deal with the way fees and taxes have made housing unaffordable for most Canadians.