Saturday, June 15, 2024

Ottawa calls development fees a housing tax, but without them, who pays for new infrastructure?

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An aircraft passes behind towers in the Metrotown area of Burnaby, B.C., on May 30, 2021.DARRYL DYCK/The Canadian Press

Andrew Sancton started to wonder about the way local taxes worked when his entire street in an older neighbourhood near Western University in London, Ont., got dug up and completely redone. New sewers, sidewalks, pavement, all at no extra charge to him or his neighbours.

While those upgrades 10 years ago didn’t cost him a penny, he knew that anyone who bought a new house in a new development would be paying hefty extra charges in the tens of thousands of dollars for that same infrastructure through the “development cost charges” that the builder was charged by the city.

“These people were paying for their own new infrastructure through the charges and, at the same time, for rebuilding my street through their property taxes. If it’s younger people buying houses, they’re getting dinged.”

What Mr. Sancton, then a political science professor at Western specializing in city issues and now retired, was noticing has been routine city policy for a few decades: New growth should pay for new growth, went the mantra.

But amid a housing crisis that has especially impacted younger people, politicians, economists and housing advocates are beginning to question whether that approach is fair, and whether the policy contributes to high housing prices. Some analysts have calculated the fees can amount to almost a quarter of the cost of a new home.

Without the charges, though, mayors worry about how they will pay for the significant infrastructure needed to support a building boom. Unless provincial and federal governments start committing large and regular contributions to that infrastructure, their only lever is significant tax increases for everyone, they say.

Canada’s housing minister withheld money temporarily from Metro Vancouver last year over concerns that it was raising its development-cost charges too much and penalizing new buyers.

In May, Housing Minister Sean Fraser was fighting the same fight with Ottawa city council, warning that the city would lose millions in federal money if council voted to increase the charges. Those changes meant increasing the charges to as much as $63,000 on a single house or duplex inside the Greenbelt. In the end, council decided to go ahead with the increase after city staff said freezing fees would cost the city $130-million in lost revenue.

Mr. Fraser took to X to further make his point: “Development charges increase the cost of homes for everyone. They are a housing tax. During a housing crisis, we don’t think you should raise taxes on housing. That’s why provinces and cities must freeze the fees in order to get federal infrastructure funding.”

That was the latest round in the pushback against an idea that took hold in the 1960s and then accelerated in the 1970s, as existing residents in many cities increasingly looked for ways to slow down new development.

The housing minister has the support of some economists and the country’s increasingly vocal pro-housing advocates.

They say development charges are not based on any kind of serious economic analysis, but are more a long-standing response to cranky existing residents who are anti-development and want political assurances they won’t have to pay for new services for new residents.

“The roots of this go back to the ‘60s, where there was a shift from seeing growth as progress to growth as something that destroys communities,” says University of British Columbia professor Tsur Somerville, who specializes in real-estate finance.

California passed the most extreme version of that sentiment in 1978 with Proposition 13, which severely limited tax increases for existing owners and set off a decades-long pattern of heavy taxation on any newcomers as governments struggled to cope with the resulting shortfalls.

B.C. started allowing development-cost charges in 1958 as some cities struggled with the cost of postwar housing booms, but the costs only started to escalate significantly as resistance to new development grew in the 1970s.

Ontario passed a law in 1997, the Development Charges Act, to help cities ensure that existing residents would never be required to pay the capital costs for new services. It now has the highest development charges in the country, with B.C. not far behind. Alberta is one of the lowest.

For a long time, the approach in Ontario and B.C. was seen as fair, but that’s changing.

“Before, when municipalities would raise development charges, no one would really care. The last time Toronto raised them, the left and the right made noises. It is really frustrating to a lot of young people,” says Alex Beheshti, an urban planner and economist in Toronto who does consulting with Altus Group, the national company focused on analyzing real-estate costs.

Mr. Beheshti is frequently hired to do reviews of development costs to determine whether the rates have been calculated fairly.

He and others point out that the high fees on new development mean buyers end up paying for local infrastructure at the highest possible rate, through private mortgages.

“It’s hitting people at a time in their lives when they’re loading up on debt and they’re having now to take on more debt,” says Mr. Beheshti. And it’s not like the new residents pay nothing without the charges. They contribute millions in new property-tax money when land is redeveloped to higher densities.

Some also argue development costs actually raise the cost of all housing: If the fees raise the price of a new house to a particular level, then all housing in that market rises, even the older homes where there are no development charges built into the sale price.

But many mayors and city councillors argue they are left with little choice, since the provincial and federal governments don’t provide anywhere near enough money to pay for the costs of growth.

“Somebody’s got to pay and they just keep downloading onto us,” says frustrated Burnaby Mayor Mike Hurley, whose suburban city just east of Vancouver has transformed itself in the last decade with large clusters of the tallest towers in the region.

In another booming eastern suburb of Vancouver, Nathan Pachal, mayor of the City of Langley, is coping with a massive wave of development related to the new SkyTrain line.

He said the original idea of development-cost charges was that, when cities rezoned land for higher density, the value of that land increased. That resulted in a “land lift” in price and the idea was the city would get a portion of that increase for the new sewer and water lines, community centres and parks.

But even with that system, which some say isn’t working any more, it’s not the answer to providing billions in new services.

Mr. Pachal estimates his city would need to increase property taxes by 20 per cent a year to pay for all the infrastructure needed if land lift were to be relied upon without development fees. (Mr. Sancton has calculated a more modest 2 per cent in his studies.)

The dilemma is especially acute for communities struggling to attract developers to build new housing. Many of those, from Burlington, Ont., to Prince George, B.C., have cut development charges, but that leaves them with less money to pay for any extra services.

Even Mr. Sancton says that it’s not financially feasible for cities to drastically reduce or eliminate the development charges immediately.

There’s no guarantee, he said, that developers will reduce their prices. They’ll continue to ask whatever they think the market will pay, so the best strategy is to freeze or slowly eliminate the costs.

“We bought a long time ago and didn’t have to pay for any of this,” says Mr. Sancton. “I just don’t think that’s fair.”

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