COMMENT: The link between development charges and your property tax bill

Poole Creek Village under construction, November 2015

(Photo: Poole Creek Village under construction.)

On November 7, the Greater Ottawa Home Builders Association (GOHBA) took out a quarter page ad in the first section of the Ottawa Citizen entitled “Empowering Millennials to Succeed”. It was a blatant pitch to the newly-elected federal government to seek reductions in municipal development charges on newly constructed homes in order (nominally) to support young millennials in purchasing these homes.

You will recall that development charges are to pay for the municipal infrastructure costs associated with new development (roads, water, sewers, etc.) so that existing taxpayers do not end up paying more in property taxes for the costs of new development (and consequently subsidizing the new development).

It should come as no surprise that there is a demand curve for new homes. Higher prices (including the land transfer tax, development charges, construction costs, and profit) reduces the demand for these new homes. One would think that higher prices would create pressure for more efficient land development, but (surprise!) it is profit which directs developers in the housing market.

Nothing wrong with that in principle, but when the GOHBA starts pushing public policy-makers to change public policy to their advantage, we should pay attention. There is a reason why we have development charges (so existing taxpayers do not subsidize new development) but clearly one can see why developers would like to reduce these charges: lower charges = lower prices = more sales = more profits.

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The GOHBA has also targeted the Land Transfer Tax (LTT) issue. Currently only the City of Toronto has access to the LTT (a charge for when land changes hands, usually on the road to higher zoning and development). The Ontario Government is reviewing the Ontario Municipal Act to provide the opportunity for other municipalities to charge the LTT. This is seen as helping municipalities gain some new revenue to meet their infrastructure and other responsibilities.

Obviously the LTT would add to the cost of a new home (the GOHBA says about $5,300 to the average price of a new home). Again, one would think that this would lead to more efficient land use, but instead the GOHBA is suggesting that the new federal government disburse its promised infrastructure money on a quid-pro-quo basis to municipalities for dropping development charges, in order to “help” millennials buy homes.

How nice for the millennials, and for the developers who make up the GOHBA, but not so nice for taxpayers who have already paid through their taxes for the infrastructure that supports their homes. The GOHBA proposal would add to everyone’s property taxes and subsidize not only the millennials but the profits that would accrue to the GOHBA and their friends.

I bring this to your attention as a topic to pay attention to. In this instance the interests of the GOHBA and ordinary property taxpayers are not the same. You may want to let your newly-elected MP know this.

(Alex Cullen is former MPP, city and regional councillor and school board trustee.)

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RECOMMENDED READING: “Public trust and the City’s development charge agreement”.  Councillor Tobi Nussbaum wrote in October about the city’s decision to roll back development charges, and freeze any changes until 2019.  A brief excerpt:

“The city is obligated to demonstrate the highest level of openness and transparency, particularly when dealing with the development industry. A settlement agreement, negotiated and debated behind closed doors, that alters a publicly-consulted set of rules and provides veto power to developers over City decisions, does not meet that test. The result of that failure is a loss of public trust.”


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2 thoughts on “COMMENT: The link between development charges and your property tax bill”

  1. As a building inspector I can see this argument from both perspectives, but I should point out that development charges increase the price of new homes and consequently also the existing housing stock, which makes it harder for anyone to enter the home owner ship market, existing homes are valued at what it would cost you to construct a new home, less some depreciation of the replacement components, shingles etc. So if a new home costs an extra $10,000 then the existing housing stock will increase in price to reflect this, or in the alternative, the market forces play a roll in increasing the market forces, less new home sales, more existing stock sales, therefore bidding wars on existing stock.

    The other thing I have noticed, is that a homeowner lives in a community for 20 years, pays their taxes, then nearing retirement, builds their dream home, so now you would have them pay more taxes, as if they did not exist for the past 20 years?

    The other side of the coin is that a community of 25,000 people has a fire hall, a police station, municipal garage, rec center etc. So every time the building permit meter for new homes clicks over 25,000 (and we build approximately 200,000 new homes in Canada every year) more infrastructure is required, someone has to fund these.

  2. For the most part I agree with what Claus Trost said above but the issue of home affordability is embedded in a much larger context of issues not touched on in this article. I understand that the article’s focus was on the role of development fees and municipal land transfer taxes on the prices of homes but these two factors are just a drop in the bucket. Valid points all around but the elephant in the room is really mortgage financing.

    Full disclosure, I am a realtor working in the GTA area. I also have a background in economics and corporate finance. Without a doubt in the last 25 years the main driver of housing prices has been easy credit – 5% down mortgages. This requires a detailed explanation but in short having easily available credit pushes up asset prices because every time someone takes out a loan or a mortgage, money is created. This money is injected directly through the housing market pushing up the general prices of homes. Now in general if this process was spread evenly through the economy it would be called inflation but this ‘appreciation’ is not even across industries. Since housing and land is a physical asset it benefits from acting as collateral in a loan while having the simultaneous ability to earn income as rents. Easy money has a natural bias to anything that can be collateralized simply because it will lower lenders’ risks. The next result is the actual problem – capital distribution imbalances aka asset bubbles. They distort the natural incentives for people to navigate the economy which lead to magnifying effects. As real estate asset prices rise people invest in real estate further thinking it will continue to appreciate raising prices and leading to more investment. Coupled with easy lending rules the whole industry takes on price levels which are removed from their actual and proportionate contribution to economic productivity. Once again this leads to asset bubbles which eventually have to correct themselves, unfortunately, in the form of contractions.

    Keeping this mechanism in mind and adding to this analysis the natural cultural biases of which we are a part (the need to own property as a ‘fully realized’ citizen in North American culture) leads to the development of inefficient suburbs which only contribute to the exacerbation of current problems – destruction of arable land, the consistent deficits in the administration of public services and the stratification of socio-economic levels.

    Housing like so many other issues plaguing modern society exist in a web of interconnected issues. Which cannot be addressed on a case-by-case basis. Alex Cullen, nonetheless, well done on this article.

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