How improvements to development charges can help create more rental housing in our province

Stimulating the building of new housing projects, especially purpose-built rentals, is the best way to tackle the housing crisis, and with it the affordability issue. In previous posts we have outlined proposals for zoning and approval processes that would help expedite the building of new supply. Another tool available to governments that can help enhance supply is reform of development charges.

Development charges are a legitimate means for local governments to raise funds for improving existing spaces and the infrastructure of new developments. They were intended as a way for growth to pay for growth. However, in recent years development charges have increased substantially and become one of the biggest impediments to new housing projects. This is especially true for purpose-built rentals, which come with greater risk, lower margins, and they can only start collecting revenue once fully built and ready to welcome tenants. In this market, added upfront costs represent a significant increase in risk, making many new projects unviable when they are needed most.

To better understand the impact high development charges pose it is important to look at some context. In Ontario, and especially the GTA, we have some of the highest development charges in North America; at 30-50% higher on average. They make up 8.9%-10.8% of the cost for new developments in the GTA, compared to an average of 4.5% in other Canadian cities and 4.4%-6.2% in US counterparts. Cities like Brampton, Markham, Toronto, and Oakville have the highest high-rise charges in the country, with charges as a percentage of the cost per unit at 10% or more. That means that in some jurisdictions, development charges are over $40,000 per unit, which is a significant barrier to increasing supply.

However, the problem goes deeper. Development charges in Ontario are not just higher when compared to other jurisdictions, but they are rapidly rising. In Toronto, where we have one of the highest development charge regimes in North America, charges have increased by up to 878% since 2004. From 2016 to 2020 charges doubled, as they did in both preceding reviews in 2009 and 2013. Development charges are an important means for municipalities to fund new development, but the rate of increase in Toronto and surrounding areas is very difficult to justify in cities where most new development is happening in already urbanized areas. Recent data from the C.D. Howe Institute shows that cities are paying increasingly less of the money collected via development charges to accommodate new growth. Instead, large parts of the funds collected are used to pay for operative expenses.

Along with property taxes, development charges are the municipalities’ main method of raising funds. That means that politics play a role as increasing development charges is more popular than raising property taxes. As a result, from 2000 to 2018 development charges increased by 14.3% annually, as compared to 2% for property taxes.

However, the high upfront cost offloaded to builders serves to constrict supply of new housing. While cities allow rental housing providers to defer payment of development charges, the cost of doing so remains high due to interest payments. If a 250-unit rental building were to defer $10 million in development charges for five years, the added cost would be around $950,000. That’s a 10% increase in five years, and many deferrals are longer. Interest can be reduced with a letter of credit, but this can also be problematic as most builders need to take on debt to finance construction.

The current development charge regime is a big hurdle in creating more affordable housing. Changes must be made at all levels if we are to unlock more supply, starting with putting a stop to the steep rise in development charges. While charges are under the purview of municipalities, their funding options are limited, and it could make more economic sense for the Government of Ontario, which enjoys a broader, more progressive tax base, to help bring down the cost of development. This could be done by subsidizing the cost of new infrastructure for cities, or by subsidizing charges for builders. This would help relieve pressure for both municipalities and developers alike.

For municipalities, taking examples from other cities, such as Albuquerque, New Mexico, where development charges are based on geographic location would be a good idea. This makes development cheaper in more urbanized areas where the infrastructure base already exists. Offering innovative ways to pay for development charges and help lessen upfront costs, such as an option to pay in installments could also help.

The development charge regime is currently one of the biggest hurdles to the development of new purpose-built rental housing in Ontario. Development charges here are the highest in North America, and they are rapidly increasing. It is now time to take a close look at development charges, and how they really impact growth and housing in Ontario. With the help of industry, governments can lead the charge toward change. In collaboration and consultation with builders, they can implement innovative policies to reduce charges and provide builders with easier options to pay their dues. Whether it is in the form of a geographic restructuring of development charges, an ability to pay in installments, or more help from the provincial government in subsidizing both builders and municipalities, policy options that would make a difference are available. If governments and industry work together, we can find new ways to build better communities, while still stimulating new housing supply in Ontario.