I am of the strong opinion that, as a general rule, development charges should aim to capture the costs and impacts directly attributable to new development. This is why I prefer the term "impact fee" as opposed to "development charge." The latter makes it seem like a generic catch-all tax. But that's not the intent. The intent is that "growth pays for growth." At the highest level, this makes sense and sounds good. So with all the talk of lowering/eliminating DCs to help with housing affordability, I think a lot of people are rightly wondering: Is this actually feasible? What fees are actually needed to fund growth-related infrastructure? Let's talk about this today.

For reference, here are the development charge rates effective June 2024 in the City of Toronto.

Non-rental housing:

Rental housing:

In other words, if you were building 3-bedroom family-sized condominiums, the development charge would be $80,690 per home. And if you were building 3-bedroom family-sized rentals, the development charge would be $45,280 per home. But keep in mind that in addition to the above development charges, there are also other charges like the Community Benefit Contribution (Section 37), Parkland Dedication, Education Charges, Development Application Fees, HST, and so on.

Growing development charge reserve funds

Looking at just DCs, Ontario municipalities collected about $17.5 billion in development charge revenue over the last five years (according to the Missing Middle Initiative). But importantly, these same municipalities only spent $11.8 billion. The rest is sitting in DC reserve funds. Why is that? Well, part of this could be explained by timing. DCs are typically collected when a developer is issued their first building permit. But the costs associated with growth-related infrastructure may not happen at exactly the same time.

Except that these reserves have been growing. From 2010 to 2022, DC reserve funds across Ontario have increased from $2.6 billion to $10.7 billion (again, according to the Missing Middle Initiative). This is a 316% increase over 13 years. And in the case of Toronto — Ontario's largest city — reserves have grown 891% over the same period. This suggests that these charges aren't accurately tuned to actual impacts, because, in theory, these reserves should trend toward zero over long periods of time, as growth-related infrastructure costs are incurred.

Nexus between development charges and the impacts of new development

Let's get a little more specific. Over the last five years, DCs generated about $450 million for social services across Ontario. This includes things like long-term care, affordable housing, day cares, and public health; all of which are important and good things. But can all of these things be considered growth-related impacts? In other words, is it fair to say that because new housing got built, we now need more long-term care homes? I don't think so. Long-term care homes are certainly needed, but I don't think it's fair for new home buyers and renters to shoulder this cost.

Who is paying for the renaming of Dundas Square?

Let's consider another example. Back in 2014, Toronto City Council decided that Dundas Square should be renamed. I personally don't think this was at all necessary, but it got approved and the cost to do so was estimated at $335,000. At the time, it was also decided that this would be paid for through Section 37 funds as opposed to "taxpayer money." Section 37 of the Planning Act used to function in practice as "let's make a deal." It was a way for cities to extract money from developers in exchange for allowing more density. This has since been replaced by the Community Benefits Charge framework, but the intent is the same:

Section 37 of the Planning Act authorizes the City to adopt a community benefits charge (CBC) by-law and collect CBCs to pay for the capital costs of facilities, services and matters that are required to serve development and redevelopment. CBC funding will help support complete communities across Toronto.

In funding it in this way, the City of Toronto took a position. It basically said, "renaming Dundas Square is important to the city. We must do it. But we don't want all Torontonians to pay for it. We only want new home buyers and renters to pay for it." Because that's the effective outcome of using funds charged only to new developments. Is that fair? Once again, I don't think so. Because it's not reasonable to say that because new housing got built, it's now imperative that we rename Dundas Square. The two are unrelated matters.

By and large, this is the issue that many take with development charges. It doesn't appear to be "growth just paying for growth." It's growth paying for a lot of stuff. And it has a direct impact on housing affordability. In tomorrow's post, we'll expand on this last point and talk about what lowering/eliminating DCs could mean for apartment rents.

This past week I listened to two podcasts in preparation for Canada's upcoming federal election. I listened to Prime Minister Mark Carney with Scott Galloway and I listened to Pierre Poilievre with Brian Lilley of the Toronto Sun. If any of you have any other recommendations for an interview that I should listen to, please share it in the comment section below.

Here's what I would say. Carney came across as more measured and less direct. But naturally very capable when it comes to understanding the economic implications of our shifting global order. He wasn't forceful when talking about oil and gas pipelines, but I understand that he fully supports them. This is critical to diversifying our trade and frankly gaining more market power.

I'm skeptical of government being able to act as any sort of big developer and/or stimulate a thriving prefab construction industry. The latter is being worked on by a lot of the private sector; what is needed are dramatically lower fees and less barriers to development. I was, however, comforted by the fact that Carney did seem to reduce government's role to an enabler for private enterprise.

Both are promising dramatic cuts to development charges, which is essential. Poilievre is promising to eliminate the federal sales tax on all new homes priced under $1.3 million, whereas Carney wants to do it for homes under $1 million and only for first-time buyers. Carney also focused a lot on increasing construction trade capacity as a way to dramatically increase overall supply.

Broadly, Poilievre was more focused on "axing the tax" and removing the barriers to developing new housing. As we have talked about many times before on this blog, upwards of 30% of the price of a new home in Canada can be attributed to government fees and taxes. This is unsustainable, as we have seen, and it needs to change if we are going to improve housing affordability.

That said, Poilievre did make a specific comment that I didn't care for. He was talking about family formation and housing affordability and he said, "how can you start a family without a backyard and driveway?" He went on to say that, "people want detached single-family houses." Now, there's some statistical truth to this claim, but it's not like it's enshrined in our DNA.

It's an anti-urban statement. There are lots of cities around the world where kids are raised, just fine, without a backyard and/or driveway. They walk to school, they play in wonderful city parks, and they generally enjoy a high quality of life in an urban environment. I'm not suggesting that this has to be for everyone, but I do believe in removing our cultural biases and letting the market ultimately decide.

This is a pivotal moment for Canada. Regardless of who is successful on April 28, the status quo cannot continue. We must become a global superpower. And when it comes to housing, I would encourage whoever wins to give me a call after the election. Prime Minister: I'll walk you through a development pro forma and explain what it will take to make housing more affordable, and get lots of it built.

Cover photo by Hermes Rivera on Unsplash

This week, Urban Toronto reported a record number of residential development applications submitted in the City of Toronto over the last quarter. A total of 25,598 residential homes were proposed across 12 condominium projects, 16 rental projects, and two projects that also include an office component.

The total area was around 20 million square feet. The total number of buildings was 66. The median height was somewhere around 23 storeys (~86 meters), with the tallest being 67 storeys. And the average parking ratio was around 0.3 spaces per home. (The below chart seems to suggest that parking minimums were previously constraining the market.)

This is, according to UT, the highest number of proposed new homes in a single quarter over the last five years:

So, should this be taken as some sort of leading indicator that the market is set to rebound? My view is no. It certainly shows some degree of optimism for the future of our market, but there are lots of reasons why a developer might submit a development application in a down market.

Developers could be seeking more density as a way to reduce their land basis. If you bought a site for $25 million and you have approval to build 250,000 sf, your land basis is $100 per buildable square foot. If you can now build 350,000 sf, you've just reduced your land basis to $71 pbsf. That effectively means it's cheaper, which is good; but importantly, it now means have more space to absorb. So there's a trade off.

Another reason could be that developers are reworking their sites for purpose-built rental (from for-sale condominiums). The figures provided by Urban Toronto show that the majority of the applications were for rental projects. I suspect that this could be a big driver. Converting a project from condominium to rental isn't as simple as just flipping the legal tenure.

Lastly, I will say that developers could be pulling the trigger on new development applications simply because they need or want to do something. We all have sites, and we're programmed to move and get stuff done. Sitting around doesn't accomplish anything and it frankly doesn't feel good. Question now becomes: who will be in a position to be patient once they get their approvals?

It's hard to pinpoint exactly what drove this surge, but it should not be assumed that it will translate into more new housing in the short term. The real indicator is market absorption. Without it, development density has very little value.

Cover photo by Bennie Bates on Unsplash