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If you're a longtime reader of this blog, you might remember this post from 2020, which was about a cost comparison that developer Urban Capital had done between a project they completed in 2005 and a project they were doing in 2020. What they uncovered was that the biggest culprit in terms of rising costs was none other than development charges. This line item had increased by 3,244%!
Everyone in the development industry knows that this is the reality. Not only have developers needed to carry a big budget for development charges, but they've also had to carry allowances for escalations; and that's because they have tended to jump multiple times throughout the course of a single project. It's frankly hard to keep up.
So for anyone to say that development charges have generally increased at the rate of inflation -- which some do say -- I'm guessing they don't know math, they don't know how inflation works, or they're lying because taxing new homes is politically easier than the other ways of collecting municipal revenue.
Thankfully, the Bank of Canada has an easy-to-use inflation calculator. And if one were to plug in 2005 and 2020, it would tell you that over this 15-year period, the average annual rate of inflation was 1.63% and that, as a total percentage change, this equates to 27.43%. So, 3,244% vs. 27.43%. It's not even close.
For a long time, nobody cared to listen to developers complain about this. The market was, you know, too good. Isn't this just developers being greedy? Well, that is no longer the case and consumers are waking up. Here's an excerpt from a Globe and Mail article published this week:
But cities started to enjoy that revenue stream too much. They began to gorge on development fees, a flow of money that allowed politicians to keep property taxes low. Who was going to complain? Future owners of homes are often people who don’t yet live in the city and can’t vote. It’s the city-building equivalent of that Monty Python joke about an innovation in how to raise government revenue: taxing foreigners living abroad.
But even more importantly, municipalities are now waking up. Last week, the City of Vaughan -- which previously had the dubious distinction of the highest DCs in the Greater Toronto Area -- announced that it would be reverting back to the rates they had in effect on September 18, 2018, and that these rates would remain in place until November 19, 2029.
This takes the development charge for a single-family home from $95,466 per unit back down to $50,193 per unit. This is significant! And given the current strains on housing affordability, these savings will almost certainly flow through to end purchasers. (FYI, all of the developers who have signed the CANT pledge have all agreed to pass on any tax savings dollar for dollar.)
Here's a quote from Vaughan Mayor Steven Del Duca:
Development charges have become an unfair tax burden on homebuyers. Too many of our residents, in particular young families in our community, have seen their dream of buying a home close to where they grew up, disappear completely as housing prices have spiraled out of control. We have a housing affordability crisis and it’s time for us to get real about the solutions needed to solve it. Today’s decision by Vaughan Council to dramatically reduce our development charges for the foreseeable future is a strong step in the right direction. I urge other municipalities to follow our lead and do the right thing.
He makes a good point. It behooves other cities in Ontario to follow their lead.
The stated policy goal of inclusionary zoning is to to produce more affordable housing. We can debate who ultimately pays for this below-market housing, and we have many times before on the blog, but for the purposes of this post let's just focus on its stated goal.
Given this ambition, it makes sense to carefully measure the number of affordable homes produced. And that is ordinarily what is done: "We implemented this new policy on this date, and since then we have produced X amount of new affordable housing."
It is then likely that we will take X and form opinions on whether it was a successful policy or not. If X seems like a lot, then maybe we think it's a good policy. And if X doesn't seem like a lot, then maybe we think it was a bad policy, or perhaps just an ineffective one.
But what is largely impossible to measure with any real precision is the number of new market-rate homes that are now not being built as a result of a policy. Let's call this number Y. It is, of course, possible to come up with an estimate by looking broadly at rents across the city, plugging in some development costs, and seeing what pencils. But this is a rough approximation.
It does not capture the countless times that a developer has looked at a possible housing site, only to come to the conclusion that it is not feasible to build. There is no official Y figure. And any amorphous estimates of Y are going to be easy to ignore by the general public anyway. Unbuilt homes? Opportunity costs? What?
I am saying (okay repeating) all of this because I continue to feel like most people believe that development will just happen no matter what is thrown at it. There is a housing shortage, right? So developers should just do what they do best and build today. Surely they could if they were genuinely nice people and really wanted to. Hmm.
What many people seem to ignore (or not know) is that development, and in turn new housing supply, operates under this very simple decision tree:
Find development site
Underwrite said site
If math works, seek capital/investors and then build
If math does not work, do not build
If math works, but capital doesn't like it, also do not build (most can't in this scenario)
Repeat
Just because you aren't seeing or noticing something, it does not mean that it doesn't exist and that it's not happening behind the scenes.
One natural response to yesterday's post about (housing) affordability vs. beauty is to think that I put forward a false dichotomy. Why can't we have both? Why does it need to be a zero-sum game? Surely there's a middle ground. Our cities should be both inclusive and beautiful. And of course, I don't disagree.
What I was trying to do with the post was force a thought exercise. There are lots of things that we do as city builders which serve to increase the cost/price of housing. Going to a design review panel adds time/cost. Deciding to use that really nice material from Europe adds cost (and maybe time). And even adding a simple building stepback adds time/cost.
So in doing these things, we are in effect deciding that these are more important that just building cheaper and lowering the resulting rents/sales prices. We can certainly debate the right balance and how much should be spent on things like design and/or sustainability, but it doesn't change the fact that, for better or for worse, we are saying, "it is important that we spend the money on this particular item."
Now, there is also a common counter argument that none of this really matters, because developers will always price new housing at whatever the market will bear (i.e. the maximum possible price). But as I have tried to argue many times before on this blog, this is not always true. Pushing prices too far increases risk and slows absorption.
It also ignores the fact that in any given city there are going to be sites that are infeasible to develop with new housing. That is, when you look at all the costs and, yes, what the market will bear, the numbers just don't work. And so what can happen when you reduce development costs is that you now unlock more sites for new housing, increasing overall supply.
None of this is to say that our cities shouldn't be beautiful or that we shouldn't strive for creative design solutions. This is exactly what we should be doing! Instead, this post (and yesterday's) is simply a reminder that time and things do cost money, and that the decisions we make are rarely benign. In fact, they usually speak to what we value the most.
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