Development charges (DCs) are designed to allocate funding for growth-related capital projects. Their use varies across Canada, with municipalities in BC and Ontario relying more heavily on this funding. Affordability concerns have highlighted how rising DCs increase the cost of buying a new home, as these costs are built into the purchase price. In our supply constrained market, this has a compounding effect—driving up prices for not only new homes but also existing homes, since property valuations are based on comparables.
I have argued that a more effective approach would be to fund major development costs—such as water and sewer infrastructure— through a municipal utility and shift more of the burden to property taxes. A recent study, The State of DCs in Ontario, commissioned by the Building Industry and Land Development Association (BILD) and the Ontario Home Builders’ Association (OHBA), examines where legislation in Ontario can be fine-tuned.
Below are key takeaways from this report.
- DCs have been rapidly increasing
Between 2011 and 2023, development charges for single-detached homes in the GTA’s 10 largest municipalities rose by an average of 208 per cent (from $38,827 to $110,210). In the City of Toronto, these charges surged by 592 per cent. In the 10 largest non-GTA municipalities, DCs increased by 157 per cent (from $19,238 to $49,412). Over the same period, inflation rose by just 31.7 per cent. Despite agreements to cap these charges to secure federal funding, some municipalities have continued raising them.
- DCs are accumulating in reserve funds
Municipalities justify DCs with the argument that “growth should pay for growth.” However, reserve fund balances have been steadily growing. As of the end of 2022 (the last reporting period available), municipalities collectively held over $10 billion in DC reserves. While there is naturally a timing gap between housing project completion and infrastructure development, the scale of these reserves raises questions—either municipalities are facing a huge backlog in delivering infrastructure, or DCs have become a cash cow for cities.
- Definitions matter
The purpose of DCs is to ensure municipal costs related to the new developments are paid for by the new homeowners, rather than the general public. In economic terms, they should cover the incremental costs of new construction. DC legislation distinguishes these costs through the concept of “benefit to existing” — referring to the enjoyment derived by existing homeowners and renters. However, this concept has not been clearly defined. When a municipality can use DCs to fund its portion of a $144 million indoor soccer facility, it raises concerns about how broadly municipalities can interpret the definition.
- DCs are inflated by a funding cap loophole
Ontario’s DC legislation sets a cap on how much DCs can be raised, based on the value of the assets a municipality owns – such as roads, police and fire stations, parks, and recreation centres. Land value is also included in this calculation. However, because municipalities can factor in the value of land beneath existing structures, the demand for land for new developments drives up the value of the land tied to those existing structures, which in turn pushes up the DC rate. The author of the report notes that while land value should be included, it should only account for the land that the municipality actually provides. Making this adjustment would significantly constrain the funding cap.
- DCs are impacting housing affordability
The author provides an interesting analysis showing how much of a home’s value is consumed by DCs if housing costs were fixed at affordable levels. The analysis reveals that in the GTA, about 25 per cent of a home’s cost is attributed to DCs, with the rest covering land and construction costs. However, because DCs are a flat charge, builders must construct more expensive homes to cover these costs and make a profit, rather than affordable units. This is what’s driving the migration of homebuyers to communities outside the GTA, where homes are more affordable.
- Municipalities are underutilizing debt funding options
Municipalities could do more to finance infrastructure through debt issuance. The logic is simple — municipal funding costs are less than those faced by individuals. The author highlights that municipalities have significant debt funding capacity that remains tapped.
A second funding option is to treat water and wastewater facilities like utilities (long-term assets), and finance them with long-term debt. Homeowners would then pay a fee as part of their money water bill, similar to how infrastructure fees are added to monthly electricity bills, rather than paying for these costs upfront.
This analysis is vitally important and should be carefully reviewed by the next provincial government. It could serve as a blueprint for making the fundamental changes needed to reform the legislation surrounding development charges.
Independent Opinion
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