Municipal governments need to cut the regulatory burden on new housing

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The higher tiers of Canadian governments may be spending billions of dollars on improving housing affordability, but municipal governments undo some of that effort by imposing hundreds of millions of dollars in development fees and charges that only escalate home prices.

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The municipal regulatory burden imposes direct costs on new home construction as well as indirect costs because it lengthens the time it takes to obtain regulatory approvals. The direct regulatory charges for a typical new residential dwelling alone can add up to $180,000 per dwelling in construction costs in places such as Markham, Ont.

A recent report by Canada Mortgage and Housing Corp. (CMHC) explored the regulatory burden on housing costs in three large metropolitan areas and found that, in some cases, “government charges can represent more than 20 per cent of the cost of building a home in major Canadian cities.”

Furthermore, the regulatory burden in dollars and time was the highest in Canada’s most expensive housing markets, Toronto and Vancouver, compared to Montreal, where housing prices have been relatively and historically lower.

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The authors of the CMHC report — Eric Bond, Frances Cortellino, Taylor Pardy and Christopher Zakher — relied on data and models developed by the Altus Group Ltd. to determine the extent of development charges for various housing types and tenure. They also differentiated government-imposed costs by fee types.

The report found that despite municipal governments’ stated preference for high-density developments, they imposed more significant development charges and density bonuses on high-density construction relative to low-density construction.

By comparison, single-detached housing is “subject to the lowest government fees,” the report found. In addition, “single-detached houses tend to be the subject of the fewest government charges,” averaging between three and seven charges. High-density construction can be subjected to 10 different government charges, ultimately contributing to longer approval times.

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How much lower would housing construction costs per dwelling unit be if government charges were eliminated? In Toronto, row housing could be almost 25 per cent cheaper to build, while costs could be 16 per cent lower for low-rise rental and condominiums.

If municipal governments are serious about promoting the missing middle type of housing, they can make a difference by reducing the regulatory burden on the construction of such housing types.

The report also highlighted some progressive policies to improve housing affordability. For example, municipalities in Vancouver do not impose density payments on purpose-built rental (PBR) housing. Furthermore, government charges for PBR in Vancouver are one-third of those for condominiums. Similarly, municipalities in Montreal reported the shortest approval times with the fewest government charges.

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With PBR construction lagging for the past five decades, municipalities could adopt policies to encourage such construction by significantly reducing the regulatory burden. Montreal and Vancouver offer examples of best practices.

Markham stands out for high development fees in absolute and per-square-foot terms. Construction costs for row housing in the city could be 34 per cent lower without government charges. Furthermore, Markham imposes 160 per cent higher development charges for low-rise rental construction than for single-detached housing.

Again, if the supply of PBR is a priority, that should be reflected in lower development charges for PBR construction than other dwelling types.

The CMHC report recommends that municipal governments consider “increasing certainty around the number, timing and magnitude of government fees” to lower construction costs. In addition, it recommends “eliminating density payments payable upon spot rezoning” because they increase complexity and uncertainty.

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Despite the recent decline in housing prices, median-income homebuyers still find housing way out of their reach. There is an opportunity for local governments to make a meaningful contribution to housing affordability by lowering the regulatory burden on the construction of new housing in places where demand has outstripped supply for decades.

But will the municipal governments listen? The evidence from Toronto suggests they won’t. Instead of reducing development charges, the city has approved a proposal to increase development charges by 46 per cent. This will increase dwelling construction costs by tens of thousands of dollars.

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Cities need financial help from their province and the feds to build additional infrastructure to accommodate growth and maintain the current infrastructure in a state of good repair. Cities can’t do this without raising local fees and taxes given their limited own-source revenues.

The provincial and federal governments can pick up the tab for such costs and, in exchange, require municipal governments to reduce or eliminate the regulatory burden on new housing construction.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.