Using Development Charges to Encourage Growth
August 7, 2014 - The City of Greater Sudbury collects a development charge for every new building constructed in order to recover costs for extending municipal services, such as water, fire, police and parks, to that building.
The rates charged to builders vary for each type of building (residential, industrial, commercial/institutional), but to keep things simple this blog looks at single family dwellings.
Figure 1 illustrates the change in development charge rates from 2009 to 2014. On July 9th, 2014 city by-laws for development charges will expire, requiring a new by-law to be signed before this date. In the new by-law agreement there was a proposed rate increase of 16% for single family dwellings, meaning that a builder would have to pay a fee of $17,163 for every new home they build as of July 10th.
Figure 1.
Source: City of Greater Sudbury, Development Charges
With the deadline approaching for a new by-law to be signed, city councillors recently spent some time discussing the proposed increase. Fortunately, they have decided to freeze the rates for the next two years.
So what exactly does this mean?
There are two issues that will be directly affected by development charges:
- Costs for home builders
- Municipal government revenues
Costs for home builders
On the supply side of the market, development charges will increase costs for home builders which could mean a couple things.
First, if a builder decides to build in an area where development charges exist, they will not let their profits take a hit through higher construction costs; they will pass on the costs to home buyers through higher retail prices.
Secondly, builders may decide to opt out of doing business in the market altogether. This is the essence of market competition – if it is less costly for a business to build a house in a nearby jurisdiction with lower or no development charges, then they will do so.
A development charge in this case acts a deterrent to constructing new homes unless, of course, the economy is strong and consumers are willing bear the full brunt of the development charges.
Which brings us to the demand side of the market.
If we assume that builders are not moving their business elsewhere and instead putting all their resources into constructing houses in an area where development charges exist, then will home buyers be willing to pay the cost of development charges through higher retail prices? Likely not.
A rational consumer will search for better value in jurisdictions that are not stymied by development charges. In other words, development charges can decrease the demand for housing in the area.
But is any of this really happening in Greater Sudbury?
Canada Mortgage and Housing Corporation (CMHC) shows that housing starts for single family dwellings have been decreasing on average since 2007, while average housing prices have been growing steadily[i]. CMHC claim that “higher cost to build along with the recent proposed increases in municipal development charges are expected to push up the average price for absorbed single-detached homes by eight percent in 2014”. Additionally, Greater Sudbury’s population has been either dormant or declining since 2011[ii], while migration out of the northern Ontario region has been a growing concern. For these reasons and others, Greater Sudbury’s growth prospects are facing challenges.
To be clear, this doesn’t suggest that development charges are the sole culprit for these trends, but theory would suggest that they may be contributing to some or all of them. Depending on Sudbury’s current economic conditions and how rates are implemented, development charges can either have a role in strengthening or weakening the housing market and economy, and therefore must be put in context.
Although there are many other drivers behind housing starts, housing prices, population and out-migration, high development charges are creating a restrictive and even adverse environment for reversing these slow growth trends that Greater Sudbury (and Northern Ontario in general) is experiencing.
Revenue tool versus planning tool
With a struggling housing market and a slow growing economy, such a policy being used as a revenue tool to recover costs from new growth and development makes little sense. In fact, because the current rate structure will slow new developments, the level of municipal revenues will actually decrease.
When development charges slow the number of new housing starts, there is a direct loss in revenues from uncollected development charges, as well as a subsequent loss in revenues from uncollected property taxes and uncollected taxes for the provision of municipal services to that property. This negative multiplier effect is what truly makes development charges a deterrent to growth. Not only is the municipality implementing a policy that results in uncollected development charges, but also a policy that has an adverse effect on other revenue generating tools the city has in place.
The recent decision to freeze rates is a start; however, more fundamentally, development charges need to be viewed not as a revenue tool, but as a planning tool that can spur growth.
The idea here is that increasing development charges can be a deterrent to growth: building costs are higher, housing prices increase and builders/buyers seek other markets. However, by adjusting development charges strategically, a planner can encourage builders and buyers to invest in a particular area of the city. This means that development charges should not be flat across the board for the whole city, but rather be scaled in areas where planners want to either promote or deter growth.
For example, a top-of-the-agenda item for many planners in Sudbury is revitalizing the downtown core. In this case, using a lower rate in that area compared to other areas may encourage both builders and buyers to invest in downtown properties. Conversely, using high development charges in an overly congested area that is facing high levels of growth might be an option. Using rates as incentives or disincentives for investment that are in-line with the current economic conditions, while also considering the subsequent spin offs that come with development charges, is key when determining the rates.
Sources:
[i] Canada Mortgage and Housing Corporation (2014). Housing Market Outlook Greater Sudbury CMA.<https://www03.cmhc-schl.gc.ca/catalog/productDetail.cfm?cat=99&itm=29&lang=en&fr=1403225207082>
[ii] Statistics Canada, Labour Force Survey estimates, CANSIM Table 282-0116.
Authored by James Cuddy, Northern Policy Institute Senior Policy Analyst.