How development charge cuts could reduce new home prices, spur construction

A potential cut in development charges could help reduce home prices and spur more new builds, industry experts say.

In late March, the province of Ontario and the federal government announced they would “cost-match” development charges up to $8.8 billion over 10 years, which could reduce the charges by up to 50 per cent. The reductions will be in place for three years.

Municipalities bill development charges to developers for each of their housing projects to fund infrastructure. However, the industry has long argued that the charges have gotten out of control, outpacing the rate of inflation and the growth in the value of their properties.

Charges reaching $100,000 a door

Minto Group CEO Michael Waters told Real Estate Magazine that development charges have grown more than 100 per cent in Toronto. They have become a major component of the cost structure, reaching up to $100,000 a door in some municipalities — a cost passed directly to the homebuyer.

“If (the cut) comes out of the developer’s cost structure and is passed through to the customer, it would have a very significant impact on price,” Waters said. “In a place like Toronto… the impact could be very, very meaningful.”

Municipalities still have to approve the lower development charge and Waters predicts there may not be action on it for at least six to 12 months. If it does go through, it could mean up to a $70,000 reduction for a single-family home in Toronto, he said.

HST rebate already moving buyers

Homebuyers could save even more with an HST rebate announced the same day as the development charge cut — up to $130,000 on a home valued up to $1 million. Waters said that move, which came into effect at the beginning of April, has already brought buyers off the sidelines and boosted Minto’s sales absorption 10 times the average weekly rate seen four weeks earlier.

The impact of the development charge reductions could be slower to materialize, he noted, but could help Minto launch a number of low-rise home projects currently waiting for market conditions to improve. What will spur those projects forward are pre-sales, which can be boosted by lower prices made more possible by lower development fees.

He said the government support more easily accelerates low-rise community construction because those projects can be done in phases and don’t require up to 70 per cent of units sold in pre-sales to get started, the way condos do.

“Hundreds, if not thousands, of new homes could be started over the next several years if we could get the pre-sales,” Waters said. “If you multiply that, not just with Minto but all of our competitors, the impact could be very substantial.”

A supply crisis five years out

Economist Mike Moffatt agrees that the development charge cuts could help low-rise homes get built, noting there isn’t as much resale inventory and prices for resales haven’t dropped as much as for condos — meaning new builds can be more competitive.

He thinks a big reason the cut was introduced is to spur construction, as projects have ground to a halt due to waning demand and high building costs, threatening thousands of jobs. Ontario faces the prospect of very few new builds going through, according to Moffatt, which could create a supply crisis roughly five years down the line and cause prices to skyrocket due to pent-up demand.

Lower prices on new builds could also put downward pressure on resale prices through increased competition, he said.

“(The cut) helps create affordability across the board,” Moffatt said.

New builds finally worth the conversation

For Toronto agent Tom Storey, the announcements could make new units more competitive with resale. Up until now, new units were a hard sell — often about 30 per cent more expensive than comparable resale properties.

If the combined measures reduce the cost of new units, they could potentially entice buyers away from cheaper resale, even given the significant leftover inventory on the condo market that is move-in ready, meaning buyers don’t have to wait up to four years.

“Now at least (new condos) are worth the conversation,” Storey said. “Previous to these announcements, it wasn’t even really worth the conversation. It was just resale was way better value.”

Whether lower development charges will trigger more new condo builds remains to be seen, Storey said, since developers first have to clear out remaining inventory. Then, if demand holds, they could look at lowering prices to better compete with resale — which still has about 5,000 condo listings in Toronto.

He doesn’t think the market will catch fire the way it once did, since there won’t be as many investors gobbling up condo inventory the way they did when rates were low. Instead, it’ll be end users who need to be enticed away from resale.

“(Lower development fees) is a really big deal,” Storey said. “There’s not much in Canada that’s taxed more than housing.”

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