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Metro Vancouver board plans to hike development charges on new housing
Too many bites out of the apple: when land lift is gone, newcomers pay the charges
The Metro Vancouver board has voted to cut property taxes by raising the charges on new housing, which would offset the effect of the GST being removed from new rental housing. The federal housing minister, Sean Fraser, is pushing back by withholding Housing Accelerator funds. An alternative to the current plan would be to finance new water and sewer infrastructure with long-term municipal bonds. You can write to your local representatives on the Metro Van board to ask them to reconsider.
Metro Van board: we want to keep property taxes low
Besides the municipal, provincial, and federal governments, we also have a regional government. The Metro Vancouver Regional District is responsible for water and sewer infrastructure across the metro area (plus some other stuff, but water and sewer is most of their budget). Its board consists of 40 elected mayors and councillors from across the region.
Metro Van is planning to raise the charges on new housing for water/sewer infrastructure, as a way of cutting property taxes. This will of course reduce the number of economically viable projects. Development Cost Charge Revisions.
Going forward, existing property owners will only pay 1% of the cost of water and sewer infrastructure (that Metro Van considers to be “growth”). Newcomers will pay 99%.
The way the carbon tax works: the higher it goes, the less emissions you get. Same thing with taxes on new housing.
With the federal government removing the GST on new rental housing to make more projects economically viable (and persuading Ontario and Nova Scotia to remove their portion of the HST), Metro Van is pushing in exactly the opposite direction, raising taxes on new housing.
The initial vote was in April. The formal budget vote is coming up later in October.
Because this is so obscure (who even knows what the MVRD is?), it seemed pretty unlikely that this would get any attention.
Sean Fraser pushes back
On September 25, the word was that Burnaby and Surrey were approved for Housing Accelerator funding. Mackenzie Gray on Twitter. September 26 was supposed to be the day of the formal announcement.
Just hours before the event, the federal housing minister, Sean Fraser, issued a public statement saying that the announcement was being postponed because of the Metro Van vote.
In light of a proposed development cost charge increase by Metro Van, I’ve postponed today’s announcement of Housing Accelerator Fund deals with 2 cities who are members of the Metro Van board.
We’re studying the impacts of this proposal and I hope to have more to say soon.
This appears to have been a big surprise, setting the stage for a showdown.
New Metro Vancouver fees could add up to $24,000 in new home costs. Kenneth Chan, Daily Hive.
We don’t need to further subsidize wealthy homeowners in Metro Vancouver. Helen Lui, Georgia Straight.
Federal housing minister's 'fiasco' flip-flop on housing funds puzzles B.C. mayors. Graeme Wood, Burnaby Now.
Ottawa halts housing funding to Metro Vancouver over increased development fees. Frances Bula, Globe and Mail. Bula noted on Twitter:
Metro Van spent last two days working to convince the federal housing minister that their huge development-fee increase isn't going to wipe out any federal money given. And they say they're re-looking at the whole concept of "growth should pay for growth."
That idea of "newcomers should pay a lot more than existing residents for any new services required" has been very popular in the region for more than 20 years. But that idea is starting to lose its shine, some say, since it typically means raising a cost barrier for new buyers.
So this is going to be a challenging shift for many long-time politicians, who firmly believe that existing residents should be protected from tax increases as much as possible, with a lot of money for services extracted from new builds.
So now what?
Letter to Metro Van board
I wrote a letter to the Metro Vancouver board, saying that these increased costs would be passed on to homebuyers and renters, and suggesting that they look at financing water/sewer infrastructure upgrades with long-term municipal bonds instead.
I'm a long-time resident of Metro Vancouver and homeowner. I’m very concerned about housing in Metro Vancouver being so scarce and expensive. We’ve got a severe mismatch between jobs and housing: we need people to move here to work in health care, for example. But because vacancy rates are near zero, prices and asking rents have to rise to unbearable levels to push other people out, especially younger people. It’s a terrible situation.
As I understand it, there’s people who want to live here, and other people who want to build housing for them, but there’s multiple bottlenecks: economic viability, approval, and the actual construction.
On the economic viability side, I understand that Metro Vancouver is planning to go to a 1% assist factor for the cost of water/sewer upgrades, so that 99% of the cost is borne by new housing. The Metro Van CAO has stated that this substantial increase will have no effect on the cost of housing. This is only true when such increases can be absorbed by land lift, i.e. the project pays less to the landowner. But there’s so many development charges already taking bites out of the apple that there’s not much left (and land lift is also shrinking due to higher construction costs and interest rates). This means that projects have to wait for prices and rents to rise before they become economically viable. In other words, the increased costs will be passed on to homebuyers and renters.
An alternative would be to finance infrastructure using long-term municipal bonds, paying them back over time with usage fees and property taxes. The regional government can borrow at lower interest rates than homebuyers can: right now the BC Municipal Finance Authority will provide a 10-year loan at 4.96%.
Thank you for your time.
A quote from someone who works in the development industry:
Metro Vancouver is increasing its DCCs on new development. They're phasing in increases starting 2025, and finishing with step 3 in Jan 2027. A Vancouver apartment will see its Metro Vancouver DCCs rise from $6,249 per unit to $20,906. More than tripling in a 3 year span. A Vancouver townhouse, which I assume any future plex development will fall into, will have even more substantial increases, going from $8,679 per unit to $30,861. More than 3.5x increase.
For apartments: let's say you have a 16,500 SF lot at 2.2 FSR = 36,300 buildable square feet. Let's call that 50 suites. That's an additional $733,000 by 2027. About $20 per buildable.
The $20 per buildable represents about a 10-15% decrease in the value of development land for rental (in the city of Vancouver, even more where rents are lower). It just got that much harder to convince owners to sell, assemble sites, and build rental. Build anything, really.
In a recent paper published by the C. D. Howe Institute, Benjamin Dachis recommends financing water/sewer infrastructure through usage fees rather than up-front development charges.
First, change upfront development charges on developers into per-usage fees to be paid by the ultimate homebuyer. Those buyers already end up paying higher costs due to these upfront charges to developers. Lower upfront charges will lower housing costs. This is most workable for water and wastewater charges. These are usually the largest single upfront charge that developers face. Charging the full cost of water-related capital and operations in a per-usage fee on services will also lead to less water wastage.
Andrew Sancton notes in a September 2021 report that by charging new homeowners up front, rather than issuing municipal bonds and paying them off from property tax revenue, we’re replacing public borrowing with riskier, higher-interest mortgage borrowing. What would be the impact on property tax of funding infrastructure through municipal bonds? An example from Ontario:
We have already seen that the highest development charges in Canada are in the suburbs around Toronto, with Halton Region having the highest charges of all [about $90,000 for a new single-detached house]. Combining development charge revenues from the Regional Municipality of Halton and its four constituent lower-tier municipalities in 2018 (Ontario, 2021), we find that the total amount raised was $258 million (excluding development charges from school boards, which, in 2020, added about $8,000 in charges for each new single-family house [Oakville, 2020b]). Total property tax revenue was $896 million (Ontario, 2021). If the $258 million were financed at 2.5 per cent over 20 years, the annual amortization payment would be $16.4 million, which translates into an average property tax increase of 1.8 per cent across the Region.
Finally, I understand that Metro Vancouver is already planning to reduce or waive DCCs for below-market rental housing. But in the wake of Covid and the giant surge in remote work (increasing demand for residential space), we need a lot more market housing, not just below-market housing. According to CMHC, BC needs to build one million additional homes over the next 10 years, about 2.5X the business-as-usual rate, in order to return to 2003-2004 levels of affordability. In the heyday of public housing in Canada, in the late 1970s and early 1980s, the average number of publicly funded units built across the entire country was only 16,000 per year. We face a generational challenge of an entirely different scale.
Metro Van CAO: “The DCCs will not change housing prices”
Jerry Dobrovolny explains his reasoning (starts around 40:00). His argument only works when there’s enough land lift remaining that projects can simply lower the price they pay to landowners (so that landowners are paying for the DCC increases). When there isn’t, projects have to wait for housing prices and rents to rise.
The DCCs will not change housing prices. And I know that may be controversial for some, but I will say that unequivocally to you all now. The DCCs will not change housing prices.
A house will sell for the market price. It will be the market price, regardless, period. It changes all the calculations below the market price, but nobody sells a house for something substantially different than market price.
In my conversations with UDI and the development industry, their biggest issue is time to absorb and react to the changes. Because what actually happens over time is, the land price changes. The cost of building a house or a unit is fixed, by a whole bunch of different commodity prices. The profit amount is set by a bunch of different expectations. The biggest variable in the whole equation is the land value. And the land value takes time to change, because somebody's bought it for a certain amount, and it doesn't change overnight. And so that's why the development industry really likes to see a progression and warning, because that allows the land value to adjust, based on what the costs are.
So the market price is what transactions are set at. And what we're doing here is signaling that over the next five-ish years, we're looking to recoup more of the costs through DCCs, through growth.