When people talk about the cost of a new home in Ontario, they usually focus on the price tag from the builder. Everyone understands that it costs money to build a home and most people realize that you also to have land to build upon, which pushes the costs up even more.
Many people don’t know that behind the scenes, there are a whole bunch of extra costs that make their way into that sale price number. One of the biggest is development charges and it’s time we talk about them – and why they’re causing housing affordability to get even worse in Toronto and the GTA.
So, what exactly are development charges?
Development charges (DCs) are fees that cities and towns in Ontario collect from developers when new homes or buildings are built. The idea is simple: new housing brings new people, and those people need roads, transit, water, fire and police services, and other infrastructure. Development charges are meant to cover those growth-related costs.
Good, make those greedy developers pay.
If you don’t see a problem with making developers pay for these growth-related costs, you’re not alone. While it has been a rough road recently, developers can make significant profits after all is said and done.
The challenge with DCs is that builders don’t absorb those fees—they pass them on. Developers often borrow money to pay the charges upfront, then recover the cost (plus interest) when they sell the homes. By the time you buy a newly built home, development charges have been baked right into the price.
In some Ontario cities, all the various municipal housing taxes (including DCs) can add $250,000 or more to the cost of a modest family home. That’s a huge factor in why new homes are so expensive compared to resale properties.
Here’s a breakdown of the typical costs that go into a new build property.
While construction costs and the price of the land itself make up about 75% of the cost, development charges and other taxes and fees can add up to 25% of the eventual purchase price. With the average price of a detached home in most parts of the GTA at over $1M, that’s hundreds of thousands of dollars. Crucially, it’s the sale price that is subject to HST, land transfer taxes and all sorts of other fees, which means that you’re effectively being taxed upon a tax.
At least we get something out of it.
Even if you’re OK with the idea that the fairest way to cover the services and infrastructure required for a new development is to charge the people who are directly benefiting from it, the reality around what is charged for – and spent upon – varies tremendously. There is provincial legislation that outlines the legal framework for when, what, and how development charges can be used (the Development Charges Act or DCA) but within that framework, there is a lot of variation.
Ontario municipalities are not legally required to use development charges, and only 216 of the 444 municipalities in the province (48.6%) do so. With about half of municipalities not charging DCs, you start to understand why it seems like some places have tons of new developments happening and others have none at all. The pro forma for a builder will always look a lot healthier – and appealing – if they can cut 15% to 25% of the costs incurred, and it typically means a lower end user price as developers pass on some of those savings.
Even if we look at just those towns and cities that choose to charge DCs, what is covered and what is charged varies tremendously.
It’s complicated – and sometimes unfair
A few things make development charges tricky so let’s go over them.
- They’re based on averages. A large detached home and a smaller detached home often pay the same fee, even though the bigger one might use more services.
- They vary by area. Some charges cover city-wide infrastructure, while others are specific to certain neighbourhoods.
- They’re political. Cities make assumptions about future growth and infrastructure needs when setting the fees. Small tweaks to those assumptions can raise or lower the costs dramatically.
Let’s say you’re comparing a new townhouse in Markham to a new townhouse in Toronto.
In Markham, you’ll see both municipal-wide charges (for big-picture services like major roads or water treatment) and area-specific charges (for things that only serve that neighbourhood).
In Toronto, which is a single-tier municipality, all those charges are rolled together.
The end result? Two similar-looking townhouses could have very different development charge costs built into the price—sometimes tens of thousands of dollars apart. That’s before the cost of land is factored into the list price!
Here’s the bottom line.
Development charges are a big reason why growth in Ontario doesn’t always feel like it’s paying for itself. Instead, new buyers often end up shouldering costs that benefit both new and existing residents.
If you want to do deeper dive into understanding development charges, the fine folks at the Missing Middle Initiative (out of Ottawa University) have written a fantastic primer the subject and you can read the PDF here.
If you’re considering buying property to build your dream home, or investing into the build of a multiplex income property, then we’d love to help you make it happen. It’s complicated, sometimes challenging, but ultimately it can be very rewarding. Get in touch with us to talk about next steps!
