The C.D. Howe Institute has released a study that concludes that taxes and charges on new and existing homes are a key driver of the cost and supply of affordable homes for Canadians.
In “Gimme Shelter: How High Municipal Housing Charges and Taxes Decrease Housing Supply,” author Benjamin Dachis points to development charges, land transfer taxes, and murky density bonus payments as partial drivers of reduced supply and soaring house prices for would-be buyers.
He says that “over the past decade, housing costs have increased dramatically in Canada’s major cities and there is a persistent gap between the cost of building new homes and their market price”. The report reveals Vancouver’s housing costs are by far the highest above the cost of construction in Canada, resulting in an extra cost of $644,000 for the average new house. In other major cities – Abbotsford, Victoria, Kelowna, Regina, Calgary, Toronto, and Ottawa-Gatineau – homebuyers paid an average $230,000 extra on a new house because of limits on supply.
Dachis calls on cities and provinces to change their taxes and charges on housing to lower the cost of new housing and increase supply. His report proposes four key reforms.
1. Change development charges for water and wastewater from upfront payments for infrastructure to a direct user-pay system. Dachis says this will limit upfront charges on housing construction being passed on to buyers through higher purchase prices. “Removing water and wastewater charges would reduce single-detached home prices by tens of thousands of dollars in the Greater Toronto Area and could also spur large price reductions in BC cities”.
2. British Columbia should reform density bonus payments in the same way Ontario recently did. These transactions involve a municipality giving a developer bonus density beyond what is permitted by zoning laws in exchange for money or community amenities. “These kinds of payments should be more predictable and be less of a disincentive for growth”, say Dachis.
3. Eliminate or reduce land transfer taxes. “Land transfer taxes make up a significant portion of the expense of moving into a new home. These taxes reduce the buying power of homebuyers, resulting in a lower number of sales. Fewer transactions in the housing market reduces housing supply and affordability’, say Dachis.
4. Cities should rely on property taxes from housing for financing municipal government services, such as parks or fire services, and target tax reductions to all residents in need. “Governments should replace reductions or deferrals of property taxes with income-tested supports that all residents can receive, whether homeowners or renters, and can use toward their housing costs”, says Dachis.
The call for the elimination of land transfer taxes due to their regressive impact on both the homeowner and supply comes at a key time. The department of Finance and Finance Minister Chrystia Freeland have been musing about ways to unlock the savings of Canadians and ways to generate more revenue. Ideas have varied from reducing the rate of the GST to a short-term GST holiday (four to six months) for small businesses that would encourage consumer to help them ramp up and recover. Freeland will present a budget later this year that will lay out a plan for a post pandemic recovery.
