What's the problem?

We know market forces have played a big part in the increasing cost of housing in Alberta. This has had a large impact on housing affordability here and new home buyers are affected significantly.

Development cost charges are the hidden portion of the increase in housing costs. These are the charges to developers by every municipality to cover costs when new houses and subdivisions are built.

These costs include items like roads and sidewalks, water and sewer to electric and gas infrastructure. Other types of infrastructure in the community could include community recreation centers and parks.

 

The question is, when a new home is being built, what should a city be charging a developer when building a new house?

We would argue, and it makes sense, that only the charges directly related to building a new house, whether on its own or as part of a subdivision, should be charged to the developer.

 

Who pays?

These costs will, of course, be passed on to the new home buyer. But, to keep housing affordable, these costs should be kept to a minimum. By doing so, housing is made more affordable, particularly for new home buyers who are often stretched financially when purchasing their first home.

Looking at the chart below you can see that municipal development cost charges are a large portion of a new home’s cost. These are the 2006 figures, and 2007 figures are substantially higher.

The future looks bleak, with even larger increases in development cost charges forecast in coming years.

Municipal Charges 2006	Grande Prairie	Edmonton	Red Deer	Calgary	Lethbridge
City levies, taxes, charges	$10,431	$19,759	$13,475	$11,736	$9,848
GST & other govt chg.	$11,777	$10,782	$12,945	$11,968	$13,889
Total	$22,208	$30,541	$26,420	$23,704	$23,737

 

Why are development costs increasing?

Alberta’s booming economy and the resulting inflation has accounted for part of the increase in development costs. Increased labour and materials costs make it more expensive to develop the infrastructure needed for new houses.

That’s only part of the problem though. The other part of the problem is with the province and cities.

You may have heard of the “infrastructure deficit.” What it really means is that the province and cities have not adequately invested in infrastructure for decades. The result? City infrastructure is crumbling and city councils are scrambling to figure out how to fund the reconstruction of this aging infrastructure.

 

In an attempt to rectify this deficit, cities have focused on new homes. New homes and subdivisions require new infrastructure. City councils have taken to levying additional charges on developers to account for future developments and to make up for the infrastructure deficit. These additional costs are passed on to the buyers of new homes. 

 

Charged twice

These additional charges, for future developments, are what are known as “double dipping” For example, a developer might be charged for a portion of a road unrelated to the new home being built, and later on another builder might be charged for that same portion of road.

How many times does it have to be charged for and what is happening to the excess funds generated by these cities?

New home buyers also should not be responsible for making up the infrastructure deficit. The province and cities have underfunded and not invested in upgrading and maintaining their public infrastructure, but all taxpayers should be responsible for this, not just buyers of new homes. 

 

Consequences

The result of the double dipping and charging for unrelated infrastructure by cities is that new houses become more expensive and less affordable for new home buyers. First time buyers will be hit especially hard by growing development cost charges.

Developers may decide to pull the plug on new developments where city charges are excessive. Developers might also decide to focus on more expensive housing rather than less expensive housing geared to first time buyers because margins are smaller.

Problems during building could mean a developer might lose money on a lower priced house, so development cost charges could function as a disincentive to building those homes.

Without affordable homes for new home buyers, those buyers might look to other provinces for their houses. This province needs more workers and needs them to stay.

What will help keep them here will be affordable new housing, and to do that, we need more housing and lower development cost charges.

 
So what’s the solution to the problem?