Home prices have skyrocketed in places such as Vancouver and Toronto in the past decade. These cities have some of the highest charges and most restrictive rules on construction. The evidence from around the world shows that government policies that limit supply and increase the cost of construction are among the key causes of higher prices. It is time governments take more steps to reduce these costs.
Homebuyers in Canadian cities face a multitude of taxes and charges that increase the cost of buying a home. Restrictions on housing supply and extra costs hinder the efficiency of the housing market. Recent research has found a persistent gap between the cost of building new homes and their market price in major Canadian cities. Vancouver sees an extra cost of $644,000 for the average new house because of supply limits. Across Canada’s largest and most restrictive cities (mostly in BC and Ontario), homebuyers paid an average $230,000 extra on top of the construction cost of a newly built house because of limits on supply. This higher cost on construction spills over to the broader resale market.
To lower the cost of new housing and increase the supply, cities and provinces should change their system of taxes and charges on housing by taking four steps.
First, change upfront development charges into per-usage fees that homebuyers would pay. Lower upfront charges will lower housing costs – and therefore prices. This approach is most workable for water and wastewater charges, which are usually the largest upfront charges 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.
Second, fix outdated density bonus systems. Currently, a developer is allowed to construct a building that is taller than zoning laws permit in exchange for paying additional fees to the city or providing community amenities. Sounds good, right? The downside is that there is great uncertainty surrounding these costs for developers because they are decided rather arbitrarily in city backrooms. Cities and provinces should make these fees more predictable so that developers can build with greater certainty about their costs, which in turn will help lower market costs.
Third, cities and provinces should scrap land transfer taxes. Land transfer taxes are perhaps the most costly tax a government can collect. They lower the number of homes available on the market because the tax puts a wedge between what buyers can afford and what sellers are willing to take, and so adding to the cost for buyers. Cities that currently have them should look to reduce or eliminate them and instead rely more on property taxes. Provinces that have them should do the same and instead finance government services with broad-based consumption taxes.
Finally, governments should make sure that property-tax reduction and deferral schemes do not lock people into their homes. Property taxes are akin to a user fee. We cannot usually charge for community parks or services such as police or the fire department. All residents that benefit from services should pay for them with property taxes. But many homeowners, seniors in particular, often do not have the income to pay these property taxes. So governments create programs to reduce property taxes.
But why do some who own a home and pay property taxes get such support, while renters get much less with their housing costs. Such programs are unfair. Supports that induce people to stay in their homes to keep the property tax break have the unintended consequence of keeping these homes off the market – and therefore fewer homes are available for those looking to buy. British Columbia has the most generous such program in Canada. It and other governments should replace reductions or deferrals of property taxes with income-tested supports that people can use for any kind of housing costs.
Benjamin Dachis is director of public affairs for the C.D. Howe Institute.