Don't Buy the Developer Line About DCs

Freezing or cutting development charges risks being little more than a taxpayer subsidy to builders.

Not Mark Sutcliffe’s fault!

There has been a lot of misinformation this past week about the new proposed Development Charges (DCs) in the City of Ottawa.

It started with a Twitter thread by Mike Moffat over the weekend. Lots of the pro-developer lobby and other YIMBYs jumped in with their outrage.

Yes, a Development Charges Background Study for the City has indicated that DCs should rise by about $10K per new home. Yes, that makes homes more expensive.

But, no, contrary to the Twitter discussions, this is not Mark Sutcliffe jacking up taxes on housing unnecessarily. And, no, this is not Sutcliffe trying to deliberately skip out on his promised housing targets.

DC background studies are an objective third-party technical assessment of what growth in Ottawa will cost the city over the next decade, based on official city plans. There is no political spin or playing with assumptions in a DC study to engineer a preferred result.

How Development Charges are assessed

When a new home is built, the City charges the builder Development Charges. Development Charges are a fee that pay for the growth associated with new homes. Growth pays for growth is the basic concept of DCs.

The amount that a city can charge for a DC is set in the provincial Development Charges Act. Cities are required by law to conduct a DC Background Study to determine the amount of those charges.

This is a pretty inflexible calculation, based on eligible activities set out in regulation. The calculation needs to be defensible in a court of law, as a builder could sue if they believe they have been charged too much for development costs.

DCs pay for the new infrastructure (roads, water, sewage, stormwater management, police, fire, transit, recreation facilities, libraries and ambulances) required for growth projected over the next 10 years.

DCs are calculated based on Ottawa’s Official Plan, Long Range Financial Plan, Transportation and Infrastructure Master Plans, and historical trends in the city over the past 15 years.

The DC study doesn’t get to massage its assumptions in order to generate a result that the client wants. The DC assessment is based on an objective, transparent and defensible formula.

The Ford government had recently revised the law, so that cities are restricted to charging 80% of what growth costs in 2024, only scaling up to 100% of the costs of growth by 2028.

For reference, DCs currently amount to about $40K for a new single family home inside the greenbelt, and $50K per new single family home outside the greenbelt.

With the Ford 80% cap, DCs in Ottawa are essentially flat in 2024. That $10K increase doesn't come into effect until 2028.

And as an aside, the 2021 analysis, as reported by CBC, that people living inside the greenbelt are subsidizing urban sprawl, is still valid:

“it now costs the City of Ottawa $465 per person each year to serve new low-density homes built on undeveloped land, over and above what it receives from property taxes and water bills. That's up $56 from eight years ago.

On the other hand, high-density infill development, such as apartment buildings, pays for itself and leaves the city with an extra $606 per capita each year, a financial benefit that has grown by $151.”

What the pro-developer crowd get wrong

Higher building fees means higher prices. Correct.

But growth does not come for free. Someone has to pay for that new infrastructure and services.

Either DCs are used, and growth pays for growth.

Or increased property taxes pay for that growth.

DCs bring in about $200 million in revenue per year for the city. The provincially-mandated 20% cut in DCs in 2024 means a $40 million hole in City finances this year.

The pro-developer and YIMBY advocates outraged at the DC analysis have no answer for how we should make up the funding gap.

Lower prices to buyers or a handout to developers?

The other thing that these advocates get wrong is what happens when DCs are lowered or even removed. Let’s hypothetically imagine that the $50K DC on a new suburban single family home was fully eliminated, for a few years in order to stimulate housing.

The average price of a house in Ottawa is $700K. Would the house price drop to $650K, or would the house price stay close to $700K with the developer pocketing most of the savings?

You probably have your own opinions on that question.

My assessment is that it comes down to market conditions, and market conditions more often favour the developer over the buyer.

In a hot housing market, prices are influenced more by buyers’ willingness to pay than by the marginal cost of the home. Likewise, in a market with limited competition, sellers have greater pricing power than buyers. It is only in a sharp down market, in which builders find themselves sitting unexpectedly on excess inventory, that we would expect to see cost savings fully passed on to sellers.

Crunch time

The Ottawa city planning committee considers this study today (7 May) and then it is sent to full City Council for approval on May 15.

I expect Council to approve the study as is. That would be a vote for the business as usual approach. Which in this case, is the right thing to do. It would protect against property tax increases and have growth pay for growth.

There is a possibility that Council could give in to the pro-developer lobby and freeze or lower development charges — beyond the cuts that the provincial government has already mandated. That would be a big win for the bottom line of developers, at the expense of taxpayers.

Remember, when DCs are cut, someone has to pay for growth.

And that someone is you, Ottawa taxpayer.

By arguing that DCs should be cut or not increased, housing industry cheerleaders are essentially asking for a taxpayer-funded handout to developers.

UPDATE 23/08

A reader brought to my attention that there was a misinterpretation in this analysis. It comes down to whether Development Charges pay for the first 10 years of infrastructure capital costs, or both the infrastructure capital and operating costs.

I checked with the experts and the first of those two interpretations is correct. The revision is not material to the basic argument of this note, but I wanted to be transparent that there have been edits to this note to incorporate the revised understanding of Development Charges.