CMHC warns of a 'very significant barrier' to fixing the housing crisis

OTTAWA — Canada could take a big swipe out of its national housing crisis if municipal governments would reduce or eliminate the hefty charges attached to building new homes, according to a new report from the federal housing agency.

The Canada Mortgage and Housing Corporation (CMHC) said the number of viable building projects in some municipalities would increase by as much as 14 per cent if those local governments would scale back what is known in the industry as development charges. Those additional costs, which have become a contentious issue in Canada as the gap between supply and demand of new homes continues to grow, are for new infrastructure such as sewers, electrical and water services.

Using a new model to analyze the correlation between development charges and new builds, the CMHC found that small cuts of less than 20 per cent to development charges would have a modest effect on construction, boosting project viability by less than two per cent in most cases. But cutting the charges by between 50 and 60 per cent would trigger a building increase of about five per cent in, for example, Toronto and Vancouver, the country’s two most expensive housing markets, while eliminating development fees entirely would increase project viability by about 10 per cent in both cities.

In Burnaby, a fast-growing city just east of Vancouver, eliminating development charges would boost housing construction by 13.8 per cent, the model concluded.

“They’re a very significant barrier,” said Mathieu Laberge, CMHC’s chief economist.

The new report, based on data from 40 Canadian municipalities, is one of the first to try to make a statistical link between development charges and the construction of new homes. Canada has been battling a housing crisis for many years that has been caused by the supply of new homes not keeping pace with increases in demand, fueLled largely by population increases, migration to larger centres and immigration.

That gap between supply and demand has led to massive increases in housing prices, leaving many Canadians “house poor,” remaining in apartments or other homes that don’t meet their needs, or even homeless.

Carolyn Whitzman, an adjunct professor at the University of Toronto’s School of Cities, said cutting development charges would help cut costs and improve affordability, but added that the effects would likely be marginal without other changes.

Developers say they’d build more if land were made available and overall costs were lower. According to one recent study, the biggest cost in the price of a new home (about 36 per cent) is taxation, making the three levels of government the top beneficiary of the construction of a new home. About 70 per cent of that typical tax bill goes to development charges, land-transfer taxes, and HST. The other 30 per cent is for the indirect income and corporate taxes paid throughout the supply chain, although it’s all ultimately passed on to buyers.

Municipalities, which don’t have the authority to collect through through income or sales tax, rely largely on development charges and property taxes for their revenue.

Housing industry officials have said there’s been growing awareness in recent months of the link between development charges — and other rising costs — and the lack of building.

Whitzman said development charges, while important, are only one hurdle in the housing crisis. Other challenges include the need to reduce unnecessary regulations and other red tape, increase the use of AI and other technology in an industry dominated by small companies, and boost efficiency through greater scale within the sector. The costs of land, materials, and workers have also gone up.

“It’s hard to find construction workers if there are no houses affordable for construction workers,” Whitzman said.

Governments at all three levels, meanwhile, have in recent years also been paying more attention to the lack of homes. During last year’s federal election campaign, the Liberals promised that 500,000 homes would be built annually over the next 10 years, triggering a level of residential construction not seen since the years following the Second World War.

Prime Minister Mark Carney has since promised a new Crown corporation called Build Canada Homes to provide about $25 billion in public financing for prefab and “affordable” housing, plus $10 billion in low-rate capital.

The federal government also launched the Build Communities Strong Fund, a 10-year, $51-billion program to help support the construction of water, sewage, transit and road infrastructure. Carney also promised to eliminate the GST on new homes that sell for less than $1 million to first-time buyers.

Economists say an increase in housing construction is important beyond filling a critical social need. It means downward pressure on housing prices, economic activity and jobs through construction and the related purchases of appliances, paint and other items that new homeowners typically make. New buildings also mean a windfall for government coffers at all three levels.

Laberge said an increase in new home construction of course means a greater take from property taxes for any municipality that cuts development charges, but it’s not clear how much.

Despite all the new policies and programs, housing construction has yet to take off. Less than a year ago, the CMHC admitted that the crisis might get worse because housing starts were expected to fall in 2025, 2026 and 2027, leaving production at less than half the 480,000 that the CMHC says Canada needs to add each year over the next decade.

Analysts say it takes years to build homes and that there’s sometimes a lag of as much as a dozen years from when a plot of land has been identified for a new home, subdivision or apartment building to when people are able to move in. It can take even longer when roads and key services — sewer, water, electricity — need to be added.

National Post

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