Solving the Housing Affordability Crisis With This One Cool Trick

The Audit has a growing library of posts addressing the housing crisis. I’m particularly proud of my Solving Canada’s Housing Crisis because of how it presents a broad range of practical approaches that have been proposed and attempted across many countries and economies. But the truth is that the affordability end of the problem could be easily and quickly solved right here at home without the need for clever and expensive innovation.

As you’ll soon see, local and provincial governments - if they were so inspired - could drop the purchase price on new homes by 20 percent. Before breakfast.

It’s all about taxes and fees. This post will focus mostly on taxes and fees as they apply to new construction of relatively expensive detached homes. But the basic ideas will apply to all homes - and will also impact rentals.

Here are some estimated numbers to chew on. Scenarios based on varying permutations and combinations will produce different results, but I think this example will be a good illustration.

Let’s say that a developer purchases a single residential plot in Toronto for $1.4 million. In mature midtown neighborhoods, that figure is hardly uncommon. The plan is to build an attractive single family home and then sell it on the retail market.

Here are some estimates of the costs our developer will currently face:

• Construction costs on a 2,000 sq. ft. home (@ $350/sq. ft.): $700,000

• Land transfer taxes on the initial land purchase: $35,000

• Development fees: $100,000

• Permits and zoning/site approvals: $40,000

Total direct development costs would therefore come to $875,000. Of course, that’s besides the $1.4 million purchase price for the land which would bring our new running total to $2,275,000.

We’ll also need to account for the costs of regulatory delays. Waiting for permits, approvals, and environmental assessments can easily add a full year to the project. Since nothing can begin until the developer has legal title to the property, he’ll likely be paying interest for a mortgage representing 80 percent of the purchase price (i.e., $1,120,000). Even assuming a reasonable rate, that’ll add another $60,000 in carrying charges. Which will bring us to $2,335,000.

And don’t forget lawyers and consultants. They also have families to feed! Professional guidance for navigating through the permit and assessment system can easily cost a developer another $25,000.

That’s not an exhaustive list, by the way. To keep things simple, I left out Toronto’s Parkland Dedication Fee which, for residential developments, can range from 5 to 20 percent of the land value. And the Education Development Charges imposed by school boards was also ignored.

So assuming everything goes smoothly - something that’s far from given - that’ll give us a total development cost of $2,360,000. To ensure compensation for the time, work, investments, and considerable risks involved, our developer is unlikely to want to sell the home for less than $2,700,000.

But various governments are still holding their hands out. When the buyers sign an agreement of purchase, they’ll be on the hook for land transfer taxes and - since it’s a new house - HST. Ontario and Toronto will want about four percent ($108,000) for the transfer (even though they both just cashed in on the very same transfer tax for the very same land at the start of the process). And, even taking into account both the federal and Ontario rebates, getting the keys to the front door will require handing over another $327,000 for HST.

Here’s how development fee schedules currently look in Toronto:

And here’s a breakdown of the land transfer taxes assessed against anyone buying land: