Ontario Cities are Sitting on $10 Billion in Cash
Development charges aren't murdering the housing market, instead it's involuntary manslaughter
In this episode, conservative pundit Sabrina Maddeaux and economist Mike Moffatt discuss the complexities of development charges in Ontario. They highlight how municipalities have accumulated over $10 billion in unspent infrastructure funds. They explore the implications of these taxes on housing affordability, the political dynamics influencing their increase, and the growing public awareness of the housing crisis.
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Below is an AI-generated transcript of the Missing Middle podcast which has been lightly edited.
Sabrina Maddeaux: One of the very early episodes of this podcast was about development charges, but for those who don't know what they are or what they're for, can you outline that for us, Mike?
Mike Moffatt: Yeah, absolutely. Regular viewers and listeners know that this is absolutely just about my favorite topic these days. And we have a post on the Substack called Development Charges, 10 Things You Need to Know About Housing Taxes in Ontario. We'll post a link to that article in the show notes. But the short answer here is that development charges are just one of an alphabet soup of housing taxes that Ontario municipalities impose on new construction. It can include things like community benefit charges and parkland dedication fees. So there's a variety of different taxes. That's just one of them. But the core theory or idea behind development charges is that new homes need new infrastructure. So as the saying goes, growth should pay for growth. Unfortunately, that's not what's been happening at all. Instead, municipal governments have been spending the money on things that have nothing to do with growth or in many cases, just not spending that development charge revenue at all.
Sabrina Maddeaux: So, I wanted to ask about that because it's pretty mind-boggling. In the piece you mentioned that municipal governments have over 10 billion dollars in unspent infrastructure dollars. What's been going on there?
Mike Moffatt: Yeah, absolutely. And there's a few different things. One is that there's just been more housing built than plans. So if you have more people paying those taxes, you're going to get more revenue than you expect, but development charges are also a series of charges. So let's say a city has a $100,000 development charge for a single detached home. That's actually a series of things where it's like $30,000 in charges for roads, $20,000 for sewers, maybe like $500 for libraries and so on.
But what's been happening is cities have been collecting that money faster than they can spend it. And in many cases, collecting money for so-called phantom projects - projects that are on paper, but they're essentially the infrastructure version of vaporware, where a city's considering doing this thing, they've costed it out, but they don't actually ever build it. And the money just sits there in an account.
Sabrina Maddeaux: Wow, again, that's pretty crazy to me. So they don't have to spend the money on actual infrastructure because I feel like Toronto, which is where I live, is constantly experiencing road closures for repairs and sewer upgrades, that sort of thing. Like, isn't that where they're spending it?
Mike Moffatt: Yeah, so sort of. So I agree that as someone who goes to Toronto quite often, that there is a real need for infrastructure there. And we should be clear that the cities can't just spend this money however they want. If they collect it for roads, it has to be spent on roads. If they collect it for libraries, it has to be spent on libraries. Now they do have some ability to borrow against that unspent road money, but let's not go down that rabbit hole.
So, you I want to make it clear that cities aren't collecting money for one purpose and then spending it for a different one. But instead, the issue is that there's no real need for them to spend the money in any kind of timely fashion, right? So they can keep collecting all this road money and sure they can't spend the road money on libraries, but they don't necessarily have to spend it at all anytime soon. So those unspent reserves can just keep going up and up and up. And meanwhile, cities are collecting interest on those reserves.
Sabrina Maddeaux: This does sound pretty shady, though. Are cities allowed to do this?
Mike Moffatt: Yeah, absolutely. And I want to be clear here that I'm not accusing any municipality of rule breaking or anything like that. So if you're a planner working for a city, don't send me an angry email about that. I'm not suggesting you're breaking any rules. But what I am suggesting is that there's flexibility built into the system for any variety of reasons, right?
So let's say you're going to build a road and you can't get some material or there's a strike or something. You know, you want to give cities a certain amount of flexibility, but what's been happening is that there's just so much flexibility built into the system. It allows those unspent reserves to accumulate again, to the point at which we have, you know, massive infrastructure needs across a province. And yet municipalities are sitting on $10 billion of unspent reserves. When just a few years ago, it was in the two to $3 billion range. So this has escalated by billions a year of just unspent money just rotting in a bank account.
Sabrina Maddeaux: It sounds like something that might only continue to escalate if not addressed. Now, anyone who has read your social media posts in the last year knows that you're just a little bit obsessed with development charges. Why do you think it's important for people to understand development charges? Because for many, it's frankly not a very interesting sounding topic.
Mike Moffatt: Yeah, absolutely. And that's a big challenge we have of taking something that's dry and boring. You know, there are very few of us who get really excited by municipal finance. And I know many are listeners, but we have to admit we're different than the rest of the population. But why you should care is that they are a primary reason why young people can't afford homes in Ontario. Full stop.
I want to be clear here, I'm not suggesting they're the only reason for our housing crisis. Of course that's not the case but they are an important contributor. That alphabet soup of taxes that I mentioned can add over $200,000 or more to the cost of a home. Part of that is the taxes themselves, but there's a couple of other things that go on here.
First, those taxes are paid early in the process, often when a builder gets a building permit. So before any kind of shovels go into the ground, that builder or developer then has to finance that tax because they don't get paid until that condo is finished, that home is finished. So they have to carry these expenses often for years and pay substantial interest on them. And all of those development charges, these other charges and those interest costs, all of that gets embedded into the final price, the same way that, you know, drywall does or an hour of an electrician's time. All of those costs get embedded into the final price. And then buyers get to pay GST, PST and land transfer tax on top of those municipal taxes. It's a tax on tax. It makes home building very expensive. It pushes up the price. And because it pushes up the price, it reduces the number of homes that get built.
Now we tax cigarettes because we want to reduce smoking. We tax pollution because we want to, well, reduce pollution. Well, what happens is, if you tax housing construction you get less housing construction. That's entirely how taxes work.
And I got to tell you, this is where we're going to get angry emails, I'm just warning you right now. The planners will say: Well, that's not fair. That's not a fair comparison for you to make because we're not using development charges with the intent of lowering housing construction. You know, they're there to pay for infrastructure.
But I’ve got to tell these folks: the economy doesn't care about your policy intent. At all. What the economy cares about or what ultimately matters is how those taxes change options and incentives for businesses, for workers, and for home buyers.
So in short, if these folks want to argue that, well, development charges aren't murdering the housing market, instead it's just involuntary manslaughter. They can have at it, but I don't see that as being helpful.
Sabrina Maddeaux: You’re still going to housing prison though, so.
Mike Moffatt: You're still going to housing prison and you know, at the end of the day you have a dead market. The economy doesn't care about your policy intent. So this is a very long answer, but why you should care is because these development charges and these alphabet soup of taxes are driving up home prices and making it so an entire generation of young people can't afford a home.
Sabrina Maddeaux: Now you had an exchange a few weeks ago with a long-time City of Toronto Councillor because he said, and I quote: “Over a decade or two, our DCs are rising at not much more than the rate of inflation.” Why did you take issue with that?
Mike Moffatt: You're going to really wind me up today. Okay. So why I take issue with it is [because] it's laughably wrong. You know, over the last decade, and we've shown the math on our substack development charges in the city of Toronto for ownership, housing, so non rentals, they've been going up 17 % a year.
Sabrina Maddeaux: Wow.
Mike Moffatt: That's a lot, right?
And if we take a longer view they've gone up over 4,000% total over the last 25 years. So when this politician says, they've gone up at the rate of inflation, I gotta ask: Like, whose inflation is he talking about? Yugoslavia's? No, Canadian inflation has been for the most part at 2% for the last 25 years outside of that kind of blip during the pandemic.
Sabrina Maddeaux: If we've been seeing a 4,000% in regular inflation increase I think we'd have a revolution on our hands, but apparently that's okay for development charges.
Mike Moffatt: Well, absolutely. And I'm glad you bring that up, right? Because we'll often hear about the issues of when food prices go up that much, or property taxes go up that much, or, you know, go up five, six, seven percent - how that causes hardship for people. Then cities have no problem increasing development charges 17% year after year, which through a compound interest, effectively gets you 4,000 % over a generation. They have no problem doing that. So there's this huge disconnect.
So I got really frustrated with this counselor because either he has no idea what's going on in his own city or he's actively misleading people. Either way, it's not a good look.
Sabrina Maddeaux: Okay, so this raises an obvious question. Why would the City of Toronto increase development charges that much, particularly if they aren't even spending the money?
Mike Moffatt: Yeah, one of the big challenges about being an economist is that it's hard for us to directly observe motives, right? We can infer motives based on actions, but we can't directly observe them. But what we can say is, well, there are a number of potential reasons why a city might want to do this - might want to have sky high development charge money and not spend it.
First thing it does is it makes their books look better because they have all of this money, it's helpful for their bond ratings. And a lot of municipal politicians and municipal governments like to brag about that thing. So it is helpful to be like: Hey, we've got this huge pot of money over here. It's going to make their books look really good.
Second. And again, although they can't spend road money on something else, there is some ability to borrow against that money. So it's nice to have that cushion because even if you're not going to spend that money, it's still helpful for you.
And I know I said earlier that debating whether or not high development charges are either intentionally killing development or just accidentally killing development - and I said that that debate was kind of pointless. But I also have to say that I'm pretty sure that there have been cases where cities have raised development charges in order to discourage development and keep NIMBYs happy. I'm not accusing any particular government of doing this. So don't send me an angry email. But I'm saying I am certain some government somewhere in Ontario has done this before.
I'm going to ask you a question because I've really been ranting here. But you know, I'm a 47-year-old housing nerd and I have a much different relationship with this stuff than normal people do. So, do you think Ontarians in their 20s and 30s understand any of this stuff and the role that municipal governments are playing in making housing unattainable?
Sabrina Maddeaux: I'd say, not really. On the development charge issue while it's so massive, just it's such, like you said, a nuanced, complex, not very sexy issue that it's still very under the radar outside of really committed housing or policy wonk circles. That said, it being talked about by economists like yourself, or whether it's housing advocates or influencers on social media and in the news, is helping. It's one of those issues that I still see as bubbling below the surface for the general population. But like many other issues over the last few years, if you talk about them enough, and if you message the right way, hopefully we can get there - where more pressure is exerted and people understand the impacts this is having on their ability to purchase a home and the overall housing market.
But I will say that more people are waking up, not necessarily to development charges in particular, but the role that municipal governments are playing in the housing crisis. I think the awareness there is more around zoning and different types of restrictions, but this all comes as a package - where you have these gatekeepers who are really imposing unnecessary hurdles to affordability.
Mike Moffatt: Yeah, I agree. I think this is growing in general awareness. And I am always heartened when I see younger people on social media, or groups like More Neighbors, highlighting this issue and, you know, letting people know how much of a problem it is.
You're not just younger than I am, but you're also more politically conservative. So I've asked you the youth question. Now I feel like I have to ask you the conservative question.
One thing I've always found strange as kind of an aging, center-left-voter, is how willing some conservative - small-c conservative - politicians are to increase development charges. You know, I kind of get it when the left does it. I always feel a little bit more off-brand when it comes from the right. So, I’ll give you an example.
Here in the City of Ottawa, our conservative leaning mayor has increased development charges four separate times in the last 12 months, causing a total increase of about 35%. So, I don't wanna ask you specifically about the Mayor of Ottawa, but the more general phenomenon of many small-c conservative mayors and counselors being willing to hike taxes so high when it feels kind of off-brand.
Sabrina Maddeaux: I think you tapped into something there that I've been talking about for a long time, which is the general failure of politicians on either side of the aisle, no matter what party you pledge allegiance to, failing on the housing front. And I think there's two factors there. One, our politicians still tend to be of older generations who are happy homeowners or investors, and they just don't personally get the issue or the urgency of it. And then the second thing is, politicians - again, no matter what stripe you are - respond to voters and the loudest voters. And those voters are often homeowners who show up to meetings in the middle of the afternoon because they're retired and they have the time. So they're not really creating policy, they're not incentivized to create policy for voters they don't yet serve, who could be moving into their jurisdictions. And that's a big problem. So when you look at things like development charges versus property taxes, I mean, they're always going to side, unfortunately, [with] the existing homeowners and constituents versus the potential ones. Unless we find different ways of exerting public pressure or those existing homeowners start to see the role, or impacts, of not having affordable housing in their communities, and they start to demand change as well.
But I think we've talked a lot about the problem here. So now that hopefully everyone understands it and is suitably worked up about it, as they should be, how, Mike, would you like people to respond to this depressing information?
Mike Moffatt: Well, I think there is a pathway to change here and we've seen it - we saw it last year. Burlington reduced development charges. The City of Vaughan reduced them substantially. And a lot of that came from public pressure. You know, folks, you know, writing op-eds, posting on social media, that kind of thing. The City of Vaughan had the highest development charges of anywhere in Canada. I know that was a point of embarrassment to some folks on council and helped…drive change. It shows that cities can change. And Mississauga has recently announced a major drop in development charges of 50% across the board with some larger drops for particular types of housing. So change is possible here, but it's all that kind of public pressure where you get younger people and groups going on social media, asking tough questions, going on talk radio, basically saying: Hey, these taxes are too high! They've priced me out of ever owning a home! We need to do something about it! And change is possible when you see these three communities in the 905 who have all reduced their development charges. If they can do it, why can't we?
Sabrina Maddeaux: Yeah, and kudos to those mayors and councils who have moved to make change, but there's so much more to come. So like you said, don't just get angry. Let's keep up that pressure campaign.
Thank you so much for watching and listening and to our wonderful producer, Meredith Martin.
Mike Moffatt: If you have any thoughts or questions about development charges or tweeting at local mayors, please send us an email at [email protected]
Sabrina Maddeaux: And we'll see you next time.
Some additional reading that informed the episode:
Are Development Charges Fair to Millennials and Gen Z?
Development Charges: 10 Things You Need to Know About Housing Taxes in Ontario
Response from the CBC on my Complaints to the Ombudsman
This podcast is funded by the Neptis Foundation and is brought to you by the Missing Middle Initiative - a think tank housed in the Department of the Environment at the University of Ottawa
