Excessive development charges on the cost of new homes is making the recession worse, and remain a barrier to economic recovery and job creation, says a report commissioned by the Canadian Home Builders' Association (CHBA).

The report says development charges have created a "revenue trap" for municipalities, which see their tax collections declining along with new home sales. It's time that municipalities re-think how they will finance infrastructure, and use alternative methods such as debt financing, the property tax base and user fees, says the report.

The current reliance on development charges "clearly does not support the federal government's view (and the general consensus amongst economists and policy analysts) that investment in basic infrastructure is a key instrument in stimulating the economy out of recessionary times," says the report, which was written by Altus Group Economic Consulting.

It says that if the current recession has the same impact as previous downturns, housing starts in Canada could decline by 50,000 or more units in 2009. Given the contribution that the residential construction industry makes to the economy, "a decline of this magnitude would mean the loss of some 100,000 jobs from a variety of sectors across the Canadian economy and some $6.3 billion from the incomes of Canadian households," says the report. "Losses to the economy of this magnitude risk spurring further declines in consumer confidence, leading to a longer and deeper recession."

If a proposed harmonized federal and provincial tax in Ontario is approved, government-imposed charges on new housing could get even worse there, as PJ Wade recently reported ( Electrical Service Boxes, System Grounding, Distribution Panels System, Branch Circuit Wiring (Distribution Wiring) ) in Real Estate-Realtor Times.

Canada Mortgage and Housing Corp. has been studying the impact of government-imposed charges on new housing since 1996. The most recent update was issued earlier this year, but covers charges imposed in 2006. It found that charges paid on a new single-detached home averaged $39,911 in the 32 municipalities studied across Canada. Charges in Toronto averaged $101,526, a reflection of the high cost of new homes in that city.

In percentage terms, charges ranged from 18 per cent of the cost of a new home in the Toronto suburb of Vaughan, to less than five per cent in Yellowknife, Northwest Territories. The median was 13.4 per cent on single-detached homes.

The Altus Group report says that infrastructure costs should be borne by an entire community and should be spread out over time to match the productive life of the infrastructure. "Asking a narrow segment of the community (the new home buyer) to bear most or all of these costs and do to so 'up front', violate both of these principles," says the report. "Asking the new home buyer to pay for infrastructure benefiting the community as a whole is effectively asking the new home buyer to subsidize existing households. This approach is inherently inequitable or unfair. It also reduces affordability for homebuyers and depresses housing demand, especially during a downturn in the economy."

The report says that because buyers are financing infrastructure, "it effectively means that a portion of the public capital stock in Canada is becoming privately financed through the household mortgage market. Effectively, households are financing up to $5.1 billion of public infrastructure each year though personal mortgages." This means that potential buyers must borrow more money, which reduces affordability and keeps some buyers out of the market, it says. It also means that households are financing the debt with "higher interest rates for less favourable terms than the municipality would be able to obtain."

The report says municipalities often warn higher levels of government that they need help coping with urban infrastructure, but that "municipalities do have a broader array of options than they typically acknowledge."

It points to the recent federal government budget, which includes $7.8 billion for "action to stimulate housing construction". The report says this plan includes up to $2 billion in direct, low-cost loans to municipalities to finance improvements to housing related infrastructure. "Municipalities have the ability to raise new funds through borrowing, even though most do not make effective use of this tool," says the report.

"Municipalities that receive federal or provincial 'stimulus' funding have the opportunity to work with partners such as residential developers and other orders of government to ensure that new stimulus investments support economic growth and long-term local prosperity," it says. These municipalities "could use the opportunity to ensure that their broad array of basic urban infrastructure expenditures are funded from appropriate tax sources. Since many cities rely too heavily on the private sector to finance their basic urban infrastructure, this is an opportunity to address this issue."

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