It’s a familiar scene for any suburbanite in Canada: construction crews laying road beds and bringing in the water, sewer and other utility infrastructure required to connect and service the new homes that will soon spring up.
Bringing new residential properties onto the city grid isn’t cheap. In fact, the City of Calgary made headlines recently with its desire to offload the costs onto homebuilders. In that city, the local tax base is covering a cost of $4,800 per unit, on average, which, based on the pace of new construction, adds up to $33 million per year. Calgary Mayor Naheed Nenshi wants to end what he calls a “sprawl subsidy.” Developers assert it will impact their ability to provide affordable housing and meet market demand.
Several years ago, I spoke with the then mayor of the City of Hamilton, who said the best thing the city ever could have done was simply to stop issuing building permits — the marginal cost of providing municipal services for each new house exceeded its marginal tax revenue.
Hamilton, incidentally, has had its own share of grief when it comes to suburban growth. In 2007, an investigative report found that a third of new homes had begun construction before a permit was issued. In some cases, new owners had occupied their homes before all the required inspections had taken place. All of this is in violation of Ontario’s Building Code. City officials had turned a blind eye to many of these violations at the insistence of builders eager to aggressively market themselves to homebuyers with ambitious closing dates.
Hamilton continues to struggle with balancing the cost of new growth with the resulting tax revenue. In July, the city announced it would issue $1.5 million in refunds to residents and homebuilders after settling a dispute over development charges with the residential construction industry that went to the Ontario Municipal Board. But the money to cover present and future city infrastructure costs must come from somewhere. In this instance, it’s the industrial and commercial sector, which will see its share of those costs rise by three percentage points, even as the residential sector enjoys a three-percentage point decrease.
Shooting ourselves in the foot
The flaw in this thinking is that there is only one taxpayer – us. Corporations employ us, are owned by us, and if they make profits, pay them to us. Shifting tax burdens to corporations limits their ability to pay salaries and dividends, so making corporate operating costs higher at some point becomes a case of shooting ourselves in the foot.
Low residential property taxes, particularly if they are lower than the cost of extending municipal services to new housing, may be politically attractive but in the long term lead to municipal financial failure – Detroit being an outstanding example. The buck only can be passed so far before the true, underlying issue must be addressed in some sort of long-term, sustainable fashion.
I’ve written before about the challenges major urban areas across Canada face with congestion and gridlock as a result of commuters living farther from their places of work. I wrote that increased travel distance increases the cost to everyone, in terms of fuel consumption, maintaining and expanding road infrastructure, and extending transit systems.
But there are of course the additional costs related to having to extend water and sewer mains, and other utilities to low-density suburbs far from the city core. Here in Ottawa, we see this in the extreme, thanks to amalgamation and that broad swath of greenery we call the Greenbelt.
I wrote in that previous article that one solution to the transportation challenge is an urban planning strategy to create a city made up of a large number of villages, in which home and work is in close proximity. In this model, where housing and employment are integrated, the total size of the city doesn’t matter.
Perhaps in this way we can return to the time when there was “a job at the end of every street.” Cities must do something different. They can’t, without full cost recovery in terms of development charges and property taxes, afford to allow unlimited suburban growth.
Densification and infill projects are part of the answer. It is always more cost-effective to build where infrastructure already exists. But neither am I a fan of massive condo towers that fail to fit into, and often times destroy, the flavour and character of established neighbourhoods. Balanced growth must be the plan for a future in which there will likely be a small number of large Canadian cities, married up with the certainty that everything has to be paid for, and it’s only us who can foot the bill.
To discuss this or any other valuation topic in the context of your property, please contact me at [email protected]. I am also interested in your feedback and suggestions for future articles.