Real estate leaders have unified around a battle cry: reduce development charges to build more homes.
As each month passes, the call to cut these costs gains momentum as preconstruction sales nosedive and construction starts remain well below target.
Over the past 10 years, the cost to build new homes has shot up in Toronto. Materials, labour, land values, commissions and interest rates have all seen significant increases, but the biggest jump has been with development charges — fees paid to a municipality to fund local infrastructure when a building is constructed or expanded.
And developers no longer want to foot the entire bill.
“The current cost-to-build crisis for new homes and condominiums in the GTA is a result of significant cost escalations across almost every aspect of projects,” said David Wilkes, CEO of the Building Industry and Land Development Association (BILD).
“The most significant cost escalations have come from the extremely rapid increase of municipal development charges and other municipal fees, and the amount of HST revenue collected by governments on new homes. These have increased by almost 240 per cent in a decade, eroding affordability and the financial viability of future housing projects.”
Industry experts argue that by reducing or deferring development charges, developers will be able to build more and lower the price tag for the consumer.
However, municipalities say there’s no guarantee removing development charges will lower home prices for the consumer — it could all go toward greater profit for the developer — and property taxes will have to increase if a key source of funding for city infrastructure is diminished.
It’s become a tug of war between developers and cities over who pays for what services, with both arguing they have the best outcome for the buyer in mind.
How the costs break down
In 2014, the bulk of the cost to build a 500-square-foot one-bedroom condo unit in Toronto came from construction (materials and labour) and the cost of land. They made up 52 per cent and 16 per cent, respectively.
In 2024, construction costs made up 47 per cent of the total cost to build, and municipal fees surpassed the cost of land, accounting for 13 per cent (up from 8 per cent in 2014), with the cost of land falling to 12 per cent.
Looking at individual increases, from 2014 to 2024, municipal fees saw the biggest rise at 238 per cent. These fees account for $81,000 in the cost of a one-bedroom condo in Toronto, according to BILD.
In comparison, costs for financing (loan and interest costs) increased 200 per cent, according to BILD, whereas construction and land costs went up by 90 per cent and 57 per cent, respectively.
Included in Toronto’s municipal fees are development charges as well as fees for community needs, parklands, and educational development charges for the Catholic school board.
BILD says these cost increases significantly affect the consumer, noting the average price of a 500-square-foot condo in Toronto has jumped 100 per cent from 2014 to 2024, going from $336,745 to $675,000.
Builder profits, meanwhile, have decreased — in 2024 profit on a 500-square-foot condo for a builder was $9,584, down from $29,100 in 2014, a 67 per cent drop, BILD said.
Development charges for a one-bedroom apartment or bachelor have increased by 405 per cent, to $52,000 in 2024 from $10,000 in 2014, according to the city. The bulk of development charges are allotted to transit, parks and recreation, and road and sewage infrastructure.
While developers agree these charges are important, the cost of building has become too burdensome resulting in fewer units coming to market.
“Reducing municipal fees works in participation with all the other factors — like interest rates, construction costs, and land prices coming down,” said Niall Finnegan, partner at Finnegan Marshall, a property development consultant firm.
Since June 2024, the Bank of Canada has made several interest rate cuts, alleviating borrowing cost pressures on builders. Construction costs are not down, but the rate of increase has slowed, and there’s isn’t data available on whether land values have decreased, experts say.
“Right now it’s really a question of what can government do?” said Tasnim Fariha, senior policy analyst at C.D. Howe Institute.
“Raw material costs, interest rates — those are all factors we can’t control. But decreasing or temporarily removing development charges can be one of the ways to alleviate the pressures being felt by the homebuilding market.”
How municipalities have responded
In Ontario, some municipalities have decided to take action.
Last November, Vaughan reduced development charges by 47 per cent with the new rates staying in place for five years. In January, Mississauga said it will reduce development charges by 50 per cent for new builds, and 100 per cent for three-bedroom units in purpose-built rental buildings for projects that pull buildings permits before Nov. 13, 2026.
Toronto has also provided incentives, including an indefinite deferral of development charges for purpose-built rentals. And in March proposed select condo builders be allowed to defer development charges for up to four years without interest. Eligible projects would need to include at least five per cent affordable housing, whether lower-cost rentals or owned homes. They also would need to have submitted a completed site plan for their proposed development before March 1, meaning only projects already in the works would qualify.
The Association of Municipalities Ontario has been critical of the removal of development charges, saying in a November report, there’s no guarantee developers would pass along significant savings to homebuyers. As a result of removing the charges, property taxes would have to cover the costs, impacting homebuyers and existing residents.
Using 2022 numbers, the report said property tax revenue would have to increase about 20 per cent to replace development charge funds on average in Ontario’s municipalities.
Experts say there are alternative ways to fund city infrastructure, which could include provincial incentives meant to boost development, more federal funding for transit, and municipalities leveraging increasing value of public lands.
“We have some of the highest development charges globally,” said David Amborski, a professor at Toronto Metropolitan University’s School of Urban and Regional Planning.
“A temporary reprieve of these charges will help build more supply in the short-run and the city has other means to make up for a reduction in development charges.”
Will home prices drop if development charges are reduced?
There is no guarantee that prices for new homes will drop if development charges are reduced, experts say. Having incentives for rental supply, which Toronto’s market sorely needs, is the best path forward, said Ricardo Tranjan, senior researcher with the Canadian Centre for Policy Alternatives.
“What’s puzzling is that we never talk about whether reducing those charges will translate to lower prices for the consumer, there’s no assurance at all that it will happen,” Tranjan said.
The other question is whether the money will go to propping up an investor-driven market of tiny condo units that experts say is mismatched to the type of housing Toronto needs. Right now, thousands of tiny units aren’t being sold as investors have fled the market and end-users want bigger units, leading preconstruction sales to stall and the cancelling of projects.
TMU’s Amborski believes developers will reduce the cost of the unit to improve sales — if developers don’t pre-sell 70 to 80 per cent of their units the condo tower isn’t being built — and will pivot to market demand, which is end-users wanting bigger units.
“The financial numbers no longer work for investors to purchase and rent out the shoebox condo. Hence the demand for these units has dried up. Consequently you wouldn’t expect condo developers to build this type of unit right now,” Amborski said.
“Rather they would build to an end-user market — hopefully larger and more family-designed units or to a retirement empty nester market — some have already targeted this market. Developers will build where there is demand.”
