A city-wide CAC would worsen affordability problem

What is the best way for cities to raise funds for amenities that are needed as communities grow? Higher property taxes? Spending-authorization referendums? Increased fees?

Cities in B.C. raise all their basic money through property taxes and also get to levy Development Cost Charges against developers to fund some basic infrastructure. But, by provincial law, those DCCs cannot be used for amenities such as fire halls, community centres and swimming pools.

In Coquitlam, we also have a Density Bonus system through which the city collects revenue from developers who, in exchange, get to build their projects to a more-dense standard that normally allowed. In the City Centre and Burquitlam areas, this typically translates into higher condo towers than would otherwise be allowed.

The City also established a Community Amenities Contribution program in Burquitlam that accepted even more funds from developers. This money is being used to fund the City’s share of the proposed new YMCA.

Now, there’s a plan afoot to extend the CAC program throughout Coquitlam and to have it apply to all residential development that involves a rezoning, even on a single lot where, for example, the owner wants to subdivide in order to build two smaller houses. The proposed charge is about $5,000 for every new lot. All the details can be found by clicking here.

On Monday, Nov. 2, Council voted 6-2 to support the plan in principle; it will now go to the public and to the development industry for its feedback. I was one of the two (along with Councillor Asmundson; Councillor Reid was absent) who opposed its going forward. And my main concern is that I believe such a program worsens to the affordability problem.

Simply put, I don’t agree with the contention, advanced by staff and strongly supported by Mayor Stewart, that the CAC charge will ultimately be borne by the person who sells the land to the developer.

The argument that CACs do not negatively impact the cost of housing is a fragile one, but is one that has gained traction throughout Metro Vancouver because of one consultant who is not an economist, but is a planner. Our staff cites, on page 10 of the report to council, the consultant’s study concluding that CACs have not impacted home prices; however, it appears no economic analysis was put forward to support this conclusion.

Dr. Michael Goldberg, Dean Emeritus of the UBC Sauder School of Business and one of North America's most celebrated urban-land economists, has taken a contrary view. He has explained that, in a mythical, totally-elastic market, where land supply is infinite, the consultant’s claim that--land prices will fall to account for the CAC burden--could be realistic.

However, Metro’s developable land market is notoriously inelastic due to geographic and regulatory constraints on land supply, like Metro Vancouver’s Urban Containment Boundary, which I spoke about 10 days ago at the Metro Council of Council meeting; there, I asked about whether anyone had studied its impact on housing affordability. Apparently no one has, even though it surely must have a negative impact on affordability.

Continuing with Dr. Goldberg, he has said another reason the developable land market is inelastic is due to the political risk associated with obtaining land-use entitlements. Since there is a limited supply of developable land, a vendor of a development site will hesitate in selling if he believes he must discount his land, resulting in less land available and higher land costs overall in the market.

At a macro-economic level, CACs are simply inefficient. Altus Group has done a number of studies on this over the last decade for the Canadian Homebuilders' Association. In effect, if the CAC cost is built into the home price, the homeowner ends up financing that cost in the residential mortgage market. (In the case of an estimated $5,500 CAC cost, the homeowner repays the original $5,500 plus $3,405 in interest cost over the life of a 25-year mortgage -- assuming a 4.25% mortgage rate). So, $8,905 is the real cost of that contribution to civic infrastructure.

On the other hand, if we, as a municipal government, borrowed through the MFA to finance that infrastructure, our borrowing costs would likely be 2% to 2.5% lower and we would amortize the borrowing over the life of the infrastructure – more like 50 years instead of the limited 25-year amortization of residential mortgages.

But what about the political considerations? Yes, it’s easier for a council to charge CACs than to hike taxes or user fees to pay for a new swimming pool. But this doesn't really represent full disclosure. By hiding this tax burden in the cost of new housing, we’re fooling taxpayers. We are pretending we are limiting taxes, when we are really hiding part of it and targeting the burden on a select group of taxpayers.

Mayor Stewart launched a strong rebuttal to my anti-CAC speech last night. One of his main points was that, because of market pressures, the added CAC cost will not be reflected in the selling price of a home. The market is the market is the market, he essentially said. The implication is that either the seller of the land or the developer would eat the cost of the CAC.

I didn’t get an opportunity to reply to the mayor, but I will do so now with this single point: if, as the mayor declared, the retail market is the market is the market (and I don’t completely buy that, of course; instead, I believe the CACs will drive up the price), then surely the land-sale “market is the market is the market,” and the price of that land won’t be discounted in response to the CAC charge.

This being the case, it will be the developer who must bear the burden of the CAC – yet another charge, hoop, obstacle, and hurdle with which the developer must cope.

Pity the developer? No, not really. Instead, pity the prospective home buyer who will have fewer opportunities to buy a home when a developer concludes, reluctantly, that the CAC is the straw the breaks the camel’s back, making the proposed development economically unviable. I hope it doesn’t come to this.