When you read the comment section of almost any news story announcing construction of a new development now, the resounding question is always, “but will anyone who lives here actually be able to afford to buy there?”
A lot goes into what price a builder decides to list a home at, but at the end of the day it all comes down to how much it cost them to build the home.
Other than land acquisition, a key cost factor for builders are development cost charges (DCCs). In Kelowna, depending on where the you’re building, DCCs range from as high as $50,531 in the southwest Mission area for a home to as low as $26,997 for a home in the city centre — however the average is around the $36,000.
In Lake Country, the DCC for a single detached home is $30,633.
Building a new home places additional strain on city resources, like roads, bridges, water, sewer, drainage and parks. The city and its existing residents shouldn’t be expected to pick up the tab for that. The new residents and the developer should. That’s why DCCs exist.
But let’s bring this back to building homes that people can afford.
Taking the home in the southwest Mission as an example with a DCC of $50,531, that DCC will cost $50,531 whether the developer builds a five-bedroom, 5,000-square-foot home or a two-bedroom, 1,300-square-foot starter home.
That means there’s no incentive when it comes to DCCs to build a smaller home (this is not the case with building permits, which is another charge based on value). If a developer will see tax savings by building smaller, and therefore more affordable, homes, it creates an extra incentive to do so.
One thing I noticed while recently looking at detached homes was if you need less than 2,000 square feet, most homes are in retirement communities, or were built in or before the 1980s. But if you’re looking at homes built in the 1990s and later, they’re often larger than 2,500-square-feet. This isn’t because families got bigger (the opposite is actually true). Developers simply started building bigger homes. Any real estate agent will tell you homes are priced on a square foot basis, so the bigger the home, the more it costs.
That’s why it’s important to use some of the tools at our disposal to incentivize smaller home construction. These are the homes people can afford. Adjusting our DCC rates is one way of achieving that.
For example, why should a two-bedroom bungalow pay the same amount in DCCs as a three-story, five-bedroom home? The tax, as a percentage of the new home’s construction, is lower the more expensive (and larger home) you build, increasing the builders desire to build bigger.
At the end of the day, the DCC exists to reimburse the city for the extra costs associated with new growth. In nearly every case, a home with two bedrooms, and likely two to three people living in it, costs less to service than a home with five bedrooms and five to six people living in it.
It should be noted the DCC rate should be based on square footage, not the number of bedrooms. To understand why, we need only to look at England’s “Window Tax,” introduced in 1696, where homes were taxed based on how many windows they had. That ultimately led to people bricking over the windows in order to save money.
At the end of the day, a policy like this should be created in tandem between the municipality, the Canadian Home Builders Association, and other similar groups that can work together to determine at what rates developers would be incentivized to create smaller, more affordable new homes.
The Okanagan is home to some of the most expensive residential property in Canada, while British Columbia continues to face a debilitating housing crisis.
Continuing to do more of the same will not make homes more affordable. We need to get creative and look at innovative solutions to make housing more affordable and this is simply one of those ideas.
This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.