Builders see perfect storm on horizon

Economic forces are lining up against the new home market, say area homebuilders.

With Waterloo Region’s plan to significantly raise development charges, talk of the implementation of a harmonized sales tax (HST), and more restrictions in the recently approved regional official plan (ROP), homebuilders in the area are worried all of the changes will combine to make for a perfect economic storm.

Emerald Homes’ Richard Trapp is concerned that a harmonized tax, combined with the region’s new development charges, will converge to raise the price of new homes significantly.
Emerald Homes’ Richard Trapp is concerned that a harmonized tax, combined with the region’s new development charges, will converge to raise the price of new homes significantly.

The region’s decision to jack up development charges on new building lots come August was seen as the latest strike against the industry.

“There couldn’t be a worse time in the homebuilding sector to bring forward a new charge of this magnitude. It seems forgotten sometimes that these charges are simply passed through to new homebuyers; it’s not an industry-absorbed charge,” said Brian Blackmere, president of the Waterloo Region Home Builders’ Association (WRHBA).

Every five years the region is required to conduct a background study to forecast population growth and calculate what kind of capital infrastructure (i.e. roads, water treatment plants, number of ambulance stations, number of police vehicles, etc.) will be required to support that growth. That information is used to come up with a levy on each additional new home to essentially cover the increased costs.

The region’s original calculations put the figure for this year’s increase at $16,300, an 81 per cent increase over the current $9,029.

The WRHBA took a strong stance against this significant spike.

“These and other government-imposed charges all affect the affordability of new homes; that is why we are taking an active role in advocating on behalf of the new homebuyer who really has no voice in the process.”

Representatives of the building industry were able to whittle that number down, successfully pushing regional council to consider “freezing” the current rate of $9,029 per single family unit for a period of time that would allow the industry to prepare for the increase and “for consumer confidence to hopefully rebound” said Blackmere. Regional staff and council subsequently acquiesced and chose to keep the current rate until Jan. 1, 2010.

“They (council) understood that $16,000 was a pretty steep increase and while it was justified under the Development Charges Act as the maximum amount you could charge, they wanted to continue to encourage development; they wanted to find the balance between what the maximum allowable is and what they thought would work, and so they came to that $12,100 number,” said Calvin Barrett, director of financial services and development financing for Waterloo Region.

The lower figure will be the one that applies when the calendar rolls into the new year. The figure will be $12,110 in the townships, up from $8,965, and $12,440 in the cities from $9,029. (The rate is slightly lower in the rural areas where transit services are minimal or non-existent.)

“They were trying to find balance because you’ve got to have the money to build the capital and the money doesn’t come for free – we have no other source for it unless we charge the current taxpayer, and they’re already paying a lot, so they were trying to find a balance between the two,” said Barrett of council’s decision.

“Because of the downturn in the economy, developers, especially homebuilders, came in and said they needed some lead time to be able to build it into their pricing; also, council felt it was kind of their own mini-stimulus package in the region that would encourage people to continue to build during 2009 because they know the rates aren’t going to go up until 2010.”

The new rates, though not as high as what was originally forecasted, are nevertheless significant.

“It’s still a dramatic jump,” said Peter Vanderbeek, chief building official for Woolwich Township.

“It puts the affordability price, if you’re a first-time homebuyer, it affects your decision. But I think that the homebuilders’ biggest obstacle now is the harmonized tax that’s going to come in next year,” he said.

For Richard Trapp, president of Emerald Homes in Elmira, the HST is a big concern.

“For us as a custom builder that is a major issue. Again, I’m still waiting for final figures and an explanation on how this is all slated to work; certainly, what we’re being told right now is that at the level of $500,000 it’s supposed to make a difference of six per cent: on a $500,000 house, it’s going to add $30,000 to the cost of that house and, of course, we put that in tandem with a  regional lot levy increase, add the two of those together and add in GST on top of that, because that 30 per cent is the increase only in the retail sales tax portion, then we’ve got something getting in the neighborhood of almost $40,000 on a $500,000 house,” he explained.

“Somebody has to pay $40,000 more and they’re getting no more house than what they were getting before.”

Indeed, the potential implementation of the HST as well as new procedures and regulations in the ROP – the legal document that contains a variety of goals, objectives and policies that will guide planning in Waterloo Region over the next 20 years – has many homebuilders concerned.

“We don’t believe the plan provides sufficient flexibility to adequately accommodate growth in the event that one, or both, of the land budget assumptions prove to be erroneous,” explained Blackmere, referring to the basic assumptions that have been made regarding “aging in place” and the number of people per unit that the region uses to make its projection for the amount of land needed until 2031.

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