Impact Fees: How Montreal Manages to Mitigate the Unaffordable Housing Crisis

“Housing Development” by Tito Olubode is licensed under Unsplash.

In May 2020, Evan Siddall, the president of Canada Mortgage and Housing Corporation, forecasted the pandemic-induced economic crisis to cause house prices to drop as much as 18 percent over the next year. In a Statistics Canada report published in October 2020, we learned that the Canadian housing market did not behave accordingly to Siddal’s forecast. Housing prices increased between February and August 2020, despite the anticipation of a housing “crash”. In the fourth quarter of 2020, the United States saw a similar phenomenon in its housing market: U.S. homeowners have collectively enjoyed an unprecedented $1.5 trillion accumulation in home equity. The average home price in the Greater Toronto Area is estimated to cross the $1 million mark in 2021, raising concerns about housing affordability for young people and first-time homebuyers. With population levels expected to rise to new heights in North America, large metropolitan centers are facing a serious housing affordability crisis. 

One large Canadian city has systematically maintained an overall favourable environment for housing affordability. As an urban region, Montreal’s aggregate house prices are significantly lower compared to metropolitan centers of its size. Though the city was not immune to the soaring housing market during the pandemic, the average home price is still expected to be half of Toronto’s house prices. The price difference between the two cities has remained stable for decades, suggesting that Toronto’s housing prices are driven by factors beyond cyclical demand. 

Like any other market, the housing market is tied to supply and demand. If there are fewer houses available, buyers bid up prices to purchase one. This largely explains the soaring housing markets in the largest North American urban centers where there is little supply; couple this with low mortgage rates, and the housing affordability issue is only amplified. The housing suppliers’ ability to respond to price increases with the provision of new homes is summarized as the price elasticity of the housing supply. On the supply side of the housing market, relative to similar urban centers, Montreal falls on the more elastic side of the spectrum. The city’s housing market is one in which contractors and developers respond quicker to rising demand. The city’s supply elasticity has been stable and consistent for decades thanks to Montreal’s non-application of impact fees, fostering a market more favourable for housing construction. More houses built means less pressure on the market. 

Urbanists call homes that fall between detached homes and high-rise apartment buildings the “missing-middle” because, nowadays, they are scarce in cities like Toronto. Detached homes and high-rise apartments account for 70 percent of Toronto’s housing supply, a stark contrast to Montreal’s 41 percent. Montreal’s charm lies in its ability to connect European architecture to North America—the city has a strong presence of low-rise apartment buildings, duplexes and triplexes, and rowhouses. Correspondingly, the Toronto city council adopted the “Expanding Housing Options in Neighbourhood” initiative to increase missing-middle housing, and in a sense, indirectly emulate Montreal’s housing supply. 

 Population growth and the continuing trend for urbanization mean growing demand for housing in urban centers. A big part of the housing affordability issue lies in the inability of these urban centers to build enough homes to meet demand. On new housing construction, the norm in many US cities and in Canadian cities outside Quebec is to charge an impact fee to developers. An impact fee is a one-time charge to developers during the permitting approval process. The rationale behind this fee is logical: new housing construction means new residents. These new residents increase the strain on public services and goods—roads, parks, fire safety, schools, and waste management. To pay for this “impact”, local governments impose a one-time impact fee on developers. 

 Toronto is a jurisdiction that has continued to increase impact fees for new housing construction. Like any other policy, impact fees have unintended consequences. These one-time charges constrain the resources, time, and increase the effort required for developers to negotiate and build new homes. The charges, which cover fire safety, schools, and transportation, mean that the contractors will often have to negotiate and deal with different governmental agencies, such as school boards, transit authorities, and city officials. Consequently, Toronto becomes a market with high barriers to entry, as developers require a lot of capital, patience, and time to build housing in a city that fosters an environment for strong bureaucracy. As a result, large property developers dominate Toronto’s housing market. It is very difficult for smaller developers, who tend to build mid-range housing, to enter the market due to Toronto’s broad imposition of impact fees. Consequently, the city’s system favours large developers with deep pockets at the expense of smaller developers and therefore, resulting in less housing supply and variety for residents. 

Alongside most cities in Quebec, Montreal is notable for not imposing impact fees on new housing construction. Instead, the city imposes auxiliary fees which account for between one-fifth and one-sixth of the impact fees imposed by Toronto. Auxiliary fees are generally charged for services in immediate proximities such as parks, but their small size means they do not discourage smaller property developers from constructing new housing units in the city. As more suppliers enter Montreal’s housing market, it makes for a more elastic and competitive market than other North American cities. Since developers and contractors in Montreal do not have to negotiate with various governmental agencies, approval times for building construction are much shorter which incentivizes more housing construction at a quicker pace to meet growing demand. 

With growing legitimate environmental concerns, municipal policymakers have to ensure they foster a favourable market towards development while simultaneously tackling climate change. Many North American cities struggle with housing costs soaring with results in the deepening of social inequality. Imposing impact fees is an effective way to mitigate CO2 emissions, but it comes at a great cost. Cities collect the revenues generated from the impact fees and reinvest them into socially progressive urban planning such as building more bicycling infrastructure. Montreal has shown that facilitating entry for smaller and midsize housing developers is an effective way to mitigate the housing affordability crisis currently faced by the big cities in North America. Smaller developers supply the cities with row houses, low-rise apartments, and duplexes and triplexes, and in turn help first-time buyers with the opportunity to become homeowners at reasonable prices. Nurturing a market favourable for developers and contractors makes for a more elastic and competitive market where housing is built to meet the growing demand.