Are City Fees and Land Costs Truly Raising House Prices Or Do We Have it Backwards?
Blog by Ben Gauer | July 25th, 2015
Almost daily we read newspaper articles about how municipal fees and the price of land and construction inputs affect the price of housing. I have been selling properties for 39 years, have developed housing and have studied economics at BCIT and UBC. Here are my conclusions: If a developer's land costs, municipal/city charges and fees or construction materials and labour costs are low but market prices are high, will he or she likely sell for less than the market allows? No. The developer will normally maximize profit. If the developer's costs are high and the market price is below his costs, will the developer be able to sell for a higher price to recoup costs and make a profit? No. The developer has no option but to either wait to sell, or sell at a loss. Market prices are determined not by input costs but by the itersection of demand and supply in the market place - in other words, what people are prepared to pay based on what else is available in the market. The market sets the price. Deduct profit, construction costs and municipal charges and you are left with what you can pay for the land as a residual. So higher costs such as municipal or city development cost charges and other fees only serve to reduce land values, all other things being equal. If owners of the raw land refuse to sell at lower prices in order for a developer to make a margin, or if input costs are too high, then normally nothing will be built until the market value of the finished product increases. So if the city increases fees to a developer on behalf of its citizens, despite the outcry of those not familiar with Economics 101, it will not neccessarily increase the price of housing. It will, however, likely reduce the price that the developer can pay for the raw land. Next time you read a newspaper article about the price of housing, remember Economics 101.