To Fix Affordability, Start From the Top
In Metro Vancouver, we can hardly go a single day without reading some sort of article discussing the affordability crisis. This isn’t just a phenomenon in Vancouver, however, with many other Canadian cities dealing with affordability issues of their own. With the growing ‘condo-fication’ of cities like Vancouver, it is becoming increasingly difficult to find places to rent. While there are clear cases to be made that supply and demand are factors, one thing that cannot be denied is this: we are simply not building enough rental units to keep up with the amount of people that are moving here. As such, this article will suggest how we can get more of the right kind of supply on the market. Namely, it will discuss how we can get more affordable, purpose-built rental housing in our cities.
Between 1946 and 1972, the conditions in Canada were right for large amounts of rental housing to be built. This was due in large part to favorable tax environment that the Federal government had in place. After 1972, the tax structure began to change, and subsequently Canada saw a significant decrease in the number of rental units being built, to the point where today rental units account for only about 5 percent of all housing units being built. This is compared to around 50 percent in 1972. For an in-depth look into the changes that were made and their effects, the 1998 study done for the Canadian Federation of Apartment Associations is an excellent resource. It shows that there has been a significant decrease in the l number of new units being built as rentals, and thus it is perfectly understandable, and certainly should not be surprising to anyone, that there are not enough rental units available for today’s population. Basic economics - that is, the law of supply and demand - tells us that this shortage results in higher rental costs, and again, not surprisingly, we’re living with the consequences of bad policies from the past. More concerning is that with the existing policies in place, we’re on the path to make the situation worse, unless the Federal government in particular, takes immediate steps help mitigate the damage.
As Canada plans to welcome an increasing number of immigrants each year for the foreseeable future, the Federal government would be negligent if it did not play its part in ensuring there is enough housing for the country’s growing population. In two of Canada’s major cities - Vancouver and Toronto - the issue of affordability has already reached crisis-levels and needs immediate action. This was reflected in the recent municipal elections in both Vancouver and Toronto, where candidates across both regions made affordability one of the – if not THE - top issue. However, municipal councils in these regions cannot solve the issue alone. The affordability crisis cannot be solved by any single level of government, and no single act of legislation, tax, or tax credit will bring prices down to the levels we need them to be. It is wishful thinking, but many people are hoping for a big correction in the real estate market to solve the affordability issue. But if that happens, people whose financial future rest on their housing assets being a meaningful component of their net worth will be severely impacted. One of the stated aims of the National Housing Strategy is to “build up to 100,000 new homes” in Canada over the next 10 years. The Strategy includes a number of financing tools in order to incentivize the construction of new rental units, but it lacks one policy that many organizations, writers, experts, developers, and even political parties have called for: the elimination of GST on development costs associated with the construction of purpose-built rental units.
If the Federal government was serious about making real progress on affordability, it should immediately work to eliminate GST/HST on the development costs associated with building these projects. The Housing Action Lab’s 2016 analysis of Federal Tax policy in regard to rental housing clearly laid out some steps the government could take to drastically increase the attractiveness for developers to build rental units. As it explains in the report, the government should not eliminate GST on the operating costs of rental units but focus on eliminating GST on the development costs that go into the construction of the units. At the moment, it simply doesn’t make economic sense for developers to build affordable rental units. Short of having the government be the sole builder of rental stock, steps need to be taken to make it economically feasible for the private sector to build the much needed rental housing stock. Interestingly, it’s not just developers and organizations like Landlord BC and the Canadian Home Builders’ Association that are calling for this step, but this strategy was part of the 2015 election platform of one of the major national political parties - and that party formed government. So far, this promise has not been fulfilled, and so with the situation worse than ever, the time is now to have the full backing of the Federal government for this proposal. If it is not the current governing party, then the next governing party must adopt this strategy.
Of equal importance is that once the rental housing has been built, or even for existing rental properties, the units need to be managed properly so that they doesn’t fall into disrepair. Many older rental properties are owned by smaller investors who may not have the financial resources required for proper upkeep on their building or buildings. Not only does this mean the properties often fall into a state of disrepair, but as we have seen in cities like Burnaby, it often leads to the older rental properties being bought up by developers who demolish and replace them with new condominium units. ‘Demo-viction’ has become a term very closely associated with Burnaby, but it can happen anywhere. For this reason, another policy that should accompany the elimination of the GST is what the Housing Action Lab calls a ‘Rental Retention Vendor Tax Credit’. By their definition, “a vendor tax credit would be structured as an incentive to those owners that have assets with moderate rents (e.g. below the local CMHC average market rent) that also wish to cash out of their long-term investment.” This would mean the owner of a property would receive a credit if they were to transfer it to a not-for-profit entity. This entity would be expected to keep the property as an affordable one. The government could potentially look into eliminating GST/HST on costs associated with upgrading the property once it had passed to the non-profit. This way, older rental properties could remain affordable without falling into disrepair.
Without a doubt, the affordability crisis could make or break the future of cities like Vancouver and Toronto – both economically and socially. If there isn’t a concerted effort made immediately by all three levels of government, then we risk losing our best and brightest to other countries and other regions which are more affordable and livable. However, of most importance is the Federal government taking the lead and ensuring there is the proper tax environment to encourage the construction and maintenance of rental housing.This article has focused on a few policy changes that could significantly increase the amount of purpose-built rental stock that is built across the country. While there are many, many factors that are causing the current crisis, not having enough of the right kind of housing is an important one. All political participants at every level - Municipal, Provincial, and especially the Federal level - must take note and make the necessary changes. Canada’s future depends on it.