Lifting the fog of rental housing

On April 7, the government released its 2022 federal budget, with its first chapter outlining the strategy for “Making Housing More Affordable.” On May 5, the Canada Mortgage and Housing Corporation (CMHC) released its Housing Supply Report, and while positive on the resale housing market and now expecting prices to moderate, it was also negative on the rental market, expecting rental affordability to further decline due to increasing demand and low rental housing stock. With a rental vacancy rate of only 3.1 per cent in 2021, increasing rental operating costs, and ambitious immigration targets, Canada has a difficult problem that remains unanswered: how do we ensure that Canadians and newcomers to this country wishing to rent have access to that market at reasonable cost? Some policy makers and commentators have not understood the cost pressures in the private rental market, and, in some cases, instead chosen to find a villain to blame for high rents. Most people rent in the primary market (purpose-built apartment buildings) and the secondary markets (duplexes, basement apartments), largely in bigger cities. However, there is an acute shortage of supply: we need more housing generally, and purpose-built rental apartments, including affordable units, specifically. Construction of purpose-built rental apartments would theoretically be a lower-risk undertaking for the private sector given high demand, if expected costs and expected rents were financially feasible in a pre-development pro forma. They often aren’t. Land costs are persistently high in major cities, construction costs have been escalating rapidly with supply chain disruptions, insuring costs are rising rapidly, and governments generally have not lowered development charges and taxes to encourage the construction of rental apartment buildings. The federal government has not lifted the punitive GST charge on completion of a rental apartment building. The City of Toronto is mulling a 49 per cent increase in development charges and a new four per cent land tax on rentals, in addition to its recently announced mandatory Inclusionary Zoning Policy. The only glimmer of light, CMHC’s Rental Housing Construction Initiative, which enabled low-rate construction financing for new apartments, is fading, given rising interest rates, even before the new punitive affordable component requirements proposed in the federal budget. A new apartment building project started today is unlikely to be ready to accommodate tenants until 2027 at the earliest, given slow approval timelines, NIMBYs, construction delays, and skilled worker shortages. Toronto’s new inclusionary zoning bylaw is unlikely to see its first affordable rental apartment units until 2027 or 2028 and even then, likely in small numbers. It is fair to say that Alberta has the best purpose-built rental apartment market in Canada, due to no rent controls and a free market. Ontario’s hybrid model, where new apartments are not subject to rent control, draws investment into new construction of purpose-built rental apartments, but repairs and renovation of old buildings and units must go through a long approval process at the Landlord and Tenant Board. Some parties and pundits have targeted apartment REITs (real estate investment trusts) or “big corporations” as villains, but that narrative is particularly misguided. Apartment REITs, for example, only own 6.3 per cent of the primary purpose-built rental market in Canada, according to CMHC as of the fall of 2021. REITs are probably amongst the best class of purpose-built rental apartment owners, given strong environmental, social, and governance policies (known as ESG), professional management, regulatory oversight, automated service request apps, high maintenance and repair standards, and a practice of regularly surveying for tenant satisfaction. Federal tax revenues from unitholders indeed may be higher than if they were corporations. As for moving those buildings towards lower carbon emissions? Without an economic return, forget it. The numbers simply wouldn’t make sense to make the retrofit investment. Seeking above-guideline rent increases in those rent-controlled jurisdictions is the reality of maintaining and upgrading old stock. Canadian policymakers need to lift the fog of rental housing and focus on the real issues, while creating an economic environment sufficient to rapidly expand the supply of rental apartments coast to coast. Government and the private sector need to work together to find ways to support the small percentage of in-place tenants legitimately needing help managing increasing rents directly, while continuing to attract the capital and development expertise needed in this country, at a scale large enough to match our country’s growth aspirations. We need to continue to upgrade older buildings to extend their useful life, and we need a massive resupply of new purpose-built rental apartments to meet the economic potential of this country. We do not have a minute to waste. Michael Brooks is the CEO of REALPAC, the senior Canadian trade association for large public, private, and institutional investment real estate companies. The Hill Times

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Lifting the fog of rental housing

Canadian policymakers need to focus on the real issues and create an economic environment to rapidly expand the supply of purpose-built rental apartments.

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