Local and provincial policies across Canada may negate latest federal rental housing plan

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Appeared in the Ottawa Sun, March 12, 2018
Local and provincial policies across Canada may negate latest federal rental housing plan

The Trudeau government’s recently-released 2018 budget includes a $1.25 billion increase for a Canada Housing and Mortgage Corporation (CMHC) program that provides low-cost loans to builders of rental housing, ostensibly to boost the rental supply in Canada’s tightest markets. But municipal and provincial governments could undermine this federal policy with red tape and additional costs.

To be clear, government should care about the supply of purpose-built rental buildings. Rental vacancy rates in the Toronto and Vancouver metropolitan areas, for example, hover around 1.1 and 0.9 per cent respectively, indicating a severe imbalance between the demand and supply of rental units. And purpose-built rental apartments are more stable than units on the secondary market (e.g. condos rented out by owners). With condo units, the owner can pull the unit off the rental market at the end of a lease, whereas purpose-built apartments are explicitly built for tenants to rent.

Subsequently, there’s merit for government to help facilitate the construction of rental buildings (although the best methods to achieve this goal remain open to debate). However, there are many barriers to rental housing construction across major cities and provinces that may negate the effect of any extra money from Ottawa for CMHC loans.

In Ontario, for example, the Wynne government has doubled-down on rent controls, which mandate how much landlords can charge renters. This is a curious decision, given that less than 10 per cent of surveyed economists support the claim that rent control increases the availability of affordable quality rental units.

While it’s difficult to count the units not built due to poor policy decisions, one estimate from last September suggests that in less than a year, 1,000 units across the Greater Toronto Area (GTA), originally intended to be purpose-built rental, were converted to condos as developers decided the investment equation for rental units no longer made sense.

Even where the economics of development make sense, local regulations can get in the way. Recent Fraser Institute research measured how long homebuilders must wait to obtain building permits, how uncertain this process can be, and how much they must pay in compliance costs and fees. The findings were illuminating.

Across GTA municipalities, it takes 18.2 months (on average) to obtain permits, costing almost $50,000 per unit (on average) in fees. Across Alberta’s Calgary-Edmonton Corridor, and Vancouver and its surroundings areas, it takes almost a full year to obtain permits, triggering around $30,000 in per-unit fees. Even worse, in the city of Vancouver, approval timelines rise to almost two years, and fees climb to just under $80,000. Clearly, local land-use regulations can significantly reduce the number of much-needed new homes (for renters and buyers alike).

So again, with both provincial and municipal governments across the country stifling construction, increasing the CMHC rental financing budget (from $2.5 billion to $3.75 billion over the next three years) may have little effect. When the economics of building purpose-built rental units don’t add up because of rent controls or local land-use regulations, favourable loans are unlikely to matter.

So what’s a better approach? Rather than pulling in opposite directions on the rental housing front, governments—especially provincial and local—should address the root causes of declining housing affordability—namely, a lagging housing supply.

In a recent report on escalating home prices in Canada’s hottest markets, the CMHC explicitly notes how the lack of new housing helps drive the high costs of buying and renting. Rent controls from provincial legislatures, and red tape from city hall, only aggravate this problem.

Until governments in Ontario, Alberta, British Columbia and elsewhere address the fundamental imbalance between high demand for new rental housing and the ability of homebuilders to respond, governments at all levels will continue to needlessly direct resources to a problem caused, in part, by their own poor policy choices.