Following the Bank of Canada’s decision to pause interest rate hikes, the housing market has experienced a significant rebound, with sales and average home prices increasing by 21% and 13%, respectively. However, the June rate hike and the anticipation of future rate hikes threaten to temper market expectations and underscore the persistent challenges of housing affordability.
The surprising level of market activity reveals that the housing market is even tighter than previously perceived, signaling a continued trajectory toward unaffordability. Addressing both affordable housing and housing affordability challenges is crucial, yet finding a single solution to the affordable housing crisis remains elusive, despite decades of discussions. Governments have provided limited solutions thus far. What alternatives exist to establish scalable programs that attract additional capital and foster the construction of more affordable housing?
- Buy vs build: The decline in affordable housing stock, driven partly by rising rents, necessitates a mechanism for selling “C” rental units from Real Estate Investment Trusts (REITs) and other property owners to governments or government-sponsored entities. Preserving the rental stock for affordable housing can be facilitated through low-cost financing provided by the Canada Mortgage and Housing Corporation (CMHC). Funding the initial equity can be addressed by involving the Infrastructure Bank. Another consideration is reducing the sale price. Currently, the sale of a property incurs capital gains tax. In the United States, investors can defer capital gains by utilizing a 1031 exchange, which involves reinvesting proceeds from an investment property into a “like-kind” property. Implementing a similar provision for the sale of Canadian affordable housing properties would alleviate costs for buyers.
- Create an affordable housing Real Estate Investment Trust (REIT): This proposal, put forth by Steve Pomeroy, suggests the establishment of a REIT specifically designed to aggregate and invest funds from small investors in commercial real estate. Currently, the Canadian market lacks an efficient mechanism for selling properties that transition to “C” properties. Consequently, managing returns on these units becomes focused on improving unit quality to gradually adjust rents upwards over time. Pomeroy suggests CMHC purchase a REIT to acquire expertise in the community-based sector. Alternatively, developing a tax-exempt REIT, akin to the treatment of municipal bonds in the United States used for infrastructure funding, could be explored.
- Increase student housing construction: Students typically seek affordable housing options when attending universities and colleges. However, despite international students becoming a major revenue source for these institutions and their enrollment levels increasing from around 142k in 2010/11 to over 373k during the pandemic there has been no major building of student housing by the education providers during this period. Expanding CMHC’s student housing program could alleviate the demand pressure on affordable housing.
- Foster public-private partnerships: A key feature of the social housing infrastructure being managed by cities is its location and density. Some cities such as Edmonton, have successfully improved and expanded their housing stock by working with developers to redevelop older housing sites. These projects require a mix of rental rates to be viable but have effectively expanded the rental stock. A similar approach can be adopted for cooperative (co-op) developments.
- Tax policy measures: In the past, federal tax policies have been employed to encourage housing development. The Multiple-Unit Residential Buildings (MURB) program, for instance, offered tax incentives for investments in these units. Key features of this program were a capital cost allowance of 10% and the deduction of soft costs. Although challenges arose, such as resort development misuses, a targeted program focused on affordable housing should be explored, aligning with the efforts of various cities to promote the development of “missing middle” housing.
While implementing these programs would represent a significant step forward, it is equally crucial to expedite development approval processes and establish an immigration program to attract more construction workers.
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any person or organization in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice including investment advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication. Readers are cautioned to always seek independent professional advice from a qualified professional before making any investment decisions.
