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Government Spending on Non-Market Housing Could Pay for Itself, Economist Says

An economist argues that B.C. could massively increase spending on below-market rental housing and that such an investment could “literally pay for itself.”

Government Spending on Non-Market Housing Could Pay for Itself, Economist Says
Photo credit: Stephen H/Unsplash.

An economist argues that the British Columbian government could massively increase spending on below-market rental housing and that such an investment could “literally pay for itself.”

Cities in B.C. have some of the most expensive market rents in the country. Earlier this year, a report published by a real-estate advisory firm found that rent for one-bedroom apartments in Vancouver increased by 13.2 percent to $2,176 per month from December 2020 to December 2021 — the largest increase seen in any major Canadian city.

According to the Canadian Rental Housing Index, rent is considered “unaffordable” for those on low incomes in every region of B.C. and “severely unaffordable” in all but three regions.

Graphic: Canadian Rental Housing Index.

In 2019, a report by the Canadian Centre for Policy Alternatives (CCPA) found that Vancouver alone needed to build 10,000 new units per year of non-market rental housing to fully address the city’s housing crisis.

Alex Hemingway, a senior economist with the CCPA, wrote last week that the provincial government could recover housing investments in the same way private real estate developers recover upfront construction costs through rent payments.

“But there’s a key difference,” Hemingway wrote on CCPA’s Policy Note blog. “Instead of generating profits, housing projects can operate on a break-even basis with rents set at below-market rates.”

Whereas private developers will only take on a project if income from rents are expected to cover upfront costs plus a healthy profit margin, governments and non-profit providers need only break even, allowing them to charge lower rents.

Existing Crown corporations, said Hemingway, such as BC Hydro, already recover their own capital and operating costs, showing that provincial government spending on below-market rental housing need not redirect tax dollars from other areas.

“In addition, the government can borrow at cheaper interest rates than the private sector and can amortize those costs over a longer period of time,” Hemingway continued.

Developer profits, he said, are typically assumed to be approximately 15 percent of costs, meaning rents in government-funded housing could be set to at least 15 to 20 percent below market rates.

The federal government currently finances some “affordable” housing units through the Rental Construction Financing Initiative (RCFI), but the program has been heavily criticized by some policy analysts for subsidizing corporate profits while delivering only small numbers of rental units that are not truly affordable.

Last summer, a 300-unit market housing development in Brampton, Ontario subsidized to the tune of $120 million through RCFI was slated to deliver just 72 temporarily “affordable” housing units, with rents in some of those units capped at 30 percent of the area’s median household income, or $2,000 per month — far more expensive than many working-class renters can afford.

Screenshot of CPAC video.

Hemingway noted that in B.C., even 20 percent below market rates would still be out of reach for many renters, but if municipalities were to cooperate, costs could be brought down even further by building rental units on lower-priced land currently zoned for low-density detached housing.

Back in February, a retired developer told the Vancouver Sun that private real estate corporations deliberately time new builds in order to maximize profits rather than to improve the affordability of the housing market.

“They want to time it so their development goes to market when the market is good. They don’t want to sell into a crappy market,” Arny Wise told the Sun. This means some developers delay putting new units on the market, he explained.

“There is no reason to expect developers to accomplish a social good unless (politicians) force them to.”

Writing in The Conversation last fall, Steve Pomeroy, a social sciences professor at McMaster University, argued that rather than focusing primarily on increasing supply to address the housing crisis, governments should also address “super-charged demand, abetted by the sacred cow of non-taxation of capital gains on a principal residence.”

“Over the last few decades we have seen a new phenomenon of super-charged demand created by households that have substantial accumulated equity from persistent appreciation in their home values, combined with strong income growth and declining and historically low mortgage rates,” Pomeroy added.

Many house buyers, he said, are existing owners who are trading up and have the financial means to pay higher prices, driving up housing costs across the board.

As reported by The Maple earlier this month, data published by the Canadian Housing Statistics Program (CHSP) found that the wealthiest 10 percent of property owners control approximately one-quarter of all residential housing value.

Ricardo Tranjan, a CCPA researcher, said governments are overly focused on building market housing supply.

“If you don't change the regulations around housing, if you don't go into taxation rules and all the kinds of structures of the housing market, you won't solve the problem,” he explained. “We're just going to add more very expensive housing into the marketplace.”

Tranjan added, “the way governments look at wealth that has been accrued through home ownership and real estate investment has to change. It has to be considered capital gains; it has to be taxed at higher rates, especially for people who own more than one home.”

As well, said Tranjan, Canada has a culture of treating the interests of “small” landlords as equal to the wellbeing of tenants.

“We need to change that perspective and say no, owning two or three homes, that operation is a business, and needs to be treated as a business; it needs to be regulated as a business and it should be taxed as a business,” he explained.

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