Opinion: 4 affordable housing policies that may actually work in Vancouver

Nov 25 2021, 11:19 pm

Written for Daily Hive Urbanized by Arny Wise, an urban planner and economist with 35 years of experience as an executive in the property development industry. He also previously served on the board of directors for the Toronto Economic Development Corporation.

We’re all aware of the problem: Housing prices in Vancouver – both purchase and rental — are out of reach for the majority of young people in their 20s, 30s, and 40s, and have been for some time.

In 2020, Hong Kong and Vancouver were rated the least affordable cities in the world for middle incomes by Demographia International for the Urban Land Institute.

Windfall profits from property speculation have commodified Vancouver land and housing, pushing house prices beyond the reach of the younger generation and ensuring that most new rental housing built is far from affordable.

Housing prices are further detached from employment incomes as young people can’t afford to live and work here. Companies can’t lure young talent; key service workers, such as teachers, police officers, firefighters and nurses, can’t afford to live near the communities they serve.

The “greenest city in the world” does not provide basic housing for anyone but the well-off who already live here. As a result, it seems that much of Vancouver is slowly becoming a rich seniors’ community — an exclusive enclave for high earners and inherited wealth that will soon lack the necessary social diversity that makes any city lively and great.

More and more, businesses in the greenest city rely on suburban employees who require cars or public transit to commute into and out of the city. Cars cost money, congest roads, cause pollution, and emit harmful greenhouse gases. And public transit in Metro Vancouver is still far from robust.

Governments have tinkered at the edges for the past 10 years, hoping that the market will ultimately sort itself out, but that has not happened. No actions taken at any level of government have made a difference. There is anger and frustration out there, demanding some bold political policies.

Robert Hogue, senior economist at RBC, argues for action now to head off the possibility of a painful correction down the road and to stop surging real estate evaluations from making the widening gulf between rich and poor any worse. “Overheated markets threaten to destabilize the economy down the road if or when a correction occurs, with possible heavy costs for governments.” To make matters worse, “the threat is particularly potent because excessively high price expectations are widespread,” and buyers face a fear of missing out (FOMO). In September 2021, Bob Duggan, CMHC’s chief economist, warned that Canada “is at a high risk of a sharp correction in home valuations as the continued appreciation in prices becomes unmoored from economic fundamentals.”

According to Statistics Canada 2019 for individuals in Vancouver, 24% are low-income earners making less than $50,000, 57% are middle-income earners making $50,000 to $100,000, and 19% are high-income earners making more than $100,000 annually.

Affordable housing is generally set at 30% of gross income for households earning 50-80% of the Area Median Income (AMI) according to the McKinsey Report on global affordable housing. The Area Median Income (AMI) for individuals in the Vancouver CMA is $36,800.

If McKinsey’s 80% of the AMI is translated into affordable rents, a single person’s affordable rent in Vancouver should be $735 per month, while a working couple’s affordable rent should be $1470 per month.

In fact, the average rent for a one-bedroom unit in October 2021 in Vancouver was $2,155 per month, 47% higher than what is affordable. And the city has the highest rents in Canada according to The National Rent Report by rentals.ca.

Translated into house prices, an affordable home in Vancouver should cost $350,000 for a working couple, based on a 2.5% five-year fixed mortgage with a 25-year amortization period and 5% down. For a 600 sq ft condo, that means a price of $583 per sq ft.

House prices are, of course, nowhere near that. As for condos, they are traditionally the first step on the property ladder. But according to the annual report by Century 21 Canada, market condos in 2020 during the pandemic sold for an average of $816 per sq ft on the Vancouver Eastside — that’s a price of $490,000 for a 600 sq ft condo, 40% higher than what is affordable. On the Westside, the average price was $1,004 per sq ft ($600,000) and $1,192 per sq ft downtown ($715,000) — double what’s affordable. Prices in 2021 are almost 20% higher still. The Oakridge Centre development is currently trying to sell units at $2,000 to $2,500 per sq ft. Insane!

No wonder Vancouver is rated as the second least affordable city in the world for middle incomes.

Here are four solutions that can work to make some headway towards resolving Metro Vancouver’s housing affordability and supply crisis:

1. Hit speculators where it hurts

Provincial Policies

Introduce a land speculation tax that taxes land profits at 50%. Ontario’s 1974-1978 successful tax policy introduced by Progressive Conservative Premier Bill Davis not only stopped speculation in land, but also stopped the commodification of housing. This big tax was introduced after home prices in Toronto soared 62% between 1972 and 1974 and was aimed at people who added no value to land and simply flipped it. The 50% tax on land profits was fully independent of any federal capital gains tax. Principal residences and family-owned farmlands were exempt. The Ontario government eventually lowered the speculation tax to 20% because Ottawa would not allow the tax as a deduction against capital gains.

The successful result was that, for the rest of the 1970s, house price increases in Toronto remained under double-digits. The late Bill Davis said in an interview at age 86 that he “doesn’t recall a major collapse in prices, and those who do are probably the ones who were speculating.”

Would a speculation tax with teeth work in today’s economic environment? The escalation in house prices in Vancouver in the 2000s sounds eerily similar to the soaring house prices in Toronto in the early 1970s. Douglas Porter, chief economist with the Bank of Montreal, believes that a speculation tax will help cool specific housing markets today, but he’s not sure how it would play out and wonders what the impact might be on domestic buyers. “You really have to proceed carefully; you don’t want to blunder into anything that tips the markets.” The experience in Ontario suggests that did not happen.

A big, bold, and decisive provincial speculation tax is exactly what is called for today to cool the housing market frenzy.

Federal Policies

External capital in the local housing market has forced prices up for the locals. We’re not alone in this phenomenon, and many other nations have introduced central measures to try and curb this trend.

Switzerland requires a permit for certain types of foreign investment in real estate. Australia requires foreign acquisitions of real estate to be approved by its Foreign Investment Review Board (FIRB). In Mainland China, foreigners are generally prohibited from owning land, and foreign nationals are limited to owning one residential property for self-use and only if they have been in the country for more than a year. Israel has doubled the property tax for properties that are vacant for nine months of the year.

Similar federal and provincial policies that curb foreign ownership of real estate in Canada can be introduced to limit ownership largely to those who live and work in the city year-round. Domestic and international newcomers to Vancouver can purchase property if their intent is to live here.

Douglas Porter, chief economist at the Bank of Montreal, supports a combined federal and provincial “proposal coming out of BC to increase property taxes, especially on high-end houses, and make the tax deductible from income taxes. It’s revenue neutral and discourages people from loading up on extra houses and hits the foreign investor.”

This proposal by Rhys Kesselman, an economist at SFU, proposes a progressive property surtax on high-end houses over $1 million, aimed at curbing speculative purchases, non-resident purchases and vacant properties. It would allow homeowners to credit their previous year’s income tax against the surtax, with an exemption for Canadian pensioners, lessening the impact for most resident taxpayers but hitting all outside investors, domestic or foreign, who hide their income, as well as owners of high-valued homes without commensurately high reported incomes.

2. Introduce Tax Incentives for Private Sector New Rental Housing Construction

Introduce tax incentives that harness the private sector to deliver affordable rental apartments by the thousands, like the 1974-1979 MURB program (Multi-Unit Residential Building), introduced by Pierre Trudeau, that created 195,000 rental apartments across the country. Rental housing built under this program still represents most of the affordable rental inventory in Vancouver. It was enacted in 1974 because the federal government believed there was a severe shortage of affordable rental housing, just like today.

Unlike today, the federal government took decisive action, launching an innovative tax incentive aimed at investors, allowing them to deduct development costs and rental losses from their taxable incomes.

Developers would start a MURB and seek investors to purchase rental units in the building. The development costs for land and servicing and utilities were aggregated and assigned to investors on a unit-by-unit basis. These costs could then be written off against income. In most cases, this would result in the investor receiving a large tax refund in the initial year of ownership. Once the project was finished, rental revenues were pooled, as were expenses like interest, taxes, insurance, and repairs. The property manager, often the developer, would provide an annual accounting for the building and for each unit, and each investor would be told how much they would have to subsidize the building’s operations. The investors could then claim their share of the rental subsidy as a loss that could be deducted from their income.

And it worked to create thousands of affordable rental units in the private sector. The MURB program fizzled out in 1979 because municipalities were reluctant to zone sufficient land quickly enough to allow the program to reach its full potential and a lack of oversight resulted in some substandard construction.

Would a tax incentive aimed at the private sector to produce affordable rental units work today? Developers prefer to build condos for sale because their money is in and out with a substantial profit. Rental apartment buildings are just as expensive to build but require maintenance, a long-term hold and a high-income stream for a decent return on investment, making building affordable rental buildings less attractive to developers. As a result, the total number of rental housing units built in Vancouver since the 1990s represents only 21% of the condominium units built during the same period.

With the MURB program, developers could build rental units and sell them to a large pool of individual investors, using other people’s money, and get their own money in and out of a project with a profit, just like a condo project. Encouraging the private sector to deliver affordable rental housing through tax incentives, like the MURB program, may be more effective and less costly to taxpayers than outright public funding for purpose-built affordable rental housing. But both are needed.

Andy Yan, city program director at Simon Fraser University, says: “Everyone talks about housing affordability, but affordable housing, suitable and adequate rental housing is the foundation of the housing ladder. It’s the crux of the affordability crisis, and for the politician who ignores it, it will be at their electoral peril”.

3. Unlock Public Land Supply

Municipal governments

The City of Vancouver is the city’s largest landowner by far, owning 700 properties worth about $6 billion. City-owned property has the advantage of a $0.00 land cost, which creates a lot more flexibility in achieving more realistic affordable housing goals.

The city currently requires large new private-sector developments to provide 30% “affordable housing.” For public lands, why would the city only require 30% of the housing to meet affordability standards, with the balance of the 70% built as market high-priced condos, which are only affordable for the 19% of high-income earners? The city must choose between using these lands as revenue generators and using these lands for the public good.

If the city is serious about affordable housing, then select large-scale city-owned public lands could be redeveloped as community lands that reflect the incomes of the community by requiring a housing mix that more closely reflects the actual annual incomes in Vancouver. To make these public projects financially feasible, 25% of the housing would be built as social housing or other rental housing for low-income earners, 45% for middle-income rentals in the form of housing co-ops and leasehold strata units, and 30% of the housing built on public lands be geared to high-end market condos and rentals.

This is a reasonable proposal that provides 70% of the housing for low and middle incomes who make up 81% of the population and 30% at market prices for the 19% earning high incomes and investors. This formula could be applied to any number of properties in the city’s portfolio. Examples are the city-owned Langara Golf Course, or the entire block next to the Cambie and Broadway Canada Line station, or some city-owned EasyPark parking lots which have the potential to be redeveloped as mixed-use developments, including parking.

Instead, according to the latest South False Creek Plan, by tripling the density the city has lowered the percentage of “affordable” non-market housing and increased the percentage of high end market rentals. The higher percentage of market rentals again serves the 19% high earners, and ignores the rest of the 81% who need it most. That’s fine as a real estate strategy, but not as a planning strategy that addresses affordable housing.

The high-end housing mixes on North False Creek (the former Expo lands) cannot be repeated on any future large development, without a much higher component of housing for low-income earners and the middle class.

Institutional organizations

School Board lands also have the advantage of a $0.00 land cost and therefore more flexibility to achieve more realistic affordable housing targets. School Board lands larger than required for the operation of the school could be redeveloped to provide affordable housing for teachers and the general community with a 25% low income, 45% middle income, and 30% upper income housing mix.

Vancouver Public Library lands near major commercial arteries could also be redeveloped as mixed-use buildings with the library at grade and affordable housing above. TransLink lands at subway stations and bus interchanges can similarly be redeveloped for affordable housing. Excess provincial, military, RCMP, YMCA, church and legion lands could also be redeveloped with a much higher requirement for affordable housing.

4. Increase Affordable Housing Requirements for Large Private sector developments

The City of Vancouver currently has the authority to require large private property developments to provide 30% affordable housing (20% for social housing and 10% for moderate income rentals for households earning $30,000 to $80,000). That leaves 70% of the housing as high-end market condos or rentals to serve only 19% of the population. The city also provides numerous density incentives for developers to build new rental housing projects, but it only requires 20% of the units to be affordable.

These policies clearly have not delivered sufficient affordable housing for most middle-income Vancouverites.

A better proposal — for the next five years at least – would be to require every property development that exceeds five acres (about 200,000 sq ft) to negotiate a housing mix with the city to provide rental or ownership housing that more closely reflects community incomes, closer to the formula of 25% for low-incomes, 45% for middle-incomes, and 30% for high-incomes, in every phase of the development. Certainly, it’s more complicated for private lands because of the significant land costs, often 20% of the total project costs. And developers will push back that it’s not financially feasible. But Vancouver will simply not be a livable city if we continue to allow large developments that do not house the full range of incomes in the community.

The scale of profits from large development projects gives the city a golden opportunity to step in and make greater demands for a progressive housing mix, while still assuring the developer of a decent return on investment.

The optimum mix of housing for financial feasibility may be difficult to negotiate, but the current 30% for affordable housing is simply not enough. A case can be made that the exorbitant scale of profits from housing at the high-end can support the housing at the low end, and the middle can support itself. The financial feasibility of the high profits from the high and middle market housing should offset and support housing for the lower end of the market.

Current progressive income tax policies that tax higher incomes at higher rates and lower incomes at lower rates work in a similar manner to overcome large income disparities.

Developers must make their case to the city, if they believe such a progressive housing mix is not financially feasible in every phase. And the city must have the ability to review the developer’s case, using financial proforma experts in land development. Developers must prove to the city the degree to which a more community-reflective housing mix is not financially feasible.

All large development projects need city approvals and/or services to proceed, giving the city considerable leverage in the negotiations.

The current affordable housing crisis in Vancouver and elsewhere in Canada is a problem that is decades in the making, and it will take time to turn around. Despite a chorus of dire warnings from respected economists, there has been no slowdown in the frenzied housing market. If governments are truly serious about affordable housing, decisive political action is required now.

Sustained action by all three levels of government at the scale proposed here will likely be necessary to make serious inroads on housing affordability.

There is no silver bullet, but focusing on the implementation of some of these measures, can at least start to make a difference.

In addition, it’s time we recognized that in the future, it is likely that every large development in Vancouver will also have an Indigenous piece of some kind.

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