“Rental Break­down,”

Why you can’t find an af­ford­able apart­ment in Canada’s big­gest cities

The Walrus - - CONTENTS - by john lor­inc il­lus­tra­tion by christy lundy

It’s not hard to avoid home­own­er­ship in Canada’s largest cities these days. All you need to do is pull down an or­di­nary mid­dle-class salary, and al­most cer­tainly you’ll find your­self on the wrong side of the ask­ing price for even a skinny semi with a filthy kitchen.

But in his re­cent book, The Wealthy Renter, Alex Av­ery, for­mer CIBC real es­tate eq­uity an­a­lyst, ar­gues that this fate might not be a bad thing. Draw­ing on for­mu­las for cal­cu­lat­ing the full costs of home­own­er­ship over a life­time, Av­ery shows that if a Cana­dian to­day rents a home or apart­ment and pru­dently in­vests the dif­fer­ence be­tween the monthly ten­ant ex­penses and the monthly av­er­age all-in car­ry­ing cost of a home or condo, they will come out ahead.

This is an es­tab­lished re­al­ity in other parts of the world, but it’s a rel­a­tively new mid­dle-class ideal here, where the dream of the sin­gle-fam­ily home en­dures. Yet from a fi­nan­cial stand­point, Av­ery’s ar­gu­ment makes sense. In Canada’s largest cities, hous­ing prices are well past the point of af­ford­abil­ity for all but the gen­uinely af­flu­ent — a de­tached sin­gle-fam­ily house in Van­cou­ver costs roughly twenty times the city’s an­nual me­dian house­hold in­come. Canada could do well to be­come a na­tion of renters in the tra­di­tion of such ur­ban­ized, wealthy coun­tries as Ger­many, France, and Den­mark.

How­ever, as any­one ac­tu­ally look­ing for an apart­ment in Toronto or Van­cou­ver in our cur­rent mar­kets can at­test, it will take more than a lifestyle de­ci­sion to be­come a “wealthy renter” — there are mul­ti­ple hur­dles, most of them out of a renter’s con­trol.

Canada’s big cities are ex­pe­ri­enc­ing chronic short­ages of pur­pose-built rental apart­ments, the re­sult of decades of mar­ket fail­ures and pro-own­er­ship pub­lic pol­icy. As of this writ­ing, Van­cou­ver and Toronto both have ex­traor­di­nar­ily low va­cancy rates, mean­ing that even for those who do want to take Av­ery’s ad­vice and rent for the long haul, the prospects of find­ing a suit­able apart­ment are hin­dered by steep com­pe­ti­tion. In On­tario, decades of rent con­trol, im­posed by well-in­ten­tioned pro­vin­cial gov­ern­ments in the mid-1970s, ef­fec­tively stran­gled new capital in­vest­ment. “It was lit­er­ally the worst pos­si­ble mo­ment to in­tro­duce rent con­trols — right at the mo­ment when de­mand [for new units] was great­est,” Av­ery says.

More re­cent fac­tors have tur­bocharged the mar­ket for homes and con­dos. Al­most a decade of ul­tra-low in­ter­est rates has stoked a bor­row­ing frenzy for mort­gages that in turn has sent prices for homes and con­dos into the strato­sphere. In just the last few years, rents have risen con­sid­er­ably in big cities as peo­ple who can’t af­ford to buy find them­selves com­pet­ing for avail­able apart­ments.

As well, the in­tro­duc­tion of condo leg­is­la­tion in the 1990s and the cur­tail­ing of fed­eral af­ford­able-hous­ing sub­si­dies have meant that for more than twenty years, there’s been very lit­tle pur­pose-built rental hous­ing de­vel­op­ment. In ur­ban cen­tres, in fact, new rental apart­ments tend to be con­dos that are bought by in­vestors as in­come prop­er­ties. There are sim­ply not enough units avail­able to rent.

Lately, some large prop­erty-de­vel­op­ment com­pa­nies have be­gun build­ing rental apart­ments again: pri­vate de­vel­op­ers started con­struc­tion on ap­prox­i­mately 30,000 new units across Canada in each of the last two years, up from about 20,000 in 2014. Large pen­sion funds look­ing for in­vest­ments that of­fer sta­ble, long-term cash flow have showed a grow­ing in­ter­est in such projects.

Still, Peter Nor­man, vice-pres­i­dent and chief econ­o­mist of Al­tus Group, a Toronto real es­tate con­sul­tancy, says rental apart­ments still ac­counted for barely 15 per­cent of all new hous­ing units built in Canada in 2016. In Toronto and Van­cou­ver, rented con­dos rep­re­sent about 80 per­cent of all rental homes — and they are of­ten lux­ury units that don’t suit fam­i­lies with young chil­dren, the de­mo­graphic of­ten most hard-pressed to find rea­son­ably priced hous­ing.

Ur­ban plan­ners have spent years try­ing to en­cour­age de­vel­op­ers to build fam­ily­sized apart­ments, and var­i­ous hous­ing ad­vo­cacy groups have been push­ing builders to ad­dress the so-called miss­ing mid­dle — four­plexes and six­plexes, row houses, and build­ings that fall be­tween the apart­ment tower and the sin­gle-fam­ily dwelling and that tend to of­fer more op­tions for renters. “There is in­ter­est in bring­ing new projects for­ward,” Nor­man says, “but they’re not nec­es­sar­ily mid-mar­ket.”

Hani Lam­mam, ex­ec­u­tive vice-pres­i­dent of Cressey De­vel­op­ment Group, con­firms that his firm, a large apart­ment builder and op­er­a­tor in Western Canada, com­pleted ninety-five units in Van­cou­ver last year — a fig­ure that ac­counts for just more than 10 per­cent of the new sup­ply but reg­is­ters as barely a blip in a city with an af­ford­able-hous­ing crisis. As Lam­mam says, “De­mand out­strips sup­ply.”

Lam­mam pre­dicts that if mu­nic­i­pal­i­ties in Greater Van­cou­ver got the sort of prop­erty-tax breaks avail­able in Seat­tle, where the firm also owns apart­ments, “it would open up the flood­gates. It’s un­be­liev­able the amount of rental hous­ing you would get.” (Seat­tle pro­vides tax ex­emp­tions for de­vel­op­ers of multi-fam­ily build­ings who set aside 20 to 25 per­cent of the units for lower-in­come ten­ants.) He may sound like a busi­ness ex­ec­u­tive with a vested in­ter­est — which he is — but Lam­mam also points out that lo­cal taxes for apart­ment build­ings in Van­cou­ver ac­count for a brac­ing 40 per­cent of the op­er­at­ing costs (which af­fects, you guessed it, how much land­lords charge in rent).

There are other reme­dies, too. Thomas David­off, a pro­fes­sor of real es­tate fi­nance at the Univer­sity of Bri­tish Columbia’s Sauder School of Busi­ness, adds that Van­cou­ver all but pro­hibits new mid-rise apart­ments in sin­gle-fam­ily res­i­den­tial neigh­bour­hoods, thus se­verely lim­it­ing the sup­ply of land suit­able for mod­est in­ten­si­fi­ca­tion. His point: land-use pol­icy is de­ployed to favour one (ex­tremely ex­pen­sive) form of hous­ing, ef­fec­tively keep­ing out an­other (more moderately priced) one. The same could be said of Toronto.

The On­tario Home Builders’ As­so­ci­a­tion, which rep­re­sents a range of com­pa­nies that build homes — from bun­ga­lows to condo tow­ers — sug­gests mea­sures such as waiv­ing HST on rental projects, al­lo­cat­ing mu­nic­i­pal land for rental projects, and re­lax­ing on-site park­ing reg­u­la­tions. Cre­at­ing more pur­pose-built rental op­tions, says OBHA pol­icy di­rec­tor Mike Collins-wil­liams, “is part of a health­ier hous­ing mar­ket.”

Av­ery’s “wealthy renter” ar­gu­ment holds out fi­nan­cial hope for the tens of thou­sands of young, low-to-mid­dle-in­come Cana­di­ans who have been priced out of home own­er­ship. For this group, the mar­ket bar­ri­ers could be a form of sal­va­tion from the too-great fi­nan­cial com­mit­ment of buy­ing a house. The re­sult: more dis­pos­able in­come and health­ier re­tire­ment sav­ings.

But his in­sight de­pends on the will­ing­ness of pol­icy-mak­ers at all lev­els of govern­ment to make the apart­ment-rental sec­tor as ro­bust as the al­ready vast mar­ket for sin­gle-fam­ily homes and condo apart­ments. That means bet­ter land-use plan­ning rules, pub­lic in­vest­ments in so­cial and non-profit hous­ing, and tax poli­cies that cre­ate a com­pelling in­cen­tive for in­vestors to park their capital in multi-unit res­i­den­tial build­ings in­stead of in­di­vid­ual con­dos.

Av­ery’s ideas about long-term rent­ing will prove vi­able when rents them­selves re­turn to earth. At that point, mil­len­ni­als’ le­git­i­mate gripes about be­ing locked out of a fi­nan­cially pre­pos­ter­ous hous­ing mar­ket will take on a more self-sat­is­fied tone.

Canada could do well to be­come a na­tion of renters in the tra­di­tion of Ger­many, France, and Den­mark.

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