How more public rentals can pay for themselves
In the face of a mounting housing crisis, what if B.C. could massively increase public investment in below-market rental housing — and that upfront investment could literally pay for itself with no increase to taxpayer-supported debt?
While this might sound too good to be true, it simply follows from the basic logic of rental housing development. When building new rental housing, the upfront costs of construction are offset by the stream of rental income the project generates over time.
This is, of course, the premise on which private-sector rental housing developers base their business models. For them, building new housing is not a “cost,” but rather a way to generate substantial profits.
Similarly, when governments or the non-profit sector build rental housing, the investment can also be self-sustaining. But there is a key difference: Instead of generating profits, these housing projects can operate on a break-even basis, with rents set at below-market rates.
Just how much cheaper can the rents be for this type of self-sustaining public rental housing?
For-profit housing developer profits are often estimated to be about 15 per cent of costs. The government can borrow at cheaper interest rates than the private sector and can amortize those costs over a longer period of time (50 or more years, if desired), both of which can reduce break-even rents. As a result, rents could be set at least 15 to 20 per cent below market rates.
Using some additional ways to further reduce rents, which I discuss below, economist Marc Lee estimates that a new wood-frame rental building with moderate land costs, built on a public or non-profit basis, could achieve break-even rents of $1,520 for a one-bedroom. These homes would also be protected from the whims of rising market prices, a key feature as long as the overall housing shortage persists.
What pressure would a massive expansion of self-financing public housing construction put on government finances and taxes? Very little. Investing in public housing need not affect the annual provincial budget balance or redirect tax dollars from other public policy priorities.
To understand this, consider that several existing B.C. Crown corporations already cover their own capital and operating costs through dedicated income streams. For example, B.C. Hydro's borrowing is considered to be “self-supported debt,” since the servicing costs are covered by its own dedicated income stream: payments from the electricity it sells. Accounting rules and credit rating agencies consider “self-supported debt” to be distinct from “taxpayer-supported debt”, the latter of which is serviced using tax dollars.
An ambitious public housing investment program could be structured in the same way under a Crown corporation. If there is a credible plan to cover the upfront costs of investment through rental income, the housing investment won't affect taxpayer-supported debt levels.
To be clear, this is not some sort of accounting trick — it's simply a recognition that certain Crown corporations have their own income streams that cover their costs. This is why the credit rating agencies, typically conservative institutions, don't balk at the practice.
Imagine that B.C. undertook the mission to build this type of public housing at a rate of 10,000 — or even 20,000 — new below-market rental homes per year. If we peg the upfront land and costs at roughly $500,000 per unit, the hypothetical Crown corporation would be undertaking $5 billion to $10 billion per year in borrowing in self-supported debt, backed by the rental income streams created.
This is a feasible level of investment. To put it in perspective, B.C. Hydro is projected to spend about $4.1 billion this year on capital investment booked as self-supported debt (overwhelmingly related to the Site C dam), backed by expected returns in the form of payments from electricity customers.
Unfortunately, rents have been driven so high in this province that even break-even monthly rents that are 15 to 20 per cent below market levels may still be out of reach for many British Columbians. The good news is there are a whole slew of ways to achieve more deeply affordable rents.
If the cooperation of the municipality can be secured (or is simply required by the province), one way to achieve cheaper rents would be to build rental apartments on lower-priced land that is currently zoned for low-density detached housing. Because it is zoned for so little housing, this land can be acquired more cheaply than the far-too-scarce sites where multi-family housing is currently allowed.
If municipalities were willing to waive the expensive parking requirements usually put on apartment buildings, this could also lower costs substantially, allowing for further rent reductions. Parking construction adds tens of thousands of dollars in costs per parking stall.
Government could also help lower costs by contributing land they already own. Another option is to structure housing projects to cross-subsidize between units in a building, with some homes renting at market rates to help cover the cost of charging even lower rents in others.
Finally, another important way to achieve more deeply affordable rents is to create a separate stream of operating subsidies or upfront grants for some public housing developments. The self-financing portion of the housing investment would remain separate under the Crown corporation structure (continuing to be designated as self-supported debt), while the grants or subsidies would represent a separate contribution supported by tax revenues to help lower rents. Taxing the huge windfalls of the wealthiest landowners would be one good way to raise that revenue.
There is simply no way out of B.C.'s housing crisis without addressing the chronic shortage of homes overall and the shortage of dedicated, non-market rental housing in particular. A swath of research tells us that adding new housing supply really does help, and that public and non-market housing delivers the most affordability bang for the buck, since it creates new units that are immediately more affordable.
The housing crisis sometimes feels beyond our control, but a massive effort to build non-market rental homes is a policy option that's achievable, affordable and waiting at our fingertips.