The Walrus

“Rental Breakdown,”

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

- 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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