The affordable apartment shortage — tax incentives needed for private sector to build more units


by Tim Sale and Alan Borger
Where can I rent an affordable apartment for me and my family? That question haunts 30 per cent of Manitoba renters, and it has gotten worse for most of the last 25 years. The same story is true for most of Canada, and is worst in Alberta and British Columbia. Manitoba has been spectacularly successful in welcoming new families in the past decade, so our cities and towns are growing, some of them, such as Steinbach and Winkler, very quickly. But the refrain everywhere is, “Where can we rent an affordable apartment while we get our feet on the ground?” 
It wasn’t always this way. In the later 1970s, Canada produced over 100,000 units of rental housing per year. Included in this mix were substantial numbers of social housing units which were affordable for lower income families and to those with special needs. However, during the 1970s and 1980s, successive federal governments made a host of changes to the taxation provisions affecting private rental housing construction and management. Many had small impacts, but others were more significant. Cumulatively, they made construction of anything but high rent units impossible. 
By the end of the 1990s, fewer than 5,000 private-sector affordable apartments were being built across the whole country. In some areas, none were built. Many older units have been demolished, and condo-conversions have decimated the supply of older affordable apartments in most cities. To make matters worse for low- and moderate-income renters, in 1990, the federal government left the housing field and by 1998 had transferred its interests in the existing public and non-profit housing stock to the provinces. Canada became the only country in the developed world without a national housing policy.
 Private developers responded by building condominiums and houses where they could make money on their investment. Housing prices rose sharply and more and more families found themselves without affordable housing.
Rent controls were implemented in some jurisdictions to prevent rent gouging, but by themselves, such controls simply put off the crisis for a few more years. In more recent years, existing rental properties have been converted to condominiums at a frantic pace, to the point where many cities now control such conversions to prevent losses of even more rental stock. 
Like a slow-moving train wreck, our housing crisis worsened slowly enough that the crash seemed far away. Unfortunately, it’s now here. The greatest number of those affected by this crisis are lower-income Manitobans who want simply to do the best they can to raise their families in decent housing. Without many more affordable rental housing, our growing cities and towns cannot accommodate modest income Manitoba families or new Manitobans whose contributions are essential to our economic success.
National organizations across the political spectrum agree that we have a rental housing crisis across our country. For example, the Conference Board of Canada recently said: “Approximately 25 per cent of Canadians rely on housing subsidies or experience periods where they spend over 30 per cent of their before-tax household income on housing. This negatively affects Canadians’ health, which, in turn, reduces their productivity, limits our national competitiveness, and indirectly drives up the cost of our health-care and welfare systems” (Building from the Ground Up). 
Many organizations, which have studied this drastic shortage of affordable private-sector apartments, agree on both the nature of the problem and the major solutions. Groups such as the Conference Board, the University of Calgary School of Public Policy, the Canadian Chamber of Commerce, the Canadian Association of Apartment Associations, the City of Vancouver and housing advocacy groups such as Manitoba’s Right to Housing Coalition all agree on the two main problems: the taxation environment for rental developers and the cost of new construction. 
Together, these two factors have created a gap between new building costs and existing average rents of over 40 per cent. If you are paying $800 a month for a two-bedroom apartment today and wanted to move into a new one, the market rent would be over $1,100. Today, it takes a gross income of over $45,000 to afford a two-bedroom apartment in a new building, using a guideline of 30 per cent of before-tax income on housing. 
 The good news is that there is agreement on how to resolve this problem. First, the industry must apply aggressive cost control and productivity measures to new construction. Local Manitoba developers have told us that with highly-skilled crews re-using the same basic building designs, recycling concrete forms and other productivity measures, total construction costs can be reduced to under $160 per square foot, as compared to over $200 which is often seen today. Such units use traditional frame construction, and meet all code requirements for energy efficiency and are already being built in Winnipeg in several locations.
The second solution is comprised of a basket of measures that can be enacted by the federal, provincial and municipal governments to reduce front-end and soft costs, improve early cash flow, reduce land costs, defer or change some aspects of taxation affecting rental property, and reduce property taxes in the early stages of a project. 
Federally, this means reverting to capital cost allowances of the 1970s, treating groups of apartments as a portfolio rather than as individual buildings, changing the application of GST and other measures. 
Provincial measures could include PST rebates while at the municipal level Tax Increment Financing (TIF) and a simplification of permitting would significantly reduce project costs. 
Municipal support can include TIF, zoning and density allowances and lower land charges among other measures.
The changes at the federal level should likely apply to all building projects, while those at the provincial and municipal should be available only to qualifying projects. To qualify, developers would have to agree to rents at approximately the current median market rents, with normal rental increases related to operational costs or rental guidelines.
The above measures are all what are called “tax expenditures.” They do not require new funds to be spent, but rather reduce future taxation revenue. Since virtually no such housing is now being built, this “loss” of revenue would be negligible and far outweighed by the revenues from wages and construction materials. Stimulating housing is universally seen as the most potent economic measure available to governments and is especially appropriate when our economy is weak.
If Manitoba wishes to continue to welcome new residents and to make affordable housing accessible for 30 per cent of current renters who spend more, and often much more of their income on housing than they can afford, we need to make it possible for the private market to once again work for modest-income Canadians.
Ultimately though, Canada needs a robust national housing strategy. One key component of this is making it possible for the private market to supply affordable housing for as many as possible, so that the public sector can focus its resources on those who cannot afford market housing of any price.
(Tim Sale is with the Right to Housing Coalition; Alan Borger is with Ladco Company Limited.)