By Chris Seepe
There is a powerful, compelling answer to solving the pandemic affordable housing crisis, complete with a huge financial pool, if the government would only take steps to unlock it.
The government’s failure to address the housing shortage combined with its decades-long persecutorial actions to marginalize landlords (in Ontario through the Residential Tenancies Act and the Human Rights Code) have had a reverse effect towards protecting vulnerable groups, particularly seniors, people on social assistance and people with no credit, work or rental history (single moms, foreign students and refugees). The government’s sometimes well-intentioned but often fatally flawed legislation has made these groups extremely high-risk tenant prospects for landlords.
The housing shortage has driven rental vacancy rates to the lowest in living memory. Landlords receive tens of applications for every single vacant rental unit. Most landlords will choose applicants that provide the highest assurance that the landlord’s financial obligations will be met.
Low vacancy rates are also driving the alarming increase in the number of Ontario families waiting for affordable housing.
Many landlords would agree for various reasons that seniors are highly desirable tenants. However, seniors statistically remain in one building for long periods of time relative to other demographic groups. They might pay $1,000/month rent when they move in but, because of rent controls, they may be paying $1,200/month 10 years later when a landlord-investor could be receiving $1,500/month market rent. That $300/month may seem a reasonable sacrifice for a landlord to contribute to the betterment of society, but $3,600/year is a notable profit loss for most small rental property owners, especially considering the legislated inability for landlords to pass on many of their actual operational costs to their customers.
But what government universally fails to understand is that $3,600/year of net operating income (NOI) represents $72,000 of an investment property’s equity (at a five per cent cap), against which an investor-landlord could typically borrow 75 per cent loan-to-value. And that’s for one senior.
Conversely, consider the incredible pool of private sector investment income if government allowed landlords to build up the equity (not unchecked, mind you) in their rental properties and then provided incentives that encouraged investor-landlords to refinance those properties specifically to reinvest the proceeds in the purchase or construction of additional rental properties. One 10-unit apartment building might generate $600,000 of leveraged equity after five to 10 years, which becomes the down payment on a $2.5-million property purchase. Multiply those investments by tens of thousands of investor-landlords and the financial pool for building rental properties is not only self-evident but unfathomably huge – far more than any amount tax dollars could provide.
Developers would flock to build purpose-built residential properties for investor-landlords, who’d be lining up to purchase the completed properties. Deal structures and government incentives would handle the transfer of the short-term, relatively high-risk vacant rental property to investor-landlords, who would receive a financial incentive over a period of time to lease up the property without going broke in the process. Incentive examples might include a property tax moratorium, deferred or forgiven development charges, accelerated capital expenditure write-off periods and interest-free loans.
Government taxes currently spent on trying to make a dent in affordable housing could be re-channeled into providing desperately needed housing infrastructure services, especially water, sewer, garbage management, roads, transit and related services needed to drive housing intensification.
Lenders could be protected (by CMHC) for a period as the property goes from zero-income to full tenancy.
With vacancy rates so low, it’s likely most rental properties would be fully tenanted before the building was completed.
In time, supply might start to catch up with demand. Like every other business, landlords would have to compete for customers by improving amenities and finding operational economies that permit them to lower their rents.
But there’s a bigger barrier to solving the housing crisis. Ontario’s Places to Grow and other greenbelt legislation were passed to contain urban sprawl to better utilize expensive societal infrastructure. Municipal planning and bylaw enforcement agencies are fundamentally mercenary automatons who apply rules and bylaws without social context or application of their government’s spirit of intent to address housing needs and the costs of infrastructure creation and management. A book could be written on the myriad examples of seemingly ludicrous planning department decisions based on municipal bylaws that don’t reflect the objectives of urban intensification and housing development needs of all types.
Tap into the vast investment property equity pool and align municipal enforcement agencies to the housing crisis issue, and everyone wins. Government alleviates homelessness, vulnerable tenant groups have access to affordable housing, investor-landlords drive local economies through increased property, income and corporate taxes, and sustaining more jobs, lenders have new sources of investment opportunities. And the country, provinces and municipalities prosper.