Across Canada, we are witnessing a glaring disconnect between the intended goals of housing policies and their real-world outcomes. Well-meaning government initiatives, aimed at tackling the housing crisis, have often backfired or appear likely to exacerbate the problems they were designed to solve.
The landscape of rental housing development in particular has become increasingly challenging under the current policy frameworks. Policies mandating affordable housing quotas in new developments, combined with community amenity contributions based on outdated market conditions, are suffocating the life out of future developments. This isn't just a policy misstep; it's a myopic blunder that ignores market and economic realities, such as increased interest rates and construction costs.
Municipalities that aim to acquire the entire land lift value from increased density achieved through rezoning rely on stable market conditions and place an immense burden on developers. These policies have drastically reduced the land value of properties, rendering many projects unfeasible and triggering a wave of mortgage and loan defaults, escalating cases of insolvency, and a number of properties being placed into receivership.
A particularly concerning trend is the government's interest in old buildings. Acquisitions of single room occupancy units, which don't meet modern health and safety standards, and other properties in need of extensive repairs, are often conducted at inflated prices. Such decisions result in the inefficient use of taxpayer money, contribute little to the resolution of the housing crisis, and inflate property values even further, exacerbating the issue it seeks to address.
The $500M Rental Protection Fund launched by the BC Provincial Government stands as another prime example of this. Aimed at protecting affordable rental properties at risk of being redeveloped, the fund actually hinders the creation of new housing units. By focusing on preserving aging buildings, often situated on underutilized sites and in dire need of repair, it prevents the development of modern, efficient housing solutions.
This approach is flawed for several other reasons. Firstly, several municipalities have already addressed the issue of tenant displacement through extensive tenant protection policies, which require the full replacement of existing units at current rents. Secondly, the fund's stipulation that non-profits intending to redevelop within the next 20 years cannot utilize the fund further limits its effectiveness. As a result, the fund is set to finance less than 2,500 units – units that are riddled with asbestos, wet rot, rust, mold, and other deficiencies typical of older constructions. These buildings, erected under outdated building codes, pose significant health risks to occupants, especially during extreme weather conditions. They are far less energy-efficient and will inevitably need replacement.
An alternative and potentially more effective use of the same funding would be to finance approximately 5,000 new housing units, designating 20% as affordable housing. These new buildings would not only be fully self-sufficient, contributing to lower market rents, but also provide a stable source for future developments. Additionally, keeping these properties as government assets would allow for greater oversight and long-term planning, while still enabling contributions from non-profit organizations.
The current approach risks inadvertently enriching private enterprises at taxpayers' expense and negatively impacting the housing supply. To ensure a focused and beneficial use of these funds, it would be prudent to mandate in each purchase and sale agreement that any net proceeds from the sales to non-profits are explicitly earmarked for new development projects. This measure would guarantee that the funds continue to serve the intended purpose while still enabling the expansion and improvement of the housing stock.
Ostensibly another tool for market regulation, the Property Transfer Tax's true effect has been to stifle real estate affordability. It burdens both buyers and sellers, creating an additional financial hurdle to home ownership. High transfer taxes, intended as a regulatory and revenue-generating measure, have inadvertently reduced real estate market mobility, constraining the supply of available properties and impacting overall market dynamics
The current approach to property taxation, which encompasses both the land and the buildings on it, is another significant disincentive for property development. By levying taxes on buildings, governments inadvertently create a financial barrier to new construction and renovation — activities that are essential for urban development and renewal. This taxation framework becomes particularly unreasonable and counterintuitive during the construction phase, where levying taxes on improvements to an unfinished building is not only unfair but also adds an illogical financial burden to a process already requiring substantial investment.
Instead, a more sensible approach would be to tax only the land. Land possesses inherent societal value and its taxation can ensure that it is put to productive use. This would encourage property owners to develop and improve their properties, as these activities would no longer be penalized through increased taxes. The change could lead to a more dynamic and efficient use of land, spurring development and rejuvenation in urban and rural areas alike.
The collection of substantial revenues through capital gains taxes on asset sales, including those in real estate, underscores the significant profits generated in these transactions. However, the current tax structure, which lacks provisions for the rollover of capital gains into new investments or assets, poses a significant challenge for the real estate market. It may dissuade property owners from selling assets that are subject to capital gains tax, thereby limiting the availability of land for essential redevelopment.
Furthermore, when capital gains tax revenue is withdrawn from the market, it often results in an elevated debt-to-equity ratio within the real estate sector. This shift in financial dynamics, marked by reduced equity for investment and an increased dependence on debt financing, can adversely affect the sector's capacity to fund redevelopment and support urban growth and economic opportunities. Addressing these issues in the tax regime could unlock more potential for investment, stimulate market activity, and foster sustainable development in the real estate sector.
The impending updates to British Columbia's building code present new challenges for the development industry as well. New requirements resulting in larger unit sizes or modified layouts to ensure accessibility are well-intentioned, but will likely result in substantial construction cost increases. For instance, adapting a unit to accommodate accessibility features could increase construction costs by as much as $75,000 per unit. Considering that only a small portion of the population requires an accessible unit, the collective cost impact per individual needing accessible housing is in the millions. This cost not only reflects increased construction expenses but also potential revenue losses from necessary changes in unit design. These requirements could add tens of millions of dollars in costs to some projects, rendering many financially unfeasible under current market conditions. Consequently, this scenario could lead to higher housing prices for consumers, thereby intensifying the existing affordability issues.
Last, but certainly not least, is government actions as it relates to foreign capital. Balancing foreign capital with the developmental needs of Canada's housing market is a critical challenge. Foreign investment is vital in driving the number of projects that can proceed, and a reduction in this capital — through restrictions or taxes — has a direct effect on the supply of new condo and rental housing. Aligning the level of foreign investment with immigration rates is essential to ensure a healthy growth rate in the supply of housing. Therefore, directing foreign capital towards new development projects or newly built properties, rather than existing, less productive assets, is crucial. This approach would ensure a more efficient and productive use of foreign investment, significantly contributing to the expansion and health of Canada's housing market.
The path forward for Canada's housing market requires a shift in approach. A balanced, realistic approach that respects market dynamics and economic principles is essential. Policymakers need to recognize the complex interplay of various factors that influence the housing market, from investment flows and construction costs to demographic trends and consumer needs. This involves fostering an environment where investment is encouraged and directed towards productive uses, and where policies are adaptable to the ever-changing economic landscape. Only by embracing innovative, market-driven solutions can we hope to overcome the current challenges and lay the foundation for a robust and equitable housing market in Canada.