In late-July, when a group of Vancouver developers published an open letter to the Government of Canada asking them to reconsider the foreign buyer ban, a match was lit that reignited the debate around the divisive issue of foreign investment in Vancouver real estate.
It's clear that many who have been affected by the housing crisis place some (or maybe even all) of the blame on foreign buyers, who they believe flooded the Vancouver real estate market and drove up prices.
Developers feel differently. Some have historically been more reliant on foreign buyers to fund their presale projects than others. Regardless, all of them would undoubtedly argue that restricting investment in any way is a net negative decision and counter-productive to overall growth in the industry.
Many developers also recognize the divisiveness of the issue, thus not all developers who were asked to sign the open letter did so. One such developer is Vancouver-based Townline, whose projects include the rehabilitation and transformation of the Hudson's Bay building in downtown Victoria and the upcoming Langara YMCA redevelopment in Vancouver with the Musqueam Nation.
In an interview with STOREYS last week, Townline Founder and CEO Rick Ilich explained how he views foreign investment, outlines his proposal for a regulated program that would require condos purchased by foreign buyers to be rented out for the first five years, and discusses the overregulation by government.
What did you make of the open letter? While Townline did not sign the letter, were you asked to and then declined, or were you not asked at all?
Yeah, there was an opportunity to participate in that, but I didn't necessarily agree with the approach. There is no point looking backwards. It's about models moving forward and that's really what I'm trying to suggest. I think the messaging that went out there, it was going backwards versus going forward.
I think the letter from the panel of self-acclaimed experts was also really based on old school thinking. We've got to stop looking at government for handouts. They're saying we should just subsidize more social housing and forget about the free market. That's just very unfortunate thinking. In a free market world, I think we should have less of that thinking.
But regardless, do we need government support for the industry and providing homes? Absolutely. But the support we need is to start looking at providing housing as a necessary infrastructure product — particularly rentals, but don't ignore people that aspire to do well and want to have ownership.
I think it's time to work together, rather than regulate the industry to death and that's what all three levels of government have done. They just can't help themselves to extract rather than provide assistance — and assistance, again, doesn't need to be in the form of subsidy, it needs to be in the form of treating this industry like a desired industry, like they do for resource exploration and renewable energy. They're incentivizing through tax benefits for those areas of employment, but actually they employ less people than the housing industry. They've got this [belief] in their head that providing houses shouldn't be a profit centre. Well, you know, why would people take hundreds of millions of dollars, or billions of dollars, of risk if there wasn't a return? That's kind of my point. Canadian pension funds that are investing dollars that are earned by Canadians, it's not by chance that most of their money is invested outside of Canada. They simply can't make money here because we're so regulated.
What do you make of the proposal to carve out exceptions in the foreign buyer ban for presales? Do you think it would make a difference, or do you disagree with that as well?
No, I don't disagree with it. Foreign investment, whether it be in the form of housing or whatever, has always been part of the capital stack providing solutions to business. So in the case of housing, foreign investment doesn't mean that there's a bunch of folks who are going to buy a bunch of houses, leave them sitting empty, and treat them like playing cards. They're trying to inject money into a safe economy, a relatively stable government, and they want their money to be protected, and in a perfect world, they want to make money doing it.
So, my [suggestion] is creating a system of inviting the capital back into the market and have it be part of a solution for providing rental housing. We need more time to build more rental housing and we can build more rental housing if government would start to deregulate, so let's throw all those condominiums that are coming to the market, throw them into a rental pool, but under the finance structure that we're all having to work with. We need buyers to throw that product into rental pools and I think that foreign capital would be appreciative of that opportunity. And in the meantime, industry gets to catch up and build purpose-built rental during that five or six-year window where these condos are regulated to be rental. It's a win-win.
Where did you get this idea? Have you seen this in other places?
I haven't seen it done elsewhere. I'm not saying that it hasn't, but I haven't seen it. I'm just simply trying to be a solutions provider, and the quicker housing providers like ourselves are able to turn over the capital that they already have locked up in some of this [condo] product, we can reinvest that dollar into more housing, which is what we're lacking. We need more capital in the housing market, and with our capital all trapped in standing inventory, that serves nobody. So, get the money, free up the capital in some fashion, and I think this is a solution to it, so we can reinvest in more housing and keep that system of cycling through housing going. We need inventory, we need a means of creating more affordability, which we're all advocating very hard for, and I think we can get there. This is just one piece of that cycle.
Have you raised this idea with others in the industry?
Yeah. Most that have reached out to me like the idea. Some don't — they want more instant gratification. But, again, I don't think you're going to get much support [on that]. But a lot of folks appreciate the nuanced approach to it and I can't see why it wouldn't work.
Government blamed foreign investment in housing as a catch-all for all of their problems, which is just totally inaccurate. But regardless, it has become a popular topic. And in the straw polls, it's popular to keep the capital out. But I think if it was framed appropriately — that capital can actually bring good and provide more rental housing — I'm pretty confident that if the public had that full understanding, there would be a lot of support for it.
Again, we're a country in economic distress and the last thing we need to do is tell the world we're not open for business. Canada makes it very challenging for companies to make money, to attract new capital. That's why the pension funds aren't paying attention to Canada. So, what can we all do to attract more capital, to create more housing? That comes down to deregulating and allowing some of these ideas to come to the surface. And I think some foreign capital, if small investors buying one or two homes and they get thrown into a rental pool, I don't see how that could not be a win.
Since the open letter was published, I have seen many people ask the question of why developers previously said that foreign buyers make up a small portion of buyers, but are now saying that foreign buyers are important and can make a difference. Can you explain why foreign buyers are so critical right now?
The government has aggressively put a lid on the demand side of housing, while they keep raising the cost of producing it. To your question about the importance of foreign capital, it's not the end-all be-all. It's simply part of an equation that has made it challenging to continue to produce housing. So we're saying "invite that capital into this market." And if it's directed to [a rental pool], that's not a bad thing. That's smart economics.
Before we had that kind of thinking and we were taking our projects out for presale, we were getting some foreign investment, but — I'm trying to think of the highest point for Townline — it might have been 5%, maybe 6%. It's certainly not 50% or 75% like some people profess. But it's still 3% to 5%. What's wrong with that? That's 3% or 5% more consumer spending than we have now. Every bit helps.
Government just was extracting the hell out of housing. Every level of government had their hand out and they're creating these taxes and these fees. These fees, they always kind of have a fancy name around it, like school taxes and such, but they're wealth taxes. They were thinking, "How do we extract more capital out of this product that is being produced" and they choked it to death. There's way too many fees. In the City of Vancouver, 30% of the cost of producing a new home are fees. That's a lot of money. And if you look at the policies that they've created, every political ideology you can think of that's layered onto housing is impacting the cost of it.
We've been in an extensive market downturn now for two or so years. How has Townline been affected and how have you adapted?
Townline is quite a diverse company. We're not just a developer of speculative housing. Yes, we do that and that's part of our core business, but we're also a contractor, we build for others, we also have a building and a development solutions provider to the not-for-profit sector, so we're always busy with social housing. We've been very busy building market rental housing, which is coming to a stop, just due to the cost of producing the housing. But it's impacted us. We're not chasing anything. We're looking at maybe some of the distressed opportunities and trying to help lenders and other developers work out of their problems. And, unfortunately like a lot of our peers, we've had to look around and let a lot of people go seek employment elsewhere, which they're struggling to find. That kind of unfortunate rejigging is going on in every office right now and I think we've stripped ourselves down to the core working group and we'll do our best to satisfy and keep everybody busy. But it's not for the faint of heart right now. There's a lot of small and medium-size developers that are just not going to be here next year.
You alluded to TL Housing Solutions. How has the social housing sector been affected by the market downturn? I imagine it has been impacted even more than market housing.
In many cases, it costs more to build subsidized housing than it does to build market housing. And that's because of government policy, wrapped around trying to tackle every ideological good you can think of, from climate change to carbon offsets to various livability issues that, you know, people really can't afford. The more government layers on ideology and policy on social housing, the less of it is gonna get built. So, what we're seeing is a lot of our not-for-profit providers, just to service the debt that they're gonna take on, they have to build more and more housing that is closer to market rents, when really they should be doing less of that and more of the deeper-subsidized homes for the folks that really need it. Government policy is driving that direction.
And even policy is chasing the same ideology, in all three levels of government they all layer on their take on that topic, such as the energy code issues. And they actually often conflict. So then you've got to spend a lot of time, months and sometimes years, trying to get around the conflict between the levels of government that are all trying to do the right thing, but they're simply not communicating and talking, so you get this unnecessary waste of time and resources, because someone's drawn a line in the sand and said this is how we're going to approach that topic. It's shocking how infrequently the three levels of the government can agree on something. It's an old model of management and an old model of thinking, and I'd like to believe that's going to change and somebody's going to wake up.
We have a cost of delivery crisis and the only release valve left is government. Some of the people that I've seen in the media are talking about land prices being too high, "land is just a conduit for speculation." That boat sailed a long time ago. Land prices are dramatically reduced. I can show you pro formas from some areas around the Lower Mainland and the land can be free and the math still doesn't work. And the cost of land in Richmond, Victoria, Vancouver is down 40 to 60% from a couple years ago. It's still challenging to work because various siloed parts of government just keep layering on more costs.
