12/22/2023
A very good article by Chris Seepe.
CMHC’s survey (authored by Ernst & Young LLP) stated that roughly 90% of the Canada-wide rental housing developers who responded to the December 2023 survey said that purpose-built rental projects are no longer feasible with conventional debt financing. Construction costs are up by over 50%, conventional lending rates have more than doubled, and government fees in markets such as Vancouver and Toronto have increased to over 25% of construction budget costs.”
The December 2021 most plainly stated, “Market rents are consistently below economic rents (i.e. rents required to make a project financially viable). In other words, market rents are rarely sufficient to cover the development and construction costs of projects, regardless of the project size, location, and quality
of the finishes” and concluded, “Traditional financial performance indicators do not support the development of private-market, purpose-built rentals …”
The four primary (but not only) performance indicators used to determine financial viability were:
Cash-on-cash return (including principal payment)
Internal rate of return (levered, 10 years)
Margin on cost (Generally, a margin of 15% is required for financing purposes)
Yield on cost (return on cost) - divide net operating income (NOI) by total development costs
CMHC economic specialist Tania Bourassa-Ochoa concluded, “… it's extremely difficult to make the math work to build new rental projects.” Rental projects are required to pay the same upfront costs as condominiums projects such as development charges and certain taxes. But rental projects lack some advantages of condo projects, such as advanced capital through presales or the ability to pass on taxes to the end user.
Once again though, conflicting, uncoordinated or sometimes self-serving agendas have conspired to frustrate efforts to create housing that’s affordable. One particularly blatant example is where the federal government waived the GST tax on new housing development but Metro Vancouver increased their development cost charges a week later that essentially eliminated any benefit that developers would have received from the GST reduction.
CMHC has refreshingly informed government for decades that Canada faced an ever-increasing housing shortage that has become systemically critical. It has said that financialization is not the root of all evil and its positive elements are in fact important to producing Canada’s future housing supply. It suggested that rent control is not good policy and that vacancy control in Ontario from 1986 to 1997 was disastrous (Ontario’s Rent Registry cost $610 million (2023 dollars) to “save” tenants $236 million). Politicians at all levels of government don’t even listen to their own housing experts.
Once again, I conclude that government will never solve housing unaffordability or substantially increase housing availability, and it will never comprehend why missing middle rental housing in particular will never be constructed, without:
Coordinating housing needs of all stakeholders through a centralized, vertically-integrated and empowered government agency;
Proactively engaging all (not just the “big”) rental housing providers and creating a legal and financial framework that makes housing construction AND operation financially viable and legally balanced.
“Fat,” self-serving municipalities appear to me to be by far the most culpable for the housing crisis in general (especially so-called property licensing, development charges, various taxes) while provinces like Ontario massively discourage small-to-medium rental property construction and operations (e.g. second suites, lane way/tiny homes, etc.) by passing brutal, heavily-tenant-biased residential tenancy legislation and then fails catastrophically to provide timely justice for tenants and landlords alike.
Chris.
