BUILDING HOUSING LIKE WE DID THE ST. LAWRENCE SEAWAY
Tyler Meredith and Alan Broadbent
In the next several days, Prime Minister Trudeau and his recently shuffled cabinet will convene in Prince Edward Island to discuss the government’s policy agenda heading into the fall. Undoubtedly, housing will be somewhere near the top of that list as the government grapples with increasing economic and political pressure to address a growing barrier to our collective growth and wellbeing: the imbalance between available housing supply and housing demand, and the lack of sufficient quantity of deeply affordable housing for the 1.5 million among us who live in core housing need.
The federal government has done a lot to reinvigorate the federal role in housing with the introduction of the 2017 National Housing Strategy, and subsequent investments to top it up, but there is clearly a need to do more and to think more boldly.
While bold thinking is what the moment ultimately requires, any desire to meet that moment, will run headlong into a key problem: facing a $40 billion deficit this year and other major competing and urgent needs for investment, like decarbonation, national dental care and improving productivity – can the government afford it?
Yes.
There is a way to square this circle – to act boldly to solve a major national problem, while being mindful of the federal government’s limited ability to run greater deficits.
And let’s be clear: unlike provinces, whose fiscal positions were greatly improved during COVID because of strategic federal spending to prop up the economy, the federal government does not have as much fiscal flexibility as some provinces do. But Ottawa should not think that it can only eat away at the margins here. It just requires a different way of thinking about how the government invests and spends to solve this problem.
It is important to distinguish the way federal finances work. Ottawa, like most provinces, uses a version of accrual accounting, backed by public sector accounting standards. What this means is that for programs where there is no asset, the cost is effectively the cash expended on people or transfers. But if there is an asset to be built, the “cost” is equal to the capital cost amortized over its lifecycle. If Ottawa grants money to a lower level of government or external organization who builds the asset themselves, all of that cost is realized up front in the federal fiscal framework, because it is simply a cash transfer for which there is no corresponding asset that Ottawa owns.
The Rapid Housing Initiative, which helped to get things built quickly during COVID-19 “cost” the government a lot of money because it mostly just transfers money to external providers at 100% of the project value, with all the ownership resting elsewhere. You can see why even with large sums at play, there is a limit to what the federal government can do with this approach.
A better alternative for the federal government, as well as provinces, is to use public lands and borrowing power to build housing at scale, and build the strength of its balance sheet at the same time. The key is to retain ownership of the land as an asset on the government balance sheet, and to increase the value of that land by building housing on it. Provincial and municipal governments also own land which they could use in the same way, and the federal government could also step in to help coordinate the freeing up of crown land at other levels of government to be made available for construction.
Not all federal land is well suited to development, but some is and a large amount of provincial and municipal land is even better situated. There is an obvious opportunity here for governments to work together. We need to stop looking at our public land as an asset to be monetized rather than a public asset whose value should be enhanced to solve an urgent economic problem.
To enable building housing at scale, the federal government can also use its access to capital markets at low rates to provide secure development and construction financing which would significantly reduce the contingencies built into housing pro formas required by conventional providers of capital. To spur the development of affordable housing they could offer these rates in exchange for developer commitments on performance and keeping rents low long term. Rental pro formas typically show a ten year period before income from rents becomes profitable. Federal financing can also extend the amortization rate on loans to provide financial relief for housing operators, enabling them to keep rents as low as possible.
Both these measures would contribute to pulling costs out of building housing. Home prices would be lower, making ownership affordable for more modest income earners. Rental prices in purpose-built rental would be lower.
Ownership of large assets by the federal government is normal. The Canadian portions of The St. Lawrence Seaway and, more recently, the Trans Mountain Pipeline (TMX) are two examples. Bridges, port facilities, and military bases are other examples seen across the country.
In 2018, when the federal government spent $4.5 billion to buy TMX, it effectively cost the government $0 because it got an asset of the same fair market value in return. Ottawa was able to justify that because the deal made sense and helped address an urgent economic need. The same kind of thinking is required now, by all levels of government.
Building housing on land would increase its value. Government itself would not have to build or operate the housing. This could be contracted to those with expertise, and Canada has some of the best development and construction companies in the world. It also has non-profits and cooperatives experienced in developing and managing housing.
But the retention of the asset by government would take away some of the reluctance of meeting the severe housing shortage at scale, a reluctance that comes from seeing every contribution as an expenditure rather than an investment. Giving money away depletes the treasury. Investing in upgrading the value of an asset grows the treasury.
That there is a housing crisis in Canada is now commonly accepted, with measures of housing affordability the worst they have been in decades, for renters as well as homeowners. This is the product of many reasons, including the current macroeconomic environment, but most especially the impact of not having government as actively engaged as it should be, as far back as the 1980s, in helping ensure we build enough units to meet our growing needs. There are many opinions on what to do in many places, ranging from a single magic bullet to a comprehensive redesign of government and policies. In reality there are many things to do, some easier than others, but all of which need to be addressed in some degree. What is clear is that the time for tinkering has passed. Canada is short about two million homes and CMHC forecasts a need for 3.5 million more by 2030.
There are few places where costs can be reduced in producing housing. Some of these costs can’t or likely shouldn’t be reduced. Labour and materials are set by markets. Charges by municipalities should not be reduced as cities have few revenue instruments, relying overly on land based revenues like property tax and development charges. They cannot levy income or sales taxes, the purview of federal and provincial governments. Housing costs generally include:
Cost of land, which varies widely by geography and within specific geographies, and tends to be higher where people want to live
Cost of financing, with developers having to show high margins on pro formas to lower risk and deal with contingencies
Length of amortization
Development charges levied by municipalities which cover the cost of connecting development to municipal services, and which are a significant element of municipal revenues
Other public levies to support community infrastructure
Labour costs
Materials costs
The most obvious places to seek savings are in the cost of land and cost of financing, and governments with land assets and fiscal capacity can make a significant difference. Canada’s federal government has strong fiscal capacity, and the larger provinces do too. Provinces have the same revenue tools as the federal government, lacking only the ability to increase the money supply. They also have relatively low borrowing costs.
There is a great deal of publicly owned land in Canada, by the federal, provincial and municipal governments and their agencies (eg. school boards, port authorities). From time to time governments identify some of these lands, often under a “surplus land” category. These are usually unattractive parcels unsuitable for housing, such as by railway sidings or under bridges. Much of the publicly-owned land is not deemed “surplus”, and held against a possible future need. When it is identified as either for sale or re-use, there is often a stipulation that it be valued at its potential “highest and best use” as a measure to protect the public interest. If the government retained ownership of the land, such a stipulation would not come into play.
This proposed initiative needs to operate at scale and with clarity in order to meet the challenges of the housing crisis. For its part, the federal government could take a leadership role by having CMHC establish an independent but related affiliate or subsidiary, which could adopt some of its existing financing programs, and have separate governance. If CMHC cannot provide that independence then a new agency should be created, possibly modeled on The Business Development Bank of Canada or the Canada Infrastructure Bank. The BDC was initially formed in 1944, and the CIB in 2016, both with the structural and governance independence needed to act effectively. The housing crisis demands a similar instrument. Critical to its success would be empowering a strong and experienced executive team to drive the project.
The housing situation in Canada is a cascading crisis. At the top end of the market, either sprawl or high-rise condos is the norm. Sprawl consumes farmland and is expensive to service with infrastructure. Condos overload city infrastructure requiring expensive upgrades. At the bottom end of the market there is little supply of new rental housing despite a high percentage of renters (about 1 in 3 of Canadians rent, yet only 10% of housing is purpose-built rental). There is also little new supply of affordable social housing, almost no supportive housing for people living with disability, and limited deeply affordable housing. Yet governments and the market continue to respond as they have for four decades, as if this crisis will resolve itself. It has been decades that we have been living with a reality in which demand and supply are not in balance – we need to build more, and at scale.
To be clear, the idea we propose is not the only thing that can and must be done. And it is not entirely for the federal government to solve. But it is a critical and otherwise overlooked ingredient that all governments should think about and for which the federal government can play a key role in coordinating and leading. Ensuring we can build sufficient affordable housing to meet Canada’s long-term growth potential is an urgent economic priority today and it will take years of building to get right.
Canada is capable of big efforts to meet big challenges. Wilfrid Laurier populated the prairies between 1905-14 with a concerted effort to attract cold weather farmers and help them succeed: free or subsidized land, credit, crop transportation and storage, marketing assistance, and seed science. Louis St. Laurent forged ahead building the St. Lawrence Seaway despite US reluctance, a huge boost to Great Lakes prosperity. Justin Trudeau reduced child poverty with the introduction of the Canada Child Benefit and met the Covid-19 pandemic with financial supports for businesses and individuals, aggressively pursued vaccine supply, and promoted public health protocols.
The housing crisis demands the same response from both federal and provincial governments. Effective ministers with strong administrative support should be mandated to identify publicly owned lands to be made available, financing should be rapidly put in place at low rates, strategies to access supply chains favourably must be developed, labour force development must be accelerated with a focus on immigration and the required construction and building skills, and each government should identify the operational centre of the effort to avoid interdepartmental non-cooperation.
Housing is a fundamental building block of society with positive outcomes socially and economically. A full scale investment in housing on public land will strengthen our public balance sheet and will advance the right to adequate housing for all current and future Canadians as promised in the 2019 National Housing Strategy Act.
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ABOUT THE AUTHORS:
Alan Broadbent is Chairman and Founder of Maytree, and Chairman and CEO of Avana Capital Corporation.
Tyler Meredith is a Fellow of Maytree and a former senior economic advisor in the government of Canada.
The views and opinions expressed are those of the author and do not necessarily reflect the position of Air Quotes Media. Read more opinion contributions via QUOTES from Air Quotes Media.