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Who should pay for affordable housing?

Deeply affordable housing is mostly infeasible to build.

This is why you don’t see the market naturally building this kind of housing on its own. It, for the most part, doesn’t make any economic sense to do so. So this is also why the US has fabricated things like low-income housing tax credits. They are a way to make up the economic shortfall that exists with low-income rental housing and get the private sector building this kind of housing.

We sometimes try to convince ourselves — or maybe it is a way of shirking responsibility — that there can be such a thing as no-cost affordable housing through things like inclusionary zoning. But I think we all know that there’s no such thing as a free lunch. Somebody is ultimately going to need to pay. The big question, of course, is who should that be?

By definition, we acknowledge that the people who will ultimately live in these affordable homes cannot afford to pay market rates. So by default, the subsidies will need come from somewhere else. But again, from where and from who? Should it be specific people who pay or should it be mostly everyone who pays?

If we return to the Toronto building industry’s favorite topic right now — development charges — you’ll see that under the current rates, every new 2 bedroom or larger apartment that is constructed must pay $3,727 toward affordable housing. Under the proposed rates, this will increase to $12,545 for every new large apartment. It’s by far the largest proposed percentage increase (237%) and also one of the largest service items.

This raises two interesting philosophical questions.

One, should the buyers of new housing be responsible for contributing to affordable housing in this way? Because what we are in effect saying to these people is, “Hey, you can afford to buy a new market rate home, so we’re going to collect some additional money from you — $12,545 to be exact — so that we can try and help those that aren’t in the same position as you. We’re also going to mandate additional affordable homes within your building and we’d like you to subsidize those too.” This is one way to redistribute wealth.

But if the goal is to try and create more broad-based affordability, an alternative approach might be, “Hey, you already own a home and it has gone up a lot in value, so we’re going to collect some additional money from you over time so that we can try and help those that aren’t in the same position as you.” This would be the property tax approach. It’s probably not perfect, but might it be a more fair and equitable way to redistribute wealth?

The second interesting philosophical question has to do with whether this is consistent with the dogma that growth should pay for growth. The idea behind development charges (also known as impact fees in some parts of the world) is that they should pay for the cost of new development. This makes complete sense. When you build new housing you certainly need some additional stuff — everything from additional school capacity to emergency services.

But the question here is whether the construction of new housing in and of itself creates a direct need for more affordable housing, and therefore should be charged for it. Asked in the opposite way, if you weren’t building this new housing, would you then no longer need this affordable housing, just like you no longer need that additional school capacity?

This is definitely not the case. In fact, I would argue that the opposite is true. If you don’t build any new housing in a growing city, you actually exacerbate the problem of affordability. So here’s a provocative thought. Rather than a charge, should this affordable housing line item actually be a credit towards each new project given that it benefits affordability?

While it may not make any economic sense to build affordable housing, I think that many of us would agree that it makes a lot of social sense to build affordable housing. We know that our cities are at their best when they are both diverse and inclusive. The problem is that we can’t agree on who should pay for it.


  1. Ken Brooks

    When I first moved to Toronto in the late ‘90s, I moved into a newly completed co-op in the St. Lawrence Neighbourhood. These were financed through a federal program, had about the lowest rental rates in the city at the time, and as a co-op, fostered a close knit community. Shortly after that the federal government ‘got out of t he housing business’, for reasons that still escape me. My fondest wish for how to effectively create affordable housing is to widely distribute where the money is coming from (the full population) through a progressive income taxes, and through the public sector, who can borrow money cheaply, and fund the projects as long term investments (the St. Lawrence co-ops had 50-year mortgages). For the life of me, I don’t understand why this never even comes up in conversation. For most of the reasons you’ve put forward in your blog, it feels like the private sector is just not the best delivery system for affordable housing.


  2. Jakob

    Here’s another thought. Assuming that we successfully shift markups from new builds to the larger population, will these cost savings be passed on in full to home buyers?

    Unquestionably there’s intrinsic value in simply having more housing stock to begin with, but if it ends up increasing profit margins more than decreasing end user prices, the population would get squeezed twice. And everybody knows how sticky housing prices are once they’ve gone up already.

    I think we’re on the same page in that affordability can be achieved mainly through more efficient building of new housing. But in the grander scheme of things, efficiency means spending less on production and that includes everyone involved – property owners, developers, materials suppliers, engineers, tradespeople, bankers, and whoever else takes a cut. Taxes don’t really count because they mostly get redistributed in necessary ways anyway.

    Distribution of costs among the greater populace is a worthwhile consideration, but in the end it’s a zero-sum game. The big gains are in figuring out what parts can be cut out entirely from production itself. Whoever makes the biggest margins, we should look more closely for lower-cost alternatives.

    Co-ops have done this by cutting out banking to a large degree. Developers have made units smaller because it turns out most people didn’t actually need that much space to begin with. Stronger materials have given us more height. Townships have sprawled on cheaper grounds that somehow the government was still owning. However, it seems none of these are having a lasting impact and there’s always someone else to take the same or more money. Plus the government is running out of space to sell and land owners are making bank instead.

    So what’s left? How is it that everyone involved is complaining about higher costs, but at the same time everyone is passing on the cost increases not just as an absolute dollar value but as a percentage (even higher cost increases) instead? I don’t know, call me a socialist if you will, but my impression is that there are too many entrepreneurs involved and we should try to offload some of the (expensive) risk to the government in return for more consolidation, lower-interest borrowing and perhaps bounded wages for everyone in the industry. Also, let the overpriced property markets crash (and I say this as a homeowner) to recoup some equity from long-outperforming property owners. At the cost of screwing some of the unfortunate more recent buyers of course.

    Somehow we need to get to a point where capital gains and profit margins are cut out from the whole housing pipeline and only salaried income remains for individuals. Because essential services and stuff.

    Also, yeah, obviously this isn’t going to fly. So we’ll just continue to tread water and when shit really hits the fan, we’ll eventually vote in a radical populist who doesn’t give a damn about either efficiency or cutting excess fees and instead just gets people to jump at each others’ throats. And we’ll have a higher taxes in a worse economy anyway. Such is life.


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