I am deeply skeptical of our federal government getting into the real estate development business, and I think a lot of the industry shares this sentiment. However, there are aspects of Carney's housing platform that do make sense. Here's a recent article by Frances Bula in Storeys citing industry reactions:

Do not create a federal housing developer, empower the private sector to do its thing

Multi-Unit Residential Building (MURB) program (which previously existed from 1974 to 1981 and spurred a lot of new rental housing)

Capital gain deferral on funds immediately re-invested back into housing (something akin to the 1031 exchange in the US)

Remove the federal ban on foreign investors

Dramatically reduce / eliminate municipal development charges (though, there's the important question of how exactly this gets done)

Expand the no HST on new housing (Carney's current plan is to only eliminate it for new homebuyers and for new homes under $1 million)

Tax credits for investors in affordable housing (This is not currently proposed, but I like it too. The US has something called Low-Income Housing Tax Credits, which HUD calls their most important resource for creating new affordable housing.)

Create policies that will outlast the current government, and don't make them convoluted

There are, of course, many other things that need to be done to improve the delivery of new housing in this country, including a lot at the micro level. On this blog, we regularly talk about everything from single-stair buildings to streamlining environmental permissions.

If you have anything else you'd like to add, please leave a comment below. Let's keep the pressure on.

Cover photo by Charan S on Unsplash

Big news today in development land. The federal government just announced that it has removed sales tax (GST/HST) from new rental housing effective immediately. This is a significant step in the right direction, and something that we have spoken about many times before on the blog.

Here's how things used to work:

In the case of a newly constructed or substantially renovated multiple-unit residential complex or addition to a multiple-unit residential complex, the builder must generally self-assess GST/HST on the fair market value of the whole of the substantially completed multiple-unit residential complex or addition when possession of the first unit is given under a lease, licence or similar arrangement as a place of residence of an individual.

What this is saying is that if you build new rental housing, and even if you plan to continue owning it forever, you need to determine the fair market value of the property and then pay HST on that amount. In Ontario, the HST rate is 13%. However, the effective rate was a bit lower because of new rental rebates. Let's say it was somewhere around 11%.

Now that this no longer needs to be paid, a lot of rental projects that were flirting at the margin should suddenly make economic sense. Which is why I tweeted earlier today that every housing developer in Canada is right now dusting off their "what if we built rental" development pro forma. It didn't work yesterday, but maybe it does today!

Today is a good day for new rental housing supply in Canada.

Update: This announcement only relates to the federal portion of the HST. The feds are now calling on provinces to follow suit.

There are lots of ideas out there for how to improve the supply of new rental housing. But it is important to remember, at least here in our market, that the playing field is not level between new condominiums and new rental homes. We have spoken about this before, over here, where I compared the (per square foot) revenue generated from your average new condo against that generated by your average new rental home. Of course, since I wrote that post in 2020, we have seen upward pressure on cap rates (meaning downward pressure on values). So feasibility has gotten even more challenging.

The important thing to remember is that developers do not have some philosophical aversion to building more rental housing; it is that the math is challenging. You generally need economies of scale (really big projects), patient long-term capital, and a belief that rents will continue to exhibit meaningful positive growth. If you want to negatively impact new supply, cap rental growth. But if you want to encourage new supply, somebody needs to pull out a development pro forma and make the call to improve the cost structure for new rental housing.

In my opinion, two obvious line items to focus on are development charges (as well as the other government levies) and HST (our harmonized sales tax). The point of development charges, as we always talk about, is for growth to pay for growth. They are intended to pay for municipal services like roads, transit, water and sewer, and so on. In the other words, they're supposed to capture of the cost impacts of new housing. But what about the impact of not building enough new rental housing? Are we thinking about this the right way? Especially if you consider the possibility of more new rental housing in our existing transit nodes.

The HST charged on new rental housing is also significant. There is a new residential rental property rebate available to builders (not tax advice!), but the thresholds have not been indexed and so it's grossly out of date compared to where values sit today. In any event, if the goal is more homes, why not make new rental homes exempt? Developers are simple. If the math works, they will build. If the math doesn't work, they will not build. And these two line items, alone, would go a long way to helping the former.

Photo by Pierre Châtel-Innocenti on Unsplash