Do governments make good developers?
The Liberals just announced that, if elected, they will form a new entity called Building Canada Homes (BCH) which will, "get the federal government back in the business of building homes." Broadly speaking, this new entity is proposed to have three key functions: it will build affordable housing at scale (including on public land), it will help to "catalyze" the private sector, and it will provide financing to affordable housing developers. There's a lot that is interesting in the policy teaser, but let's focus on function number one today: Do governments make good developers?
The outlined intent is that BCH will "act as a developer to build affordable housing" and "partner with builders for the construction phase of projects." So it sounds like they will not be constructors. The language they use also suggests that BCH will be an acquirer of land. Sometimes it will develop on already-owned public land, but in other cases it will go out and buy new land, sometimes offering it back to the market via land leases.
Acquiring new land will be challenge number one. As we have talked about many times before on this blog, land should be the residual claimant in a development pro forma. Meaning the value of land depends on what you can build on it. So if BCH is looking to build affordable housing and the rest of the market is looking to build some higher-and-better use, it will be very difficult for them to complete in the market. This is the same reason why, historically speaking, the City of Toronto has struggled to acquire new parkland with the funds it collects from developers. It can't compete.
On the flip side, it's very possible that in a downmarket, like the one we're in right now, BCH might be the only real buyer of development land. Affordable housing requires subsidies and if the subsidies BCH has access to result in both feasible projects and higher residual land values, well then they'll be able to win sites. But it will depend on the market conditions at the time. It also raises an important question: What is the right level of subsidy for the affordable housing that BCH intends to develop itself?
The second challenge is going to be execution. Development is a risky endeavor, but most of the time the private sector accepts these risks because they believe they will be compensated accordingly. And once they have taken on these risks, they become highly motivated to deliver for their investors and partners. Will the federal government be equally motivated? Perhaps. There are, of course, lots of examples of public housing developers in other parts of the world. But is it the most effective way to deliver new affordable housing? An alternative approach would be motivating the private sector to participate.
Getting the federal government "back in the business of building homes" may sound promising, but there's reason to be skeptical. There will be lots of details to figure out if it's actually going to be efficient and effective.
Cover photo by Eduardo Alvarado on Unsplash
I'll quote Reagan: "The most terrifying words in the English language are: I'm from the government and I'm here to help." I think (and I'm no developer) that they're looking at the problem from the wrong end, with the unspoken assumption that the lack of affordable housing is due to greedy developers (a common liberal trope), when every bit of evidence points to the fact that the regulatory environment is the main and biggest hurdle. We've all seen what pouring billions into government programs has led to before. I'm not hopeful that if this is enacted it will do any good.
The two public examples that immediately come to mind are Singapore and Vienna. I'm going to look into them a bit more. But it's hard to imagine government being more efficient than the private sector.
Would love to hear your findings. It seems safe to say that both of those governments would be more discipline than ours in handling it.
I suggest you read up on the Vienna Housing Model. Unfortunately, the two best books on the subject are out of print but I am sure you can find a ton of articles by Googling “Vienna Housing Model”. Vienna has been building social housing for 100+ years.
Good point. I had this in mind when I was writing this post. I'll look into further. It deserves a follow-up post.
Test