We have spoken recently about the reset taking place in the development industry right now. It is difficult to underwrite new projects.
But even before this current environment, it was challenging to make new rental housing pencil. Condominium projects almost always look more attractive (at least here in Toronto) and generally speaking, the spectrum for rental housing feasibility goes from "no, this doesn't work" to "yeah, maybe this will work if we trend rents over a long enough time horizon."
The problem with this is that we know more rental housing would be a positive thing for our cities. So how do we address this? Here are some common solutions that get thrown around:
Make condominium projects less attractive to build. If fewer developers want to build condominiums and if fewer investors want to buy them, then maybe new purpose-built rentals will become more enticing to build. On some level, this makes sense. It should create downward pressure on land values. But this doesn't help rental housing supply if it isn't feasible to begin with. And why limit overall housing supply? (Related post, here.)
Make rental housing projects less attractive to build. I know this sounds counterintuitive when I say it this way, but we do do this. Rent controls, to give just one example, generally make it harder to build new rental housing. Yes, it can help those who are already housed, but it can disincentivize proper building maintenance, it can lead to more people being over-housed, and it absolutely hurts new supply. So there are trade-offs.
Make rental housing projects more attractive to build.
I find this last one intriguing, and so here's one specific idea that I have raised before. Though this time, I'm quoting Benjamin Tal of CIBC:
But, by far, the most pragmatic step to take in the immediate future would be to waive or defer HST payments on purpose-built rental projects from first occupancy to the sale of the building, while keeping the same valuation methodology as the current regime.
It’s the most realistic option since it’s relatively easy to implement, and Ottawa will have a willing partner in the Ontario government. Buried in page 84 of the recent Ontario budget was the following sentence, “we call on the federal government to come to the table on potential Goods and Services Tax/Harmonized Sales Tax (GST/HST) relief, including rebates, exemptions, zero-rating or deferrals”.
Such a move alone would shave close to $60K from the unit cost of that 400-unit project in Toronto, resulting in a meaningful reduction in rent, while at the same time unlocking tens of thousands of rental units across the country in short order — clearly a step in the right direction.
We should do this.
P.S. Sam, thanks for sharing Tal's article with me.
