Thank you for taking time out of your busy day to view my blog. Today’s article is a continuation of last week’s article will focus on ways to increase private participation in the creation of affordable housing. It summarizes the key points in “Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint” by The Institute on Municipal Finance and Governance (IMFG) is an academic research hub and non-partisan think tank based in the Munk School of Global Affairs at the University of Toronto.
Here are the ways that we can make the demand stronger and make the numbers work better:
- Increase wages,
- Increase government transfers and tax benefits, or
- both of the above.
Although it is nice to think that philanthropic causes can help create and maintain affordable rental stock, but the reality is that it must make business sense for the private sector to participate in it.
Today’s reality is that developers are far more willing to invest in condo project than in purpose built rentals. Why?
- Time: a condo project can pay off within 5-7 years, which the holding period for a purpose built rental project may be 10-30 years.
- Risk: condo developers can pre-sell units and lock in prices. This allows them to use less of their own money, borrow at more favorable rates, and possibly get out of the deal if the numbers don’t make sense anymore (case in point)
- Churn: given the shorter development window, condo developers can invest their money several times, while purpose-built rental developers don’t have much choice as they must either exit or refinance the project.
- Operational risks: condo developers set it and forget it. We all know that after the Tarion warranty terms end, the developer is no longer on the hook, thus they have no incentive to put in more expensive equipment/components. On the other hand, purpose-built apartment owners must take on operational risks (e.g. capital expenditure, tenants that don’t pay, rent control, etc.)
- Tenant dispute: we all know that the tenant landlord act is very much on the side of tenants. Thus, we can incentivize investors to invest in rentals by expediting many processes and disputes, which can hamper losses.
Given the above, we must all acknowledge that for affordable housing to work and be sustainable it must:
- financially feasible – investors must get a descent return, whether that is private or public investors.
- Partnership models and ways of doing business must change – it might be obvious, but without government intervention, affordable housing will not work. Thus, private sector partners must understand that the government sector must abide by certain rules to ensure transparency as they are under public scrutiny and that they must adopt themselves to these standards to keep moving forward.
- As a former public sector employee in the housing sector, I can confidently state that employees from junior to senior levels spend 30-70% of their time “covering their tracks” and “justifying” their decisions. These are indeed inefficiencies, but this is a cost we as a society have accepted.
- Also having been on the other side of the fence, I can tell you that a group of top executives that work for a private developers can sit in a room and decide how to finish their suites, who to hire, and how much to pay. Again, we as a society accept the fact market forces work themselves out and hopefully savings will be passed on to the customer.
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