Opinion: Canada needs more rental housing, but the feds might make it harder to build

Proposed changes to the Rental Construction Financing Initiative may see developers reduce the number of units in a building or cancel projects altogether

By Steve Lafleur and Josef Filipowicz

One of few silver linings for cities during the COVID-19 pandemic was an easing rental market in Canada’s largest, most expensive municipalities. From 2019 to 2020, rental vacancies rose in most major metropolitan areas, and more than doubled in the chronically tight Greater Toronto and Vancouver areas.

But whatever reprieve many renters enjoyed early in the pandemic is evaporating quickly. Between 2020 and 2021, rental vacancies fell in all but five metropolitan areas, and we’re on track to return to pre-pandemic levels in the GTA. So we’re right back where we started three years ago: with too few units available and rapidly increasing rents.

Reversing this trend would require a lot more housing construction. While some people are skeptical that “supply-side” housing policies work, the stats don’t lie: rents have moved inversely to vacancy rates in major Canadian metropolitan areas over the past three decades. And the pandemic gave us a crash course in what a rental market with some slack looks like. In the first year of the pandemic, it wasn’t uncommon to find Toronto landlords offering prospective tenants their first month’s rent for free, or discounts on utilities.

One part of the solution to Canada’s housing shortage is purpose-built rental apartment buildings. While in general housing construction has lagged far behind what is needed to maintain a healthy market in Canada, rental apartments have been a bright spot lately. For example, the number of purpose-built rental units under construction across the GTA almost tripled between 2016 and 2021.

There are many reasons for the resurgence of rental apartment buildings. To a large extent, it was just the market recognizing that there is a shortage of units. Higher rents and high occupancy levels made rental buildings an attractive asset class to investors such as pension funds. Another under-looked factor was access to low-interest loans from the federal government. In 2017, it introduced the Rental Construction Financing Initiative (RCFi), which offers low-interest loans to rental developers during the riskiest phases of development.

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A Canada Mortgage and Housing Corporation evaluation conducted last year found that the program made a substantial contribution to the supply of rental apartments, especially in Toronto, where 66 per cent of rental housing starts in 2019 benefited from RCFi loans. In fact, a survey of program participants found that roughly two-thirds of units affected by the program would either not have been built at all or would have been built smaller (or later). Of course, there is no perfect way of gauging how rental construction would have fared in the program’s absence, but the analysis suggests that it has helped.

Unfortunately, the RCFi has come under fire from the federal NDP for producing “unaffordable” housing. In fact, the NDP negotiated a re-focusing on the program with the Liberals as part of their supply and confidence agreement. The text calls for “Re-focusing the Rental Construction Financing Initiative on affordable units (under 80 per cent [average market rent]) and use 80 per cent [average market rent] or below as definition of affordable housing.”

As well-intentioned as such a move may be, it risks further eroding the feasibility of purpose-built rental development. When asked to make units cheaper, builders need to look elsewhere in their budgets to make the math work. They may reduce the number of units or cancel projects altogether — especially when faced with higher costs driven by labour shortages, high costs of materials, and rising interest rates. Instead of improving affordability, the proposed changes to the program would likely worsen it by reducing the number of rental units getting built. Fewer units means more competition between tenants and, ultimately, higher rents. It also means some people get pushed off the housing ladder entirely.

If the intention behind the proposed changes to the RCFi is to increase the supply of non-market or social housing, there are other federal, provincial and local programs in place for this very purpose. If they aren’t getting results, they may be better candidates for changes. The RCFi, however, appears to be doing exactly what it was designed to do — spurring more rental housing.

Canada’s rental housing shortage remains severe. And a slowdown in rental housing construction would make it worse. We need more market rate housing, not less.

Special to National Post

Steve Lafleur is a public policy analyst and Josef Filipowicz is an urban policy specialist.