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How to Spur Construction of More Rental Units

A row of rental townhouses with balconies on a sunny day.

With more than 300,000 new rental homes needed in the Greater Toronto Area alone in the next decade, the federal government’s decision to remove the GST on construction of new apartment buildings – and Ontario’s proclamation shortly thereafter that it will follow suit with the HST – is good news.

But there could be another development for the apartment building industry. We learned recently that the CMHC sent a briefing note to federal Housing Minister Sean Fraser on the possibility of bringing back a tax measure from the 70s and 80s that spurred more rental construction.

The briefing note, obtained by CBC News, said that “many housing stakeholders suggested that to promote investment in new rental construction and restore affordability, the federal government should reconsider the tax policies previously in place in the 1970s, particularly the MURB.”

MURB is the acronym for multi-unit residential building. Under the plan, investors were allowed to claim depreciation and certain other costs of an apartment building against related income. The plan encouraged the construction of about 195,000 units at a cost of $2.4 billion in forgone taxes. 

In most cases, a MURB results in an investor receiving a large tax refund in the initial year of ownership. The tax-shelter plan was introduced in 1974 and ended in 1982.

Internal records obtained by CBC News indicate that CMHC recently reviewed the information. However, both the agency and Fraser’s office have declined to say whether the program is on the table.

I, for one, hope it is.

Along with removal of the GST/HST, the plan could be a good way to boost construction of more purpose-built rentals as it would harness the private sector to deliver rental apartments in the thousands.

LDC Model Would Be a Win-Win

Meantime, the feds should look into bringing back another rental housing program, known as the limited dividend company (LDC) model, as a means of increasing affordable rental housing projects. 

CMHC used the model to encourage private investors to build and operate housing that was geared to low- and moderate-income individuals.

The program, which existed in legislation as early as 1938 and ran until 1975, allowed owners of affordable housing to benefit from government loans at interest rates that were below normal. In return, developers had to offer units at rental rates that were below certain income levels. Additional restrictions were placed on rent increases. The LDC was a win for both developers and tenants.

In many ways, the LDC is similar to the model used by water and energy utility companies. They charge a specified amount for the services to reflect the costs incurred for the commodity, plus its delivery, and an allowance to cover depreciation and provide a reasonable return on investment.

Unfortunately, neither the MURB nor LDC are active. The feds would need to resurrect the programs.

A row of rental townhouses on a street in Vancouver.

Rents Have Been Rising

There is simply no time to waste.

The rental housing deficit in the GTA is expected to increase in the next 10 years to 177,000 units, which means construction of purpose-built rentals will have to more than double the current pace.

Meantime, the high cost of housing and limited supply are preventing many working families from gaining a foothold in the market. As a result, rentals are in short supply and rents have been rising dramatically.

According to Zumper, an online site for apartment listings, monthly rent for an average one-bedroom apartment in Toronto is $2,550 – up 18 per cent from a year earlier. Average rent for a two-bedroom is $3,350, and a three-bedroom is $4,198.

Many people are now leaving cities like Toronto to look for housing and rental accommodation elsewhere. To fix the situation, we must bring down the cost of both housing and apartment rentals.

The simplest way to do that is to build more homes and apartment buildings – and build them faster.

To accomplish that, we must walk and chew gum at the same time. We must make it more attractive for builders to construct apartment buildings as well as rectify systemic issues that slow down production of new homes and condos and bring down taxes, fees, and levies on housing.

A Canadian flag flies in front of tall rental buildings in Toronto.

Systemic Barriers and High Fees Need to be Fixed

In a recent report, the CMHC said that by the end of the decade, Canada will need nearly 3.5 million more housing units on top of what’s already being built by 2030 in order to restore affordability to the market.

Systemic issues at the municipal level, including lack of digitization and a streamlined development approvals system, are slowing down the construction of new housing. Exceedingly long wait times for approvals, as documented in numerous studies, are stymieing new residential construction. 

Exorbitant taxes, fees, and levies, including rising development charges, also prevent developers from moving ahead on projects. Municipal development taxes have gone up 700 per cent over the past two decades, according to the Canadian Home Builders’ Association, with taxes comprising up to 30 per cent of the price of a home today. Our charges are the highest in North America.

Systemic barriers, as well as the high fees on new housing must go. Tax measures to spur apartment building construction must also be resurrected.

Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at media@rescon.com.

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