Bid to freeze rental stock will backfire

Friday, April 27th, 2007

Builders need incentives, not ham-fisted regulations


A recommendation by Vancouver city staff that council block the conversion of a rental building in Kitsilano to strata units highlights a difficult issue that faces most major metropolitan regions. The supply of rental accommodation is tight with few new units being built, while demand for affordable housing is increasing. Vancouver city council is scheduled to debate and vote on the issue May 17.

To staunch the loss of affordable rental housing stock, city planners have proposed what amounts to a moratorium on demolition or conversion to strata of any rental apartments. Many local governments impose limits on the conversion of rental housing to condominiums based on the vacancy rate as determined by Canada Mortgage and Housing Corp., which they are empowered to do under the Strata Property Act.

Concern about the loss of rental accommodation is understandable. After all, renters represent 56 per cent of the city’s population, predominantly lower-income earners, the young and the elderly. The city’s housing centre, using CMHC figures, calculates that only 29,000 new market multiple dwellings were added between 1996 and 2005; over the same time, Vancouver’s population grew by 46,680.

It is clear that Vancouver needs more rental housing, but making the market even more inhospitable to development might produce the opposite of the desired outcome. A paper prepared for the Greater Vancouver Regional District last year illustrated why more rental units are not being built. On a pro-forma comparison, the rate of return on equity for apartment condo construction was 57 per cent; for rental apartments 1.7 per cent.

If an apartment building owner is denied the right to maximize the value of the asset, there will be little incentive to invest in maintenance. The rental housing might be preserved in the short term, but its quality will decline to the point where the only option will be eventual demolition. This is a recipe for slums.

Rather than force an unwilling landlord to operate an unprofitable rental business, perhaps it makes more sense to shift the responsibility to the strata corporation to ensure that owners of units can rent them out. Many strata corporations limit rentals to no more than 15 per cent of the units in a building, some allow no rentals at all. Owners should be free to rent their properties as long as they remain responsible for the actions of their tenants.

Besides, the vacancy rate is highly misleading. CMHC excludes from its calculations suites in private homes, which account for as much as 20 per cent of rental accommodation. Local government could encourage this type of accommodation by abandoning the notion of an “authorized” suite and the requirements that designation imposes on owners.

There is considerable churn in the rental market, with an average length of tenancy of two years. Tenants move up to ownership when their financial position improves, leaving their apartments to others starting out on the same path.

In any case, preserving existing rentals is only a stop-gap measure. In order to stimulate more rental accommodation, governments have to make it a better business proposition.

The federal government could have taken a major step in that direction in the last budget had it heeded the advice from business groups urging a capital gains tax rollover for small investment property owners. Furthermore, the income of owners of rental apartments is taxed as investment income, like stocks and bonds, rather than at the preferential small business rate and, unlike other businesses, they get no break on the goods and services tax. These are disincentives that discourage development and push investors out of the rental business.

As for the Kitsilano building, where rents range from $1,300 to $2,900 a month, two-thirds of the tenants favour the strata conversion. They don’t need council’s protection.

© The Vancouver Sun 2007

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