Originally written by John Riche on February 12, 2012
There has been a lot of political discussion recently about affordable housing. It is often thought that this domain involves exclusively social housing, as in the case of our marketplace, those properties managed by Newfoundland and Labrador Housing or, to a lesser extent, The City of St. John’s, which are all income tested. While an important issue in itself this discussion does not discuss social housing but rather that segment of the marketplace dominated by what is erroneously referred to a “the working poor”... this demographic is not defined by age, but by income. They are usually employed or under-employed and have a household income of lower than $45,000 per annum. There are a lot of pensioners, retirees, single parents and younger people in this group. This group is where affordable housing initiatives are most required because of the stellar increases in prices in our marketplace over the past ten years as they can neither purchase a new property nor qualify for social housing. This demographic is what Victorian-styled class historians used to call the lower middle class.
There have been many ideas put forward by politically minded groups about how to solve this crisis. Most of these ideas call for the influx of more money from all three levels of government whether in the form of cash or the construction of new properties. Critics argue that this will just form another type of funded “social housing” and at worst result in “ghetto” mentality.
The problem cannot be expected to be solved by the private sector. In essence any company (contactor) has one primary goal, to profit. Affordable housing is not profitable business, especially not in an ultra-hot real estate market where larger homes means larger profits. Therefore the only way to have the private sector involved is to provide tax or other government borne incentives. Some do exist, but not to the level required to begin to solve the issue.
Therefore it falls on the three levels of government to find solutions to this problem. However instead of trying to cleave more money from already tight budgets there may be means of relaxing or eliminating certain programs and taxation that would immediately remove many of the barriers facing prospective home buyers in this demographic.
Since it is impossible to qualify every type of home purchase, let’s use many of the common attributes of a purchase by a first time home buyer. This case study will simplify and quantify where the real money goes.
Let’s take a St. John’s residential property that has a subsidiary basement apartment. Let’s also say, for arguments sake, it cost $300.000, but its assessed value was $250,000 (assessed value for taxation purposes is usually lower as it’s based on property value from two years previous). Let’s also assume that the buyers want to put down 5% as a down payment (the down payment argument we will leave for another time). Therefore they will qualify for a non-conventional insured loan from a Canadian bank underwritten by the Canadian Mortgage and Housing Corporation (CMHC insures mortgages that are under 20% down payment because the banks see these loans as risky). Lastly, let’s assume a 30 Year amortization of the loan, and that the property closes on February 15th of 2012.
Case Study: (Monies for government and or affiliated agencies in blue)
Cost of Home: $300,000.00
Down Payment: $15,000.00
CMHC Fees (2.95% of Balance): $8,407.50
Amount to Mortgage: $293,407.50
Prov. Govt. (Deed & Conveyance 4% of price +$100): $1,300.00
Prov. Govt. (Mortgage Reg. 4% of Mtge amount +$100): $1,273.63
City of St. John’s Water Tax Adjustment (x2 for apt): $443.46
City of St. John’s Property Tax Adjustment: $945.15
How the Federal Government Can Help
CMHC is a federal crown corporation. Here is their mandate straight from their website:
“Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing agency. Established as a government-owned corporation in 1946 to address Canada’s post-war housing shortage, the agency has grown into a major national institution. CMHC is Canada’s premier provider of mortgage loan insurance, mortgage-backed securities, housing policy and programs, and housing research.”
It’s odd that housing policy and programs has fallen to the third stream (out of 4 in their mandate) considering it was borne out of a real shortage of affordable housing for Canadians in the past. Indeed it is their mortgage loan insurance which has become its biggest business and business has never been better. CMHC’s net Income in 2010 was 1.77 billion dollars. This should come as no surprise since foreclosure rates in Canada usually hover below the 1% rate. Therefore the banks don’t want to take the risk, despite the 99% success rate of lending to people who can’t afford higher than a 20% down payment, so they tell the government to underwrite it. The government in turn underwrites said “risky” mortgages and makes large profits. In the above case study the purchasers paid over $8400 in CMHC fees (premiums, to be technical) which will be amortized over the course of the mortgage to cost the purchasers even more money in the long run.
The question remains then why cannot CMHC create programs more suited for affordable housing. Indeed CMHC has made some inroads into this problem as can be demonstrated on their “Affordable Housing Center” on their website. However the profits generated by CMHC’s mortgage loan insurance need to be poured back into more direct and intense affordable housing initiatives including the virtual elimination of CMHC fees for those who qualify based on income and type of home purchased.
The federal government outside of CMHC can also create tax-advantageous initiatives that will not only increase the supply of affordable housing but will give the private sector, (in this case builders, contractors and existing/prospective landlords) the gumption to tap into a burgeoning market. For example, the Canadian Real Estate Association (CREA) has been lobbying governments for years to allow for a Capital Gains tax rollover for the sale of real estate. In other words, if a person or corporation wants to sell their existing real estate and re-invest in another property, the capital gain that is triggered (outside of the profits generated by the transaction) would not be taxable but rollover into the next property, which will be payable upon its disposal. Governments have rejected this, as this type of capital gain from real estate has proved to be a very lucrative source of revenue for past (and future) governments. However if the government was to allow capital gains rollover privileges for investors whose properties that increase the supply of affordable housing, whether via the provision of rental units or via the creation of affordable real estate then this would create a boon in the affordable housing market. More housing means more taxation revenue and additional economic activity throughout the economy.
How the Provincial Government Can Help
Most home buyers see the breakdown of fees on the lawyer’s sheet as a confusing re-capitulation of terms and fees they do not understand. Not that they can be blamed, it is very confusing. In the above case study these purchasers gave the provincial government $2,573.63 to register the mortgage and the deed. While it does cost the provincial government some money to create, staff and maintain these registries, it is certainly much more income than is required.
Therefore the provincial government needs to reduce, eliminate or defer these massive costs for those persons who qualify. Indeed these fees need to be paid immediately as opposed to the CMHC fees which are rolled into the amortized mortgage. Eliminating these fees would also reduce the down payment burden for those home buyers who fall into an income tested demographic.
How Municipal Governments can Help
Without a doubt, out of all levels of government, municipal governments depend on the tax revenue generated from property more than any other level of government. Therefore solutions at the city or town level need to be more creative. However they need also to be fair.
In the case study above, municipal taxes cost the purchasers $1,388.61. This was based on a pro-rated amount calculated at the time of closing. In St. John’s, the home owner pays their taxes twice a year, from Jan 1 – June 30 and July 1 to Dec 31. In the above case the purchaser had to pay the previous home owner that tax they paid in advance. Which in this case is 137 days (remember 2012 is a leap year). These taxes include annual tax of 10.1 mils based on 250K assessment or $2525.00 per annum plus a flat water tax of $579.00. In this case however, since there was a subsidiary apartment the purchaser had to pay two water taxes, both at $579. Like the provincial fees these funds were required immediately.
Obviously the paying of two water taxes per water unit when obviously one water unit doesn’t use the same amount of water is patently unfair. This issue has been raised with councils before but to date not remediated.
If these taxes were eliminated in the first year of occupancy, or prorated over latter years then the burden on home buyers would not be as strong. Further lowering the amount required for down payment as well. Secondly it would allow the home buyer to build up a tax account with his or her mortgage provider over the course of a year.
If the city was to defer taxes and prorate, for example 5 years of taxes in a 4 year period, there would have to be some penalties to those who move early, not entirely dissimilar to mortgage penalties for those who use a 5% cash back plan as a down payment for a mortgage.
Other than taxes however the city could relax some of its non-safety related building regulations. Indeed, if a homeowner wanted to transform his property from a single family dwelling into a unit with a subsidiary apartment they would have to draw permits from city hall to ensure that this was done in accordance with city standards, which for the most part mirror the Canadian building code. While the need for fire rated gyproc between units is essential, having three working electrical outlets in every room only adds significant cost to the person creating the rental space and acts as another impediment to creating affordable housing. Councils need to review these rules and remove those unnecessary costs to help build the supply of rental units.
There has been considerable discussion of the implementation of rent control within municipalities as well. However, rent control, for the most part acts not as a way of assisting affordable housing but quite oppositely creates a barrier. The unfortunate truth about rental units is that they are a business and business has profit as its ultimate goal. If rent control is enacted it will cause existing investors to exit the market and potential investors will shy away from potential losses. The end result is that supply of rental units will be reduced not enhanced, further enhancing the problem at hand. Proponents of rent control like to use statistics that show less than 1% vacancy rates. However for our marketplace it is very important to note that CMHC who measures this statistic does not include houses with subsidiary apartments in this calculation, therefore it is essentially flawed data.
How Can We Implement Changes
Implementing changes must be based on the three I’s in that both the users of these programs and the subsequent purchased properties must be (1) income tested, (2) inclusive and have (3) incentives for the private sector.
Income testing is usually the domain of social housing, however it would have to be used for those who would take advantage of these programs that reduce or eliminate fees. Universality will only lead to abuse by those who don’t need it and these programs would eventually be shut down.
Properties purchased by clients of these programs must also be inclusive in that they must be in neighbourhoods that have regularly owned homes. Otherwise, “Ghettoization” will occur and wool lead to similar socio-economic problems faced in other lower income neighbourhood across North America. That is not to say we can’t build communities and neighbourhoods that are aimed at this new market, but that we can’t limit it to these areas exclusively.
Lastly we must have incentives for the private sector to build and create these properties, whether they are new multi-family homes or apartment buildings as rental units. In St. John’s there have been a steady number of apartment buildings refurbished as condos which has significantly reduced supply of affordable rental units. By providing tax incentives, especially capital gains rollover allowances, prospective landlords, builders and contractors can target this new market without resulting to making them $350,000 condominiums and $400,000 houses in the suburbs.
The measures mentioned in this essay can be considered tax-expenditures by governments inasmuch as they may result in a loss of immediate revenue. However the economic spinoffs of housing construction and conversions via increased jobs, lowering social housing requirements for those upwardly mobile clients and creating a larger tax base for municipalities mean that over time these expenditures can begin to offset these losses. Further by increasing housing solutions we begin to shorten the gap between the rich and the poor which is an economic benefit to all.
All we need now are governments with the foresight and courage to make it happen.