2b WORTH SAVING Changing the Economics of Rental 4/9/2012 Housing By Jonathan X. Cote
Worth Saving Worth Saving C H A N G I N G T H E E C O N O M I C S O F R E N T A L H O U S I N G Executive Summary This report examines the economics of rental housing and makes five recommendations to address the financial gap that is creating a barrier to the development of new purpose built rental units in Metro Vancouver. The report argues that rental housing is one of the most important sources of housing for low and moderate income earners in the region. Failure to address the financial gap between purpose built rental and market condo projects will result in demand for rental housing exceeding supply in Metro Vancouver. The social and economic consequences of this could be very detrimental to the region. To address these challenges, municipalities need to implement policies that will make the development of new purpose built rental projects financially feasible. The five recommendations in this report will only be effective if implemented as a whole. 1. Rental Land Banking : Municipalities need to implement policies that will limit non rental development opportunities on sites that are currently occupied by purpose built rental units. Examples of these types of policies include rental land bank, replacement policies or rental zoning. Page 1
Worth Saving 2. Density Transfer Programs : This policy would allow owners of existing rental properties to sell their unused density to neighbouring developments. Redevelopment pressures are significantly reduced if excess density entitlements do not exist on a rental property. 3. Eliminate minimum parking requirements : Minimum parking requirements should be eliminated for rental projects that are within 800 meters of a frequent transit stop. By allowing the market to determine the appropriate amount of parking for a site, the financial viability of a rental project would increase substantially. 4. Reduction of Development Fees and Levies : Fees and levies should be reduced to minimum levels needed for municipalities to cover their development processing and essential servicing costs. 5. Density Bonus Program : Municipalities should create separate density bonus fee structures for rental projects. Density bonuses should only occur in areas that have already been pre-planned for increased density. Page 2
Worth Saving Introduction Over the next 20 years the housing system in Metro Vancouver will face an increasingly daunting task of properly housing low to moderate income earners. At the heart of this problem is the current and future state of rental housing in the region. Metro Vancouver’s current rental stock provides housing for a significant proportion of low to moderate income earners. The rental stock is aging and very few new purpose built rental buildings are being built. The reasons for this are relatively straightforward; the development economics of rental housing do not work for creating new rental housing and cannot compete with market condo developments. Given the important role rental housing plays in the region ’ s housing system, this report will make several recommendations to alter the economics of rental housing. The majority of the recommendations in this report lie in the purview of municipal governments and illustrate that the economics of rental housing can be addressed at the local level. Each recommendation in this report on its own will likely do very little to improve the region ’ s pending housing challenges. It is important to recognize that the recommendations need to work together and will not achieve the intended results if adopted in isolation. Current Situation In Metro Vancouver there are approximately 100,000 purpose built rental units Page 3
Worth Saving located in 3000 different buildings (Coriolis Consulting, 2011, p.5). These units are not evenly distributed across the region. The vast majority of purpose built rental units are located in Vancouver and account for about 52% of the region ’ s total (Coriolis Consulting, 2011, pg. 5). Other municipalities with a significant purpose built rental stock include Burnaby (11%), New Westminster (10%), City of North Vancouver (7%), Surrey (5%) and Coquitlam (3%) (Coriolis Consulting, 2011, p.5). It is worth noting that older communities closer to the core of Metro Vancouver tend to have higher numbers of purpose built rental units. Metro Vancouver Purpose Built Rental Stock Vancouver 52% Burnaby 11% New Westminster 10% City of North Van 7% Surrey 5% Coquitlam 3% All Other 12% This is important because these communities also generally have higher home ownership costs. In these municipalities home ownership is out of the reach of many low and moderate income earners. The next important characteristic of the existing purpose built rental stock is that it is aging. In Vancouver, 52% of purpose built rental buildings were built between 1961 and 1970 and 80% of low rise rental buildings were Page 4
Worth Saving built before 1970 (Coriolis Consulting, 2009, p.11). In New Westminster, the median age of the rental stock is 47 years (Gray & McClanaghan, 2012, p.9). As the stock begins to age, the building conditions have also started to deteriorate. Altus Group recently completed a random condition 31% of purpose built rental assessment of rental buildings in buildings surveyed were in poor condition Vancouver. The study found that 31% of the buildings surveyed were in poor condition (McClanaghan, 2010, p.58) . The report concluded that, “the level of investment observed is not likely t o lead to an improvement in the rental stock” (McClanaghan, 2010, p.58). The final important characteristic of the rental market in Metro Vancouver is its low vacancy rate. The 10 year average vacancy rate in Metro Vancouver is 1.4%, which is well below rates that would be considered a healthy rental market (Metro Vancouver, 2011, p.1). This snapshot of the rental market in Metro Vancouver reveals that although the rental market may appear relatively stable it will continue to face ongoing and growing stresses in the coming years. A Slow Death Housing systems do not change quickly; rather they evolve slowly over time. Impacts from policy changes are often not realized until decades after implementation. The current challenges that are being faced with rental housing are rooted in policy changes that occurred in the 1960’s and 1970’s. During that time federal tax changes in relation to capital gains were implemented that discouraged Page 5
Worth Saving investment in rental properties. The result has been a, “disparity in t ax treatment that has skewed the market to ownership to the detriment of rental sector” ( McClanaghan, 2010, p.38). The introduction of condominium forms of ownership has also played a huge role in limiting the growth of the purpose built rental market. In essence, by allowing the stratification of condos, rental-only zoning was eliminated and rental housing came into direct competition with Growth in Residential market condos. We are now beginning to Market in last decade: see the results of these policy changes. Ownership: +160,620 units Over the last decade, the ownership Rental: - 2422 units market in Metro Vancouver has grown by 160,620 units, while the rental market has seen a net loss of 2422 units (McClanagahan & Gray, 2012, p13). Given the current condition of purpose built rental buildings, this gap will likely accelerate since, “a large share of the wood frame rental properties have reached an age where they have a higher likelihood of being candidates for redevelopment” ( Coriolis Consulting, 2011, p.11). Coriolis Consulting recently completed a risk analysis of rental buildings in six municipalities in Metro Vancouver and found that between 16-18% of purpose built rental building were currently at risk for redevelopment (Coriolis Consulting, 2011, p. 51). This number will only continue to grow as the existing stock ages and further pressure increases for redevelopment. Page 6
Worth Saving Why Rental Housing Matters Protecting rental housing for the sake of saving a particular housing tenure is not a justification on its own to warrant government policy changes. To understand why rental housing is so important it is first necessary to examine who the rental market is serving. In Metro Vancouver, the average rental household annual income is about $40,000 which is well below the regional average (Metro Vancouver, 2011, p.1). Approximately 80,000 renter households in Metro Vancouver are spending more than 30% of their gross incomes on rent and over 31,000 are paying more than 50% of their gross income (Metro Vancouver, 2011, p.1). Nationally, there is a huge wealth disparity between renters and homeowners. Homeowners have nearly twice the income of renters and 70 times the amount of total wealth accumulation (Hulchanski, 2004, p.3). The City of Vancouver’s rental strategy concluded that, “as the cost of ownership continues to increase, the private rental market will play an increasingly important role in the overall housing system, as renting becomes a permanent housing tenure for a significant number of households in Vancouver” Only 12% of renters (McClanaghan, 2010, p. 22). It needs to be can afford entry level condo acknowledged that home ownership for a variety of ownership in reasons will always remain out of the reach of many Vancouver low and moderate income earners. Based on the average rental income, only 12.1% of renters can afford entry level condominium ownership in Vancouver (McClanaghan, 2010, p.21). Rental housing also provides a Page 7
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