Housing market realities
The residential rental market differs from other consumer markets in certain key ways that result in the market being unable to meet the housing needs of many Canadian households at a price they can afford. So what are the causes of this market failure?
To begin with, prices in the rental market are not even across market regions. Prices for rental housing are determined by local market conditions. For most other consumer purchases I can shop in one part of Canada and pay the same price as I would anywhere else in the country. I can buy a car in one market and move it to another. Not so with housing. It is not portable. I cannot rent in a more affordable market and move my housing to a more expensive market. I must go to the housing, and pay the going rate for the local market I need to live in.
Second, the supply of rental housing is also very inelastic. Increases in demand do not result in increased supply in the short or medium term. When demand for a product is increased and supply remains fixed, the result is inflationary pressure on prices. We have only to look at historic patterns of supply and demand for oil and the effect on oil prices to see that this is so.
Third, there are competing uses for land and construction: commercial use competes with residential uses; development for ownership competes with rental development. The supply of land is fixed and as noted it cannot be moved, unlike the supply of raw materials for other commodities. A real estate developer will always opt for the best return on investment. Thus the price of land (and what is built on it) will always be determined by its so-called highest and best use, the maximum possible return on investment. In the unfettered free market land will always be priced at its highest market value regardless of its actual intended purpose.
Fourth, there is the distinction between want and need. People need housing, as they need food and clothing. These are not optional choices that can be foregone in favour of other spending preferences. Housing is not an optional choice because there is no product that can be substituted for it. If I don’t like the price for a particular fruit at the grocery store, I have the option of choosing a different fruit, or buying no fruit at all. This is not the case with housing. There is no product that can substitute for it.
These realities create a supply and demand gap for low-income households. Housing demand is based on ability to pay. If a would-be renter cannot pay for housing at the price for which offered there is no effective demand. The need of low-income households for housing is undiminished but it is not supported by purchasing power: the market cannot supply rental housing at a price low-income households can afford. This is the gap that the free market cannot bridge. Meanwhile, everyone needs suitable housing that they can afford.
Thus the price of rental housing cannot simply be left to open market conditions because to recap, housing is not an optional commodity that people can do without. Everyone needs housing. The rental housing supply is inelastic in the short and medium term; increased demand will not alter the supply of purpose-built rental housing, but will raise its price. There are no products that can be purchased instead of housing that will meet shelter needs. And finally, the affordable housing needs of low-income (and even moderate-income households in many markets) cannot be met through free-market supply and demand.
Overcoming the supply and demand gap
First, consider the regulatory technique of rent control. Rent controls exist in many jurisdictions, with landlords, in many but not all cases, being subject to government-determined maximum rent increases.
Rent controls are favoured by tenant rights organizations and activists. It can be argued, however, that rent controls are in fact counter-productive because they provide a disincentive for investors to expand the stock of private rental housing or even to repair and maintain existing properties to an adequate standard. And landlords can be exempted from rent controls in many different ways, such as under new tenancies or when renovations are carried out. They are a flawed system of controlling rent levels in the residential tenancy market.
So if the private rental market cannot on its own supply housing to low-income households at a price they can afford, and with rent controls offering a inadequate solution at best, what is the policy answer for low-income households?
There are three complimentary policy solutions for government which taken together can in large measure address the housing affordability crisis facing Canada. (A fourth and equally important housing policy goal must be to launch a Canada-wide initiative to end homelessness. This is not addressed in detail here only because the present focus is on affordability for Canadians who are already housed.)
First, there is the question of addressing the situation facing co‑operative, non-profit and public housing – the stock of existing community housing in Canada – that has been supported by government assistance programs. The total stock housing of this housing amounts to some 630,000 homes, of which 200,000 house low-income households that have depended on government financial assistance to pay rent. The programs that have provided this support are ending. Unless they are replaced, which can be most effectively achieved through multilateral government cost-sharing programs, Canada runs the real risk of losing existing housing affordability even as we explore policy intitatives to add other affordable housing options. This is a critical and urgent matter. It would be illogical to say the least not to address it, given the cost effectiveness of continuing to support affordability in stock we already have.
For tenants in the private market without any immediate prospect of getting into existing affordable social housing, the most effective, immediate and comprehensive solution is a government system of portable housing benefit that is paid directly to households according to their incomes. Paying the benefit to the tenant and not the landlord reduces the risk of inflation in the rental market because a landlord need not be aware that a tenant is receiving the benefit. Inflation risk can be further mitigated if the benefit is only provided to assist the tenant up to a median market rent, based on an appropriate unit size for the household, and not up to the actual rent charged by a landlord if that rent is above the market median.
Allowing the benefit to be portable, to go where the tenant goes rather than being tied to a particular housing unit, as has been the case with most low-income rent subsidies in Canada, would be a real step forward in allowing mobility, whether to a job opportunity, a more suitable location or for reasons of personal safety. A Housing Benefit has been in place in the UK for decades and it has worked well.
Introducing a housing benefit will not on its own address Canada’s housing challenges without a supply-side solution. Here lies the third policy solution There is an opportunty for government to stimulate growth in the supply of purpose-built rental housing, both in the private and social rental markets. New financing and equity models are needed to attract private capital to the development of new rental stock, thus allowing supply to come into a better balance with demand over time. This approach should encompass both the the social and private rental sectors. The latter has generated significant growth in Canada’s rental stock when government incentive programs have been available in the past. Private market actors should not be excluded if new supply programs are to have maximum impact on rental stock expansion.
But as we noted earlier, the supply of rental housing is inelastic in the shorter term – it can take years for development incentive programs to deliver new housing. Hence the critical need for the more immediate solutions of replacing community housing rental assistamce programs and launching a comprehensive housing benefit program will lift hundreds of thousands of Canadians out of housing poverty in very short order. Government should not delay the introduction of either of these measures.
The argument has been made that state rental subsidies single out low-income households for favoured treatment at taxpayers’ expense. This is not reasonable. The labour market conditions that create income disparity in the first place disfavour the same households. And because our income-tax system is progressive, the taxpayer “burden” of a housing benefit, if it can be called that, is borne to a greater degree by those taxpayers who are favoured in the economy through higher incomes.
– Nicholas Gazzard, Executive Director, Co-operative Housing Federation of Canada