Helping collaterally damaged renters

Marion Steele, Emeritus Associate Professor, University of Guelph. Resident Research Fellow, Cities Centre, University of Toronto

Last fall Bill Morneau, Minister of Finance, announced a raft of measures to tackle the linked problems of financially precarious homeowners and accelerating house prices.  These measures put home ownership out of reach for many would-be home buyers, particularly those at the bottom of the much vaunted middle class.  The young in high-cost areas like the GTA are particularly affected.  An unfortunate side effect is that disappointed buyers, instead of vacating their rental accommodation, freeing it up for entrants into the rental market, will stay put, adding to rental demand pressure.

However, that is not all:  Mr. Morneau delivered a one-two blow. The second blow will reduce rental supply, particularly in condos. Purchases of condos by investors are curbed by making them ineligible for mortgage insurance. Furthermore, purchasers of houses converted into duplexes and triplexes are hampered by the unavailability of mortgage insurance when the value of the whole property, not the value per unit is $1,000,000 or more. Financing is more difficult to obtain now that banks cannot insure against risk.

Inevitably these measures, warranted as they might be to discourage excessively leveraged loans, will reduce condominium construction aimed at investors and will permit well-heeled prospective owner-occupiers to outbid middle-class investors for duplexes and triplexes.  Economics 101 tells us that the increase in demand – as prospective homeowners remain tenants – and the cut in rental supply–as many investors exit—must collide in a way that tightens rental markets and increases rents.

The collateral damage of Mr. Morneau’s moves will be a rental market even tougher than it is now. This will not cause hardship for some, especially those protected by rent regulation. But low-income renters, especially newcomers and those who have temporarily fallen out of the middle class because of job loss, will suffer much more.  The 2016 survey of users by the Toronto Daily Bread Food Bank found that the average they spent on rent plus utilities was 71 percent of income.  Why these users need free food is obvious, and higher rents, unless there is cash help, will surely increase the need.

The way to help is to adopt a housing benefit. Reports are that the Government, to its credit, is considering one proposed last fall by the National Housing Collaborative, a group encompassing a broad range of organizations, from social housing organizations to those acting for private landlords. The NHC proposal would provide a monthly benefit deposited, like the Canada child benefit, in the bank account of recipients. It would go to low-income renters, either working, on social assistance or retired.  The amount would depend on the income of the renter, the rent paid and the number in the renter’s family.  The subsidy would be capped at the median rent.

The benefit, like the Canada child benefit, would be administered by the Canada Revenue Agency. CRA has experience dealing with evidence of rent paid via its administration of the Trillium Benefit in Ontario. Quebec has runa similar program—albeit with a benefit that is very small –  for decades, using its revenue agency for administration.

Some people worry that landlords will benefit more than tenants. But that is no more—and arguably less—a concern for the housing benefit than the child benefit. Landlords have no way of knowing who is receiving the benefit and what the amount is, because they cannot know a tenant’s income once the tenant is in place, nor what the tenant’s income was on their last tax return.

The use of the tax system means there is a lag before a lower income is reflected in a higher benefit—as is also true of the child benefit—and this means there is an unfortunate delay after misfortune strikes. But this also encourages frugality because renters have to pay for any increase in rent up front, with no subsidy for some months.  The lag also means special provisions will be needed to tide over the homeless until their federal benefit starts.

– Marion Steele, Emeritus Associate Professor, University of Guelph. Resident Research Fellow, Cities Centre, University of Toronto