Finance Committee on May 4th, 2021

[Michel Tremblay]

The answer to that would be that we can't just look at the rent and the loan. We have to look at the operating cost of the building and so forth. It's the capacity of the borrower to be able to repay the loan. Rent is obviously a consideration, but it can't be the only thing we look at.

[Jenny Kwan, NDP, Vancouver East, BC]

There is no minimum rent requirement, then.

[Michel Tremblay]

No, there isn't.

[Jenny Kwan, NDP, Vancouver East, BC]

CMHC's response to one of my written order paper questions shows a spike starting in 2015 of REITs acquiring existing properties with moderate rent. It also indicated that CMHC does not track rent for insured projects after funding. If rent is not tracked after CMHC provides funding, what safeguards are there in place to prevent REITs from jacking up the prices in the properties that they have acquired, including through reno evictions?

[Michel Tremblay]

Thank you for the question.

First I'll just set up the context. Thirty per cent of Canadians rely on rental housing for their homes. Purpose-built rentals have not been a very active market over a number of years, which means that the stock is very old. The rental construction financing initiative has changed that somewhat, with the construction over the next several years of 70,000 units.

I do want to point out that the private sector is the largest provider of rental housing, including housing that is affordable, in this country.

That said, you mentioned REITs specifically. I can tell you that while this segment has increased, and certainly they have bought significant properties over the last several years in the large census metropolitan areas of Canada in Vancouver, Toronto and Montreal, but in Vancouver, for example, they are still less than 5% of the market. In Toronto they are less than 15%, and in Montreal they are less than 10%.

As far as our mortgage loan insurance support for that is concerned, we do want to encourage new construction in purchases and refinancing, but we tightened our rules in May of last year to restrict the use of funds for refinancing purposes to make sure of the supply and preservation of housing.

[Jenny Kwan, NDP, Vancouver East, BC]

CMHC doesn't track the rent, though, and you also don't have a minimum rent requirement. Then really, because you're trying to ensure that their project works, it means that the higher the rent, the more likely the project is going to work, so it doesn't really provide for more affordable rental stock.

CMHC doesn't have a policy to ensure that this is in place, and there are no safeguards in place to prevent REITs from jacking up the prices in properties. That's the result of the program: It doesn't really provide the affordability measures that I think are required.

[Michel Tremblay]

There are two aspects to that.

One, we do have a multiple insurance product that is for more affordable housing, so they do get an additional premium for that.

Again, this is more about ensuring that there is supply in the market, because the solution is more supply, and the more we restrict supply, the harder it's going to be for affordability purposes. There is a trickle-down effect that happens when rents.... Again, these buildings that are being purchased are sometimes very old, and the alternative is sometimes not better.

[Jenny Kwan, NDP, Vancouver East, BC]

I'm going to turn to Leilani on the next question.

If CMHC is increasingly providing insured loans for the acquisition of existing moderate-rent properties, is it likely that these acquisitions are contributing to the increased cost of rent?

[Leilani Farha]

We know that the business model of REITs requires an escalation of rents.

Please realize that I'm a human rights lawyer. This is what I've learned over time, so bear that in mind.

As I understand it, the way it works is that real estate investment trusts rely on investors. They're often institutional investors like pension funds, insurance companies and that kind of thing. If you're an investor, you want to know that you're going to get a good return on your investment. REITs generally will provide somewhere around....

Let's say 8% is expected. The way the REIT guarantees a good return on your investment is they show how they're going to generate income. The way they generate income is through rent. They need to show a progression. That means a certain amount of tenant turnover, because it's generally necessary, based on provincial and territorial law, to get tenants out in order to raise rents. The only other way is above-guideline rent increases, which they do as well. They'll do these modest renovations, which are often not the kind of thorough renovations that I think Michel and the CMHC would like to see. They're more what we call “Ikea renovations”. They're modest and not always necessary. Then they use that to apply for above-guideline rent increases.

You have to understand that it's really part of the business model. It's not that they're just being mean; it's their business. The business is to create profits for their investors, and pension funds need a good return on their investment, so that's how it's structured.

[Jenny Kwan, NDP, Vancouver East, BC]

They also have to meet the CMHC requirements, which of course is to justify that they can actually meet the requirements of the loan from CMHC. That also means that they have to increase their rent in order to meet that requirement.

[The Chair, Liberal, Wayne Easter]

That'll be the last question, Jenny.

[Leilani Farha]

I think Michel is better placed to answer that.

I do think that CMHC could be saying to the REITs that get loans from them that they are going to give them the loan on certain conditions. They could make it a condition, for example, that there are no rent increases for five years. Denmark has a law like that. They don't have a body like CMHC, but I don't see why CMHC couldn't do something like that.

[The Chair, Liberal, Wayne Easter]

Okay. You'll be back on a little later, Jenny.

We'll turn to Mr. Kelly, followed by Ms. Dzerowicz.

It's a five-minute round or a little bit more, Pat.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Great.

We've had some fascinating testimony so far. The last meeting we had with CMHC and Dr. Kershaw was also quite fascinating.

I'd like to pick up more or less where Mr. Fast left off with Dr. Kershaw. At the end, I think I heard you say that yes indeed, Generation Squeeze has taken a position in favour of attacks on real estate wealth and a tax shift away from the incomes of younger people into taxing the wealth of primarily older Canadians.

Can you give me some details of what you would recommend that this kind of real estate wealth tax would look like?

[Dr. Paul Kershaw]

I have a couple of key observations.

First, I think that what one would aim to do is make a tax shift that benefits the vast majority. How could we get 80% or 90% of Canadians better off, either by paying lower taxes or receiving larger benefits from government investments? That would be the primary goal.

Then, consistent with conversations that are happening more and more at the federal level—this is across a number of parties that are being represented today—think about asking those with more means to contribute. We can have an interesting conversation about whether you want to go after the people who have 1%, 2% or 5% of the wealth. Given where we are these days—

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Sorry. If I may, what's implied by this is that it's the wealth that is largely, for most Canadians, in the form of real estate equity that ought to be taxed, as opposed to a person's income. How would that look?

[Dr. Paul Kershaw]

There are a range of policy mechanisms that could facilitate that. One of the things we definitely want to do is to defend against the risk that someone who has a high-value home but a generally more modest income would suddenly need to leave their home.

What you would do is think about how you calculate the additional minor tax we are asking people to contribute over the years that they're living in their home. There'd be the possibility to defer it, just as every province right now offers most seniors the opportunity to defer their property taxes until the sale of—

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Would a person report to the Canada Revenue Agency their status as a homeowner and the home's assessed value each year? How would you recommend federal policy-makers address this?

[Dr. Paul Kershaw]

There are a range of ways to consider it. In any format, it's likely that either provincial or federal governments would need to be collaborating with the provincial housing authority, which already assesses everyone's homes on an annual basis for the purpose of collecting property taxes. You would then be homing in on the high-value homes that meet your threshold—1%, 2%, 5% or 10%—and a potentially deferrable annual tax could be put on there in order to do two things. Remember, we have to ask, “What's the intention?”

First, the key intention has to be to slow down the growth of Canadian home prices, which are leaving earnings behind. If a pandemic-induced recession is unable to slow down home prices, we need to concede that—perhaps unintentionally, but nevertheless—our housing system is designed to tolerate home prices that leave earnings behind. We'd like to think about what policy mechanisms might help slow that down and signal, “Hey, right now we shelter high-value homes from taxation in a way that we don't shelter other kinds of assets.” That incentivizes people to treat that as a way to make a good return and not just to have an affordable home. How can we close that a little bit? That's a key first point.

Then, as a salutary benefit, it's going to collect some additional revenue, which we could then invest in building more purpose-built rentals, especially when it's green, co-op housing, etc.

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

How much real estate equity tax would the federal government have to raise to achieve the kinds of policy suggestions you have also made, such as increasing benefits or reducing taxes for young Canadians? How much money would you recommend the federal government try to raise with the kind of tax that you're proposing?

[Dr. Paul Kershaw]

Yes, that's a great question. I don't think I've ever been asked it in quite that way before. I don't think we've ever supplied that kind of precise answer. If that's something that your party is interested in considering, I'd be delighted to follow up. I would be prepared to create a briefing note for sure, and could share—

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Don't misunderstand me; it's actually the other party whose crown corporation has funded your study. I think that I would—

[Dr. Paul Kershaw]

We should be very careful about the optics. I know that's a really good slogan for a campaign that may happen later this spring or next year, but that is not in any way accurate. No member—

[Pat Kelly, Conservative, Calgary Rocky Ridge, AB]

Let me point out that this was when you suggested I might want to adopt that or suggest it for my platform, but if I—

[Dr. Paul Kershaw]

It's worth considering, though, for your platform. In all honesty, you are a party that definitely wants to be helping the regular folks. That's a big part of your narrative. I'm proposing a tax shift that could help you do just that.