Finance Committee on June 13th, 2024

[The Chair, Liberal, Peter Fonseca]

I call this meeting to order.

Welcome to meeting number 149 of the House of Commons Standing Committee on Finance. Pursuant to Standing Order 108(2) and the motion adopted on Thursday, September 21, 2023, the committee is meeting to discuss policy decisions and market forces that have led to increases in the cost of buying or renting a home in Canada.

Before we begin, I'd like to ask all members and other in-person participants to consult the cards on the table for guidelines to prevent audio feedback incidents. Please take note of the following preventative measures in place to protect the health and safety of all participants, including the interpreters. Use only a black approved earpiece. The former grey earpieces must no longer be used. Keep your earpiece away from all microphones at all times. When you are not using your earpiece, place it face down on the sticker placed on the table for this purpose. Thank you for your co-operation.

Today's meeting is taking place in a hybrid format, pursuant to Standing Order 15.1. In accordance with the committee's routine motion concerning connection tests for witnesses, I'm informed that all witnesses have completed the required connection tests in advance of the meeting.

I would like to make a few comments for the benefit of the members and witnesses. Please wait until I recognize you by name before speaking. For members in the room, please raise your hand if you wish to speak. For members on Zoom, please use the “raise hand” function. The clerk and I will manage the speaking order as best we can. We appreciate your understanding in this regard. All comments should be addressed through the chair.

I'd now like to welcome the witnesses for our first panel today.

We have from the University of British Columbia, as an individual, Professor Patrick Condon.

Welcome, Professor.

From the Corporation des propriétaires immobiliers du Québec, we have the director of economic affairs, Paul Cardinal, and the director of public affairs and government relations, Madame Anne-Louise Chauvette.

Welcome.

Our third witness, from St. Michael's Homes, is Mr. Robin Griller, the executive director.

On that, we'll hear opening statements from our witnesses.

We'll start with Professor Condon, please.

[Patrick Condon, Professor, University of British Columbia, As an Individual]

Thank you very much, and thank you for the invitation.

For 30 years I've held a position at the University of British Columbia's School of Architecture and Landscape Architecture. During that time, my teaching, research and publications have been in the field of sustainable design. This has allowed me to partner with Canadian municipalities in executing path-breaking sustainable community projects, most notably the East Clayton sustainable neighbourhood project, a project that provided affordable homes in a walkable neighbourhood for over 10,000 new residents.

I have published a number of books about sustainable communities, leading up to the one entitled Broken City, which I have brought and will leave with the committee. This book contains the conclusions that bring me here today.

In my discipline, the challenge is to facilitate plans that balance social, ecological and financial considerations. This community planning and design process has always put housing affordability at the top of a long list of objectives, because a sustainable community that no one can afford to live in is indeed an oxymoron.

For over three decades, I have had the privilege of working with hundreds of others on the mission of a truly sustainable Vancouver region. During these decades, Vancouver and its region have gained world fame for its path-breaking livable region strategic plan. Even more globally well known is Vancouverism, a model of urban density done right.

All of these efforts, supported, importantly, by local voters, led to an eventual tripling in the number of housing units in the city of Vancouver, an already completely built-out city, in just four decades. Thus, all of this new housing was and is in the form of infill housing units, units already added to completed residential districts, or on converted industrial lands. No other centre city in North America has come even remotely close to this heroic achievement—this tripling of housing supply—in just four decades.

Unfortunately, all our efforts to keep housing affordable through this heroic addition of new housing supply have been in vain. Adding 200,000 new housing units did not lead to lower home prices and the lower rents that we had hoped for.

Indeed, if adding new supply to existing urban neighbourhoods would lower prices, Vancouver should have by now North America's lowest home prices. It has the highest by far.

My recent attempt to answer this puzzle is contained in my most recent book, Broken City. The answer appears alarmingly or fairly straightforward. Adding new supply in conformance with what many call “the law of supply and demand” did not lower home prices for renters and buyers in Vancouver. What it did correlate with is a tremendous increase in our urban land prices.

Presently, the assessed value of Vancouver urban parcels is typically 10 times greater than the assessed value of the structure above it. In just the year 2016, the aggregate value of all privately owned parcels in the city increased by an eye-watering $100 billion.

Even though Vancouver has it worse than most cities, this is not just a Vancouver problem. This is not even just a Canadian problem. This is a global problem: a global problem that is afflicting most of the world's major cities, the so-called global cities, like Vancouver and Toronto.

The more these cities attract investment enthusiasm from both here and abroad, the higher the land prices go, and the more impossible it becomes for builders and developers to provide homes at prices that average wage earners can afford.

What can we do? My suggestions are explained in my book.

Step one, stop using tax dollars to incent private developers. That only adds one more buyer to the already overcrowded market for urban land.

Step two, use new land use authorizations to stream publicly generated new land value into social benefit and away from the already overstuffed pockets of land speculators.

Step three, use the funds thus acquired to support the expansion of Canada's non-market housing sector, a sector that was the envy of the world before this body discontinued supporting it in the 1990s—

[The Chair, Liberal, Peter Fonseca]

Professor Condon, I'm going to need you to wrap up, because we're over the time for your opening statement.

[Prof. Patrick Condon]

I'll conclude with that.

[The Chair, Liberal, Peter Fonseca]

Thank you very much. You'll have a lot of time during members' questions.

Now we're going to the Corporation des propriétaires immobiliers du Québec. I understand that Madame Chauvette is going to deliver remarks.

You have the first five minutes.

[Anne-Louise Chauvette, Director, Public Affairs and Government Relations, Corporation des propriétaires immobiliers du Québec]

Thanks to all the members of the committee for welcoming us today.

CORPIQ represents 3,000 landlords in Quebec—we do not represent developers, but landlords—and has for 40 years.

Today, my colleague Paul will do most of the presentation, because we are talking about economics. I'll let Paul do that in French.

[The Chair, Liberal, Peter Fonseca]

I apologize for that.

Monsieur Cardinal.

[Paul Cardinal, Director, Economics Affairs, Corporation des propriétaires immobiliers du Québec]

Quebec has the largest private rental apartment stock in Canada. It has nearly a million buildings, almost as many as Ontario, British Columbia and Alberta combined.

Like just about everywhere else in the country, we are experiencing an acute housing crisis, with a vacancy rate of 1.3%, practically an all-time low. This means that households sometimes end up on the street on July 1 because of significant rent increases and pressures. Rents went up quite a bit from 2013 to 2023, nearly 50%.

The crisis has many causes, but three factors stand out.

First, net migration has skyrocketed, particularly in relation to non-permanent residents, who overwhelmingly rent when they arrive here. Second, home ownership has become unaffordable. Third, an aging population is driving some older households back to renting.

Supply has simply not been able to keep up with demand for a number of years. There are a lot of barriers. Construction costs, of course, have increased by 40% since the pandemic. Between 2021 and 2023, the cost of financing a typical rental property went from 2.55% to 7.3%.

While the climate is now more structurally favourable, land scarcity, excessive regulatory requirements, lack of infrastructure and development charges are all factors that have been holding back new construction for decades.

We recently saw an acceleration in rental housing starts, but this was due to the exceptionally low rates in place during the pandemic, something that won't happen again any time soon.

Since then, residential construction has been declining. It is currently not profitable to build new unless the rents are very high, which many people cannot afford.

The existing stock of rental housing is more affordable, but profitability is steeply declining. Renovation, maintenance, repair and insurance costs have ballooned, as have mortgage interest costs. Defaults are mounting, all in an environment where rental increases are regulated.

It is very difficult for owners to renovate their buildings. However, Quebec's rental stock is old and poorly maintained.

In short, we're in a perfect storm. According to the Canada Mortgage and Housing Corporation, CMHC, 1.2 million homes across all housing categories would need to be built to bring affordability back into the housing market by 2030, which amounts to tripling housing starts. This is in Quebec alone.

What happens is that market rents, the ones that make new rental construction profitable, are very high, almost twice the cost of rents in existing housing. Unfortunately, the perfect storm has consequences. Sometimes the only way to make the purchase of an existing building profitable is to carry out renovictions.

On top of all these stumbling blocks, the federal government now wants to throw in another obstacle. It intends to increase the capital gains inclusion rate by more than $250,000. This measure will really hurt Quebec's middle class because of our unique model. Quebec has 82% of the country's rental buildings with three to five units, which makes it a particular problem in Quebec. This rental stock represents some 300 small buildings and more than 500,000 rental units, which is one third of the province's total supply.

We do not foresee the crisis resolving itself quickly. There is a critical need for public policies that stimulate construction and the renovation of existing rental stock. However, that is not enough. There also needs to be a much more attractive tax environment for owning a rental property and, to that end, the government should consider bringing back tax incentives, as there have been in the past.

In conclusion, while everyone agrees that more supply is needed to solve the crisis, opinions naturally differ on how. In recent years, public policy has tended to increase the tax and regulatory burden on property owners. The exact opposite should be done.

If you stifle owners, you stifle supply. If you over-regulate prices, you create a shortage. There is a pressing need to recreate an environment conducive to rental investment, and to do so, you have in your hands the powerful tool of taxation.

We urge you to use it.

[The Chair, Liberal, Peter Fonseca]

Thank you, Monsieur Cardinal.

Now we'll go to St. Michael's Homes.

It's Robin, please, for up to five minutes.

[Robin Griller, Executive Director, St. Michael's Homes]

Thanks for inviting me to speak to you today.

St. Michael's Homes operates four buildings providing supportive housing and bed-based addiction treatment. Like other non-profit housing providers, we are keen to develop new housing. However, for the past 30 years or so, since the federal government first got out of housing, the rules in place for capital and financing access have made it highly challenging to develop housing that is meaningfully affordable.

While every funding announcement prioritizes non-profit, affordable and supportive housing, the models and policies in place create major impediments to actual development. This results in affordable housing developments in recent decades being carried out by for-profit developers, resulting in housing that often has a minimum number of only nominally affordable units. Where the affordability measure is based on the average market rent in a well off neighbourhood, those affordable units may in fact be anything but affordable, even for middle-income Canadians.

The current year's federal budget is a good start to improving the situation. The removal of the GST, access to federal lands, $14 billion earmarked for the affordable housing fund and the improvement in coordination between the federal government and the provincial governments are all welcome, but existing policies at federal institutions like CMHC, insufficient resourcing for capital sustainability and a lack of coordinated supports for non-profit housing development between the three levels of government leave lots of opportunities for improvement.

In order to support a greater number of developments by non-profits, there need to be changes in some of the policies in federal institutions like CMHC. I'll give you a few examples.

The financing available for projects is generally based on the rent collected, which directly undermines the capacity of non-profits to develop truly affordable housing.

A current building, in planning for 99 units, will receive only $17 million in financing out of the $54 million required, because it is “deeply affordable”. A for-profit developer would build 30% nominally affordable units with 70% market rents to receive full financing, but this non-profit will likely have to sell other affordable buildings to obtain the needed capital dollars. Additionally, per door capital funding models mean that only the smallest units—bachelors or studios—are viable, as you will have fewer doors with larger family housing units, which prevents the development of truly affordable housing for families.

CMHC will often demand A-grade security on financing. This means that if you are building supportive housing, you may be required to get a provincial commitment of support dollars for 50 years, which is not a reasonable expectation. If we want significant non-profit housing development, these approaches and models need to be changed through consultations with non-profit housing providers.

Second is capital stability, which is also needed for non-profit housing developments: The affordable or deeply affordable rents that low- to middle-income Canadians can pay cannot achieve sustainability for truly affordable housing in its absence. The capital dollars granted in the 1970s and 1980s allowed for the maintenance of buildings for the 50 years of capital funding. This approach should be reinstituted and enhanced to allow for sustainable affordable housing that stays affordable. See, for example, what's happening in some places in the country, such as Winnipeg, where provincial governments did not sustain capital resourcing after the end of federally funded mortgages, leading to the loss of affordable housing.

Third, a lack of coordination of programs between multiple levels of government leads to long, convoluted, multi-year processes that may or may not lead to financing or capital funding. As a result, non-profits spend substantial staff and cash resources taking substantial risks that may not lead anywhere. The three levels of government often do not coordinate their approaches with each other or between capital dollar and support dollar access. I know of potential building purchases by non-profits that could have broken even if they'd had support funding attached, only for the municipality to say, “We aren't accepting applications for support dollars this year.” In such situations, buildings don't get purchased and affordable housing doesn't happen.

Ideally, the solution to this would be a government agency to do much of the background development planning work in partnership with non-profits, so that we could turn properties into housing that we can run, which is our area of expertise. Among us, we have lots of properties that are ripe for redevelopment.

Thus, the key changes needed are coordination among the levels of government to simplify the development process for non-profits, ideally through a government development office; changes to funding models in federal agency policies and practices to remove unnecessary barriers to the development of deeply affordable and supportive housing; and capital supports that bridge the gap between the cost of developing and maintaining housing and the affordable rents to be paid by low- and middle-income Canadians.

Thank you for your time today.

[The Chair, Liberal, Peter Fonseca]

Thank you, Robin.

Now let's get to members' questions. In this first round, each party will have up to six minutes to ask questions.

We're starting with MP Lawrence for the first six minutes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you, Mr. Chair.

My question is for Mr. Cardinal.

Can you explain how increasing the capital gains inclusion rate will hurt housing construction?

[Paul Cardinal]

It won't actually hurt new construction as much as it will hurt existing owners.

As I explained, small rental buildings of two, three, four or five units are very common in Quebec. Many years ago, a lot of middle-class people bought these buildings. It was a way for them to be able to buy in centrally located areas, in urban centres, because they could earn additional income from the building.

The people who bought 10, 20 or 25 years ago will easily earn capital gains of more than $250,000 and will be taxed more. Many of them were relying on that asset to fund a good part of their retirement.

Now they are faced with varying tax amounts. We've run a variety of scenarios. As I said, the amount can vary a lot, but in a number of cases, people will have to pay $50,000 or $60,000 more. That will somewhat undermine the retirement plans of someone who has an asset that they can't break up to sell, as they could with shares. In our opinion, it isn't a passive investment either, because that person still invested the time and money to maintain the building. They end up penalized.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for that.

I'll switch to English here.

One of the very interesting numbers you gave at the top was the number of rentals and privately owned rental companies. Of course, the capital gains increase will affect those individuals. Because Quebec has a disproportionate number of privately held rentals, is it fair to say Quebec will be disproportionately hurt by the increase in the capital gains tax?

[Paul Cardinal]

Absolutely.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you very much for that.

I want to talk a bit about some of your comments with respect to the regulation of rent versus the cost.

Milton Friedman once described price controls as taking a boiling pot and trying to hold down a lit as hard as you can. Inevitably what will happen is that water will explode and burn the holder of the lid. You mentioned the fact that while the landlords' revenues are regulated, artificially limited by the government, their costs are not. You described that as a “perfect storm”, I believe, if the translation was correct.

Could you describe what the eventual consequences will be if we continue to drive down this road?

[Paul Cardinal]

What we're seeing now is that for some of those little plexes, small rental buildings, because, as you said, you cannot increase rents as much as expenses have increased over the last few years, there's no profitability for those people. That causes a situation in which they want to sell. Also, because they would need to invest a lot of money in maintenance and renovations because their building is old, sometimes what they choose to do is to sell to investors who have deeper pockets and who can afford to put all the renters out and do renovations for 12 months—

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I have a final question, just because my time is running out here.

The government has put a fire sale in place there. Given the pressure that landlords are under, do you think that perhaps caused some landlords to sell at a discount and to be shortchanged on their retirement?

[Paul Cardinal]

Yes, absolutely.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you. Those are my questions.

I have a minute, but I'll let it go.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Lawrence.

Now we'll go to MP Dzerowicz.

[Julie Dzerowicz, Liberal, Davenport, ON]

Thank you so much, Mr. Chair, and I want to thank our three presenters today for their excellent presentations.

I'm going to start off with Mr. Griller of St. Michael's Homes.

First, Mr. Griller, I want to say a huge thanks to you for the amazing work you and your team do for Ontarians who have mental health and addiction issues. I know you provide a wide range of programs for them. I know that one of your offices is in my riding of Davenport, and I know we are very grateful to have you in our community and very grateful for the work you do.

I'm also very grateful that you talked a bit about some of the good things that our federal government has included in our housing plan—taking the HST off construction and making public land available for affordable housing—and the fact that we're really working hard to try to coordinate better all three levels of government.

That being said, you've indicated there's still some work for us to do. I really appreciate that you have gone into quite a bit of detail on some of the recommendations you have or policy changes it would be helpful to see at CMHC.

I'd love it if you would explain a bit more, in a minute. You talked about instability of financing at CMHC and, further, the lack of coordination between the federal government and the provinces. If you could maybe be more specific as to what you're indicating there and what your recommendation is, that would be very helpful.

[Robin Griller]

Sure. Some of the elements are that CMHC generates your financing for a development based on the rents collected, so the more affordable a building is, the less rent you're collecting and the less financing you can get, which means that it's actually the most deeply affordable housing that can't be developed with CMHC support.

[Julie Dzerowicz, Liberal, Davenport, ON]

I'm sorry to interrupt, but what would be an alternative model to that, then?

[Robin Griller]

For example, in the 1970s and 1980s, CMHC funded buildings in coordination with provincial health care departments, so instead of being given massive amounts of money up front, providers were given funding over a period of 50 years to cover mortgages and maintenance costs for a building. By the end of the 50 years, the cost of the property was paid; the cost of the initial development work was paid through the mortgage, and included in those funding models were some resources for capital reserve funds, so that you were able to sustain the building over that time.

We have two such buildings out of our four buildings that were through that particular model, and we have a third building that was funded by CMHC. All three of those buildings are still fully operational and reasonably well maintained and deeply affordable. The housing portion of that is rent-geared-to-income housing, which means that people on social assistance or on ODSP, the disability plan, are paying the rent amount that they have and are not having to spend their money for food and other things on rent, which they would have to do if they were in the private sector, where rents are much higher.