Human Resources Committee on June 9th, 2023

[The Chair (Mr. Robert Morrissey (Egmont, Lib.)), Liberal, Bobby Morrissey]

Good morning, committee members.

The clerk has advised me that we have a quorum. Everybody has been sound tested. I will warn that there are some issues with practically everybody appearing virtually this morning, so we'll go as we go. It's in and out.

I call the meeting to order. Welcome to meeting number 73 of the House of Commons Standing Committee on Human Resources, Skills, Social Development and Status of Persons with Disabilities.

Today's meeting is taking place in a hybrid format pursuant to House order of June 23, 2022, which means some people are participating remotely by Zoom and we have the rest here in the room.

To ensure an orderly meeting, I would ask that all questions be directed through me, the chair. Wait until I recognize you to speak. You have the option of speaking in the official language of your choice. If you're in the room, use the headset. If you are appearing remotely, use the translation icon at the bottom of your screen. If there is an issue with translation, please get my attention. We'll suspend while it's being corrected.

I would also like to advise those who are attending the meeting virtually or in the room that taking pictures or still shots is not allowed.

Pursuant to Standing Order 108(2) and the motion adopted by the committee on Monday, October 17, 2022 the committee will resume its study on financialization of housing.

We'll begin with our witnesses for the first hour.

Appearing virtually, as an individual, we have Steve Pomeroy, industry professor with the Canadian Housing Evidence Collaborative. From the Federation of Rental-housing Providers of Ontario, we have Tony Irwin, president and chief financial officer, who is in the room with us. From the Minto Group, we have Dan Dixon, senior vice-president, project finance.

Each presenter has five minutes to give an opening presentation and then we'll go to questions from committee members.

We will begin with Mr. Pomeroy for five minutes, please.

You have the floor.

[Steve Pomeroy, Industry Professor, McMaster University, and Executive Advisor, Canadian Housing Evidence Collaborative, As an Individual]

Thank you, Mr. Chair, for inviting me to this important discussion.

In my work as an academic and a researcher in this area, a number of my studies have been cited by other witnesses, particularly around the very dramatic erosion of the low-end rental stock, with a loss of over 550,000 units in the decade of 2011 to 2021, at a time when we only built about 70,000 units of new affordable housing. The loss of existing stock is a critical issue, and that's being lost as a result of the rents moving above affordable levels.

I've submitted a brief to the committee. I don't know whether it's been translated and circulated. I'll simply highlight some of the key points in that brief, which discusses the issue of financialization as well as the state of the rental market and the issues creating the affordability crisis in rental housing.

The analysis revealed that the issues contributing to the ongoing phenomenon of rent-gouging and renovictions, and the dramatic ongoing erosion of these lower-rent options, are pervasive and relate to a wide range of investors, of which REITs are a very small fraction. In fact, as other witnesses have indicated, REITs manage and operate less than 5% of all rental housing in the country.

The behaviours have more to do with the transformation of rental housing into an attractive asset class, which is attracting investment both from large institutional investors as well as many small investors.

Really, the increasing issues are related to an insufficient supply of rental housing, which is a long-term phenomenon in this country. This is being exacerbated by a very significant increase in demand, especially from international students and temporary foreign workers. These are over and above the immigration targets. There is also pent-up demand from young families seeking to purchase a home. Because of prices and macroprudential policies, they can't afford to buy and, as a consequence, they remain in the rental market. We've seen a significant reduction in the home ownership rate in this country as a result of them being unable to move out, create vacancies and create a healthier rental market.

The other key issue relates to provincial regulations of the rental market allowing vacancy decontrol, which is the feature allowing these significant increases in rent. I think that's an issue, obviously, of provincial jurisdiction, but it's one the committee needs to think about.

In terms of the recommendations in the paper, the first one relates to vacancy decontrol and its impact. The recommendation is to request that the provinces revise current rent regulations to, at least temporarily, remove the vacancy decontrol mechanism to moderate the excessive increases in rents while new construction catches up to these historically high levels of immigration creating these pressures. While this is provincial jurisdiction, there is a precedent for this. In 1975, under the anti-inflationary measures, the federal government asked the provinces to adopt rent regulation, and they all did. Subsequently, those regulations were relaxed once the issue had passed. It has been done before.

The second recommendation, given that most acquisitions of existing properties are by various types of investors utilizing CMHC mortgage insurance, is that the committee suggest CMHC establish more stringent conditions to limit rent increases for investors utilizing mortgage insurance to purchase existing lower-rent properties.

The third recommendation relates to the changing pattern of institutional investors and REITs in the residential rental market. Historically, these investors purchased existing assets because they were priced better and had less risk than building new. Recently, many of these investors have moved to new construction. Therefore, rather than eliminating REITs and institutional investors, we should try to direct their investment into the new supply part of the market, encouraging a pivot that's already ongoing towards that nature of investment.

The fourth recommendation is to encourage institutional investors and pension funds —which offer to invest via REITs and other asset management firms—to update and review their ESG investment guidelines to minimize enabling the practice of renovictions and large rent increases in properties in their portfolios. Michael Brooks spoke about an industry code of conduct to address this issue in previous hearings.

The fifth recommendation is that the government amend the national housing strategy to create a funding and financing mechanism that would allow non-profit organizations to purchase existing lower-rent units. By taking them out of the market system, they could de-commodify those assets and preserve the lower rents in perpetuity. This would also take advantage of a desire among the REITs to dispose of some existing lower-rent assets, which I think Dan Dixon will speak about later. That creates a mutual opportunity both to preserve and to take the proceeds from those sales to invest in new construction.

The sixth recommendation is to encourage Immigration, Refugees and Citizenship Canada to review and recalibrate the issuance of international student visas and temporary foreign worker permits to better align with new rental supply and to direct the CMHC to utilize its low financing rental construction financing initiative to encourage and support the construction of purpose-built student housing that would take some of the pressure off the market and the displacement that occurs due to the high number of international students entering the country.

I look forward to the discussion.

Thank you very much.

[The Chair, Liberal, Bobby Morrissey]

Thank you, Mr. Pomeroy.

Now we will go to Mr. Irwin for five minutes.

[Tony Irwin, President and Chief Executive Officer, Federation of Rental-housing Providers of Ontario]

Thank you, Mr. Chair.

Good morning. My name is Tony Irwin. I am president and CEO of the Federation of Rental-housing Providers of Ontario, or FRPO.

FRPO has been a leading voice of the rental housing industry for over 30 years. We represent more than 2,200 members who own and/or manage over 350,000 rental homes across the province of Ontario. FRPO is also a founding member of the Canadian Federation of Apartment Associations, or CFAA.

I am pleased to have the opportunity to address the HUMA committee today as you review the financialization of purpose-built rental housing in Canada.

On Tuesday, you heard from my colleague, John Dickie, president of CFAA. John briefed the committee on the various segments of the rental market and how a dollar of rent is split between operating and capital expenses and what is left over as net income. Today, I am going to brief the committee on the cost of major repairs and building modernization of rental apartments.

Our apartment stock is aging in this country. In Ontario, over 80% of existing purpose-built rental stock was built before 1980, making it at least 43 years old. These buildings require significant modernization. Even with regular maintenance, building elements eventually reach the end of their useful life and must be replaced. This includes everything from roofs, balconies, heating systems, elevators, windows, underground parking structures and other building elements. Replacing any one of these could easily cost 20% of the total annual building revenue, and this is before all other expenses.

Figure 3 on page 4 of the joint CFAA-FRPO submission shows real-life examples from four different buildings in Ontario in 2022. A new roof cost $442,000, or 18% of the gross rent for the year in one large apartment building. In other buildings, elevator refurbishment, garage concrete restoration and new windows cost 17%, 48% and 81% of the gross rent respectively. These are significant costs for work that is needed to keep buildings safe and structurally sound or to improve energy efficiency by replacing old windows.

How do we pay for essential building modernization? In Ontario, our rent control system consists of several major pillars, including a maximum guideline rent increase tied to the CPI—this has a hard cap of 2.5%, a level that is significantly below current inflation—and an ability to apply for an “above guideline increase”, or an AGI, to cover a portion of the cost of major repairs.

It is important to understand that the AGI process is highly regulated. AGIs are capped in legislation to a maximum 3% rent increase per year over a three-year period. An AGI application can be made only after the work is complete, and the application must meet all criteria set out in provincial legislation in order to be approved by the Landlord and Tenant Board. In most cases, rental housing providers are able to recover only a portion of the cost of these repairs through AGIs due to the cap.

Some have argued that AGIs should be removed; however, with the annual rent increase guideline cap at 2.5%, and operating costs increasing at a much higher rate, there is no other mechanism to fund large-scale building infrastructure. As I mentioned earlier, 80% of Ontario's purpose-built rental stock was built before 1980. If we are not able to make essential repairs and replace building elements and share that cost with residents, the stock will slowly go out of commission. This is in the context of a significant supply shortage of purpose-built rental housing right across this country.

In Ontario alone, FRPO-commissioned reports conclude that we need over 300,000 net new rental units over the next decade to address the supply gap, and AGIs are an essential component that makes Ontario's rent control policy framework viable to operate rental buildings.

The current housing affordability challenge in housing, both rental and ownership, is fundamentally a supply problem. We are not building enough housing, including purpose-built rental housing, to keep up with demand. The right policy approach to tackle this challenge should focus on incentives to drive more public and private investments in construction of new rental projects across the country. Policies that further restrict capital investment in a sector grappling with a significant supply shortage will only make matters worse.

Thank you for your time. I look forward to your questions.

[The Chair, Liberal, Bobby Morrissey]

Thank you, Mr. Irwin.

Mr. Dixon, you have five minutes, please.

[Dan Dixon, Senior Vice-President, Project Finance, Minto Group]

Thank you, Mr. Chair.

I would like to thank the Committee members for inviting me to appear today.

My name is Dan Dixon, and I'm the senior vice-president of project finance for the Minto Group and Minto Apartment REIT.

I'm here today to represent Canada's five largest publicly traded real estate investment trusts that focus on apartment rentals in Canada and on policy matters relating to housing affordability. For convenience, I will refer to these REITs as the REIT group.

The REIT group members have a multi-decade history as housing providers. We play an important role in housing Canadians, and we are proud of what we do. We provide homes to approximately 120,000 families and households across Canada. Our average rent is $1,394 per month. While we offer apartments at a range of prices to satisfy the housing needs of all Canadian renters, 53% of our homes are affordable at rental rates that are less than 30% of a renter's median income, the standard set by CMHC for affordability.

Although we run large, visible organizations, we make up a small part of the rental stock in Canada. With approximately five million renter households in Canada, the REIT group's 120,000 suites represent fewer than 2.5% of all rental suites in Canada.

The REIT group believes in the progressive realization of the right to adequate housing as set out in the National Housing Strategy Act. We have proactively met with the federal housing advocate to ensure and improve our understanding of the rights, duties and obligations of all participants in the housing sector.

In this regard, the UN framework referenced in the National Housing Strategy Act is helpful and clear. Governments are accountable to their citizens for the realization of the right to adequate housing. Governments are also responsible for putting frameworks in place to ensure a functioning housing market and that businesses in the private sector are important players. In Canada, the private sector delivers over 96% of all housing.

As businesses, our strategy is to meet the needs of our residents while taking care of our employees and the environment. REITs are required to pay out 100% of their taxable income to their unit holders as distributions, where that income is taxed in their hands. The distribution of that income currently provides our unit holders with a yield on their investment of approximately 3%.

As we go about operating our businesses, we recognize that our apartments are homes that provide comfort, safety, convenience, pride and a sense of community. We regularly survey our residents and take their feedback seriously. We compete with each other and with the other 4.9 million rental apartments in Canada for tenants to choose our buildings.

We support CMHC's call to build 5.8 million new homes by 2030 to restore affordability. The private sector will provide the vast majority of these homes. The total REIT sector in Canada, including apartment REITs and diversified REITs, has over 230,000 homes in its development pipeline. That is the equivalent of one full year of housing starts in Canada at a time when we desperately need housing supply.

To develop these homes, we need access to the capital markets. That requires a stable and predictable regulatory environment. We agree with many of you on this committee that the government should focus its support on those one in 10 Canadians in core housing need through a mix of social, supportive, co-operative and subsidized housing. There are tools the government could use to encourage more of that.

The most affordable housing is existing housing. That's why we support a national acquisition fund to acquire existing, affordable rentals and keep them affordable in perpetuity. There are a number of buildings in our portfolios that would be good candidates for this fund.

Among the housing rights itemized by the UN is the right to choose one's residence, to determine where to live and the freedom of movement. Fulfilling that right requires a robust and functioning private housing market. Public real estate investment trusts are a vital tool in the tool box for providing choice and value in housing for Canadians.

Thank you for your time. I look forward to taking your questions.

[The Chair, Liberal, Bobby Morrissey]

Thank you, Mr. Dixon.

Before we begin, I forgot to recognize that we have Ms. Kusie joining the committee this morning. She's been here before. We also have MP Morrice as a guest again.

The only other point is that it is the interpreters who decide on the sound quality, whether it is inadequate or acceptable.

With that, we'll begin the first round of questions with Mr. Aitchison for six minutes, please.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

Thank you, Mr. Chair.

Thank you to all of the witnesses.

I'd like to start with Mr. Irwin.

I'd like for you to expand a little bit on the situation. Our existing rental stock is aging. It needs to be updated. We also need more of it.

We've talked about what causes delays with municipal approvals and all of these issues. Can you give me some specific examples of what the federal government can be doing to help speed up the process of getting new purpose-built rentals constructed?

[Tony Irwin]

It's a great question. We talk about how it really does need to be an all-hands-on-deck approach. Every level of government needs to be committed to getting more rental housing built. I guess in the context of these hearings and this meeting happening today, you want solutions and we want to provide them; but certainly, as I said in my remarks, policies that would disincentivize, that would in fact make it tougher to get housing built, seem like completely the wrong approach to be taking. We need every level of government to say, certainly as relating to purpose-built rental housing, that it is a priority. We haven't had enough built for several decades, and what can we do to improve on that?

So whether that is through the housing accelerator fund or through CMHC providing better rates for loans to be able to get projects into the ground, the federal government does have the capacity to do things through those mechanisms that will help make the economics work. We have members—and certainly Mr. Dixon can speak to that—who want to build housing. That's what they do. They want to do it. But the economics have to make sense for that to take place.

You mentioned the municipal approvals, and the provincial government of Ontario is doing a lot to try to make that better. The federal government's role to me is providing support through things like CMHC and not doing things through taxation that would only disincentivize and drive investment to other jurisdictions or other countries. That's not going to get housing built. Let's focus on saying we need to say “yes”, not “no”, and how do we actually make this happen through every level of government using the tools that they have at their disposal to make it happen.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

Thanks for that.

Mr. Dixon, I think I'll move over to you now.

I believe you said in your submission that almost 53% of your suites, about 120,000 of them, are rented at affordable rates. We often talk about new buildings being built with a mix of market and affordable rates so that the numbers work out and the math adds up on the total project. That's a staggering number to me that so many of them are at that rate. How are you able to do that and is there a general formula or is it project by project?

[Dan Dixon]

When the CMHC introduced their MLI Select mortgage insurance product in March last year, they also introduced a median renter income index, which is used by them to measure affordability. When we applied that criterion across all of the units in the REITs' portfolio, roughly about half met that criterion. We cater to all needs, so we have higher-price units and we have lower-price units.

On the development side of things, it is virtually impossible to develop in urban environments and provide affordable units without some type of government assistance. The firm that I work for, Minto, is constructing an affordable building in Etobicoke in Toronto with the help of two levels of government. A Richco project at 610 Martin Grove is being built in partnership with the City of Toronto's open door program, where they provide a capital grant and a waiver of property taxes on an ongoing basis, and it is being financed through CMHC's rental construction financing initiative. We are able to provide 100 deeply affordable units that meet the City of Toronto's criteria, and the balance of the building meets CMHC's RCFI criteria.

I look at this as an example of the private sector working with two levels of government to produce something that works for everyone and delivers socially desirable outcomes. We would do more of these projects if the funding were available.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

CMHC has just announced a significant premium increase for multi-unit residential 5+. I assume that is going to have a significant impact on these projects as well?

[Dan Dixon]

It will have an impact on projects going forward, and they've also tightened their underwriting criteria for income.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

Thank you.

Quickly to Mr. Pomeroy, thank you for your submission as well.

From what I heard from you today, I got the distinct impression that you believe that this situation in Canada requires an all hands on deck approach as well, and that the private sector and not-for-profit sectors all need to be in the mix on this. Could you confirm or deny that and maybe expand on it briefly? You only have about 30 seconds. I apologize.

[Steve Pomeroy]

Yes, absolutely. It is a partnership and I think discussions between the affordable housing sector and the industry have been very constructive and positive. Clearly to meet construction targets, we need the private sector to build those units. The challenge with just focusing on supply is that it doesn't meet the affordability crisis, so we need to actually do both, add supply and figure out ways to make that new supply more affordable, which is where you layer in various government subsidy mechanisms, which Dan Dixon has spoken about.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

Thank you.

[The Chair, Liberal, Bobby Morrissey]

Thank you, Mr. Aitchison.

[Scott Aitchison, Conservative, Parry Sound—Muskoka, ON]

I was bang on six minutes. You have to be a little impressed with that.

[The Chair, Liberal, Bobby Morrissey]

Yes, you were three seconds under. I am impressed.

Mr. Coteau, you have five minutes and 56 seconds, like Mr. Aitchison had.

You have the floor.

[Michael Coteau, Liberal, Don Valley East, ON]

Thank you very much, Mr. Chair.

I hope my sound quality is good for the interpreters. Again, thank you to them for the work they do.

Thank you to our witnesses for being here today.

I live in an interesting community. It's the Don Mills corridor. From about Overlea to Fairview Mall along the corridor, about 100 buildings are going up in the next 10 years. Because of that, we've seen a lot of change with old buildings, for example. The buildings I grew up in, 7 and 11 Rochefort, which are two buildings next to each other across from the Science Centre, are being torn down and high-rise buildings are being put up. We have 100 towers going up.

We've also noticed the larger REITs coming in over the last decade. I believe Mr. Dixon said they're about 5% of the supply across the country. We've noticed an ongoing pattern. This is not something that's isolated.

Compten, I think, was the REIT where there were constant applications for above-guidelines rent increases because there were changes in the building such as elevator maintenance and things that tenants didn't want. Those percentages really go up. There were new parking spaces being placed in different buildings. If I have to go and visit my aunt, for example, because she needs groceries, I have pay now to go and see her. If a PSW comes in, they have to pay for parking. There are other things like the separation of hydro and the downloading of the insurance to these companies.

I guess my question is for Mr. Dixon, as the representative of one of the larger REITs in Canada.

Obviously, as publicly traded companies and large corporations, the bottom line is the bottom line. You have to look for ways to increase revenue.

Do the REITs participate in practices—some of those other services and those pieces I've mentioned—that may not actually impact rent directly, but are more to help boost profits?

[Dan Dixon]

Thank you for the question.

Through you, Mr. Chair, I'll start by saying that the vast majority of Canadians are protected by formal rent control regimes in five provinces and administrative rental caps in other provinces. This year, in 2023, the majority will be receiving increases of between 2.5% and 3%.

You've asked about AGIs and other sources of revenue. AGIs apply, as Mr. Irwin spoke about in his opening remark, only to major building systems and long-lived systems, generally speaking. The majority of AGIs get amortized over a 15- to 25-year period. The application of them is capped at 3% in the first three years of application and then they stop. At the end of the amortization period, the AGI goes away.

[Michael Coteau, Liberal, Don Valley East, ON]

I have a quick question in regard to affordability.

For the Martin Grove project that you talked about, you said it would be affordable rent.

Do you know what an actual two-bedroom apartment would cost? For example, in my community of Flemingdon Park and Thorncliffe, which is next door, I just found out that a three-bedroom apartment now is above $3,300. That's considered to be a community where rent is supposed to be affordable.

What would the new rent look like in an affordable, new building like this Martin Grove project? Out of curiosity, what is the affordability number?

[Dan Dixon]

For the 100 units covered by the city's open door program, rent is capped at 25% of local area income as defined in that agreement.

[Michael Coteau, Liberal, Don Valley East, ON]

That's interesting.

[Dan Dixon]

To put that into numbers for you, a one-bedroom is approximately $1,300 per month and a two-bedroom is approximately $1,500 per month. An additional 125 units are covered under RCFI program, which caps rent at 30% of local area income. The overall rent roll on those units has to be no more than 90% of the average market rate for the area.