When it comes to rental housing, it is a well-known fact that municipalities control land use and permit approvals, thus municipalities also control the amount of new rental housing built in the community. We would like to state a simple truth as it applies to rental housing (although the same supply principle applies to all housing typologies):
The only true long-term solution to the rental housing crisis is an increased SUPPLY of purpose-built rental housing sufficiently large enough to drive prices down.
Repeatedly, governments have tried to solve the problem of housing by trying to control the demand. Rent controls and other restrictions have been around since the 1970s and have never worked to alleviate the issues. These tactics only serve to band-aid the rental environment in the short term and offer the politicians of the day something with which to placate the voting tenants of BC.
So, how do we fix the supply of purpose-built rental?
There are all kinds of symptoms surrounding the real issue and often these are tackled in hopes of finding a solution. This sometimes produces short-term breathing room, but nothing long term is going to change until the root of the issue is addressed – namely, it is significantly less risky and more profitable to build condominiums than purpose-built rentals.
Here are some of the reasons:
- At some stage, municipalities decided to demand part of the profits from developments. In the early days it was a legitimate request but soon the money rarely built new infrastructure, instead it started flowing into general expenses. Unfortunately, this has resulted in a conflict. While municipalities tell renters “we’re on your side”, they are in fact discouraging purpose-built rental building through unfriendly bureaucracy and a fee structure designed for condominiums. Rentals simply don’t feed the machine.
- Taxes unfairly burden rental builders and, ultimately, renters. When you are building any structure, the materials and labour attract PST and GST. For a condominium development those taxes are neutral. When the condominiums are sold the taxes are simply passed on to the buyers. Unfortunately, for a rental building, taxes must be absorbed as part of the cost, because there is no end buyer to pass taxes on to (residential rent is GST and PST free). This adds significantly to the cost of construction. As an additional disincentive, at the completion of construction the federal government requires the owner to estimate the fair market value of the completed building and remit GST on that value. Even if the building is not sold, the owner is required to “sell it to himself” (a deemed transaction) to generate a big GST win for the government. Talk about adding salt to a wound.
- Lastly, unlike every other business in Canada, rental building owners cannot roll over their assets for capital gains purposes. When a rental building is sold, even if the proceeds are immediately reinvested in rental housing, the gain on the building is taxed like a capital gain. The effect of this tax rule is that building owners who might otherwise redevelop their properties or sell them as rental sites, don’t do so because of the huge capital gains impact they would suffer. Thousands of buildings are frozen by the federal tax regime.
What needs to change?
Quite simply, the playing field needs to level. And I say simply, because it really is a simple problem to solve with a little political will.
- Regulate (provincially) or ban the taking of payments for rezoning or land use decisions made by municipalities.
- Municipalities need to develop a new approach to the building of purpose-built rentals and stop treating them like condominiums.
- Incentives like additional density need to be focused on encouraging rentals.
- Municipalities need to add a step to new building regulation changes which justifies the improvement against the cost.
- Taxes need to be fair. It cannot be significantly worse to build or own an apartment building from a tax point of view.
- Municipalities need to lower property tax increases on rental buildings to match allowable rent increases.
- Rental buildings need to be zero rated for GST, not exempt. This needs to include the building and running of rental buildings.
- Rollovers of rental properties into larger rental properties need to be capital gains exempt.
- Real change will only be seen when purpose-built rentals are 30% to 50% of new building permits for multi-unit buildings. Municipalities need to target a percentage, not a number of units.
- If your municipality really wants to get purpose-built rental housing built, please ensure that collectively you and planning management get on the same page in terms of rental housing. As for planning management, stop holding back your amazing staff.
- Finally, don’t make the rental business unattractive. Focus on increasing the supply and be wary of trying to control the existing stock. Rent controls, unit restrictions, taxes, and building regulations will only drive interest away.
The fact is that the only true long-term solution to the rental housing crisis is an increased supply of purpose-built rental housing sufficiently large enough to drive prices down. LandlordBC will continue to advocate on behalf of our sector so that British Columbians can be assured of a strong and vibrant rental housing ecosystem.