IIF Insights: Investing in Affordable Housing
Housing—one of the basic needs in a society—has become an increasingly contentious issue as the gap between housing costs and incomes grows in cities around the world. Sauder S3i, at the University of British Columbia, is located in Vancouver—a city that is ranked the third least affordable city in the world. This paper examines a range of alternative approaches to addressing housing affordability, drawing on best practices from around the world.
Exploring some of the ways in which countries around the world, including Denmark, Austria, Scotland and the US, have approached affordable housing, this report attempts to understand what lessons Canada could learn. Solving the housing affordability crisis requires a deeper understanding of the structural market mechanisms and public policy changes that have caused it, including declining investment by the Federal government over the last 30 years. The report also presents and evaluates some of the recent legislative steps that governments have taken to tackle this issue. Reliance on rental assistance and measures to tax speculative investment have had no real impact on the underlying supply of affordable housing and supply side measures, which cities and the Federal and Provincial governments can influence through planning and permitting and by leasing land they control for affordable housing development. While the downtowns of many cities in Canada have higher density, even in the Vancouver, neighbourhoods with single family homes have low density and have been treated as off limits for densification.
Since it is highly unlikely that public investment alone will address the housing affordability issue, the report explores a number of options that mobilize private, philanthropic and foundation capital to expand the pool of investment capital. At face value, conventional private developers, who also have to purchase the underlying land are not in a position to develop affordable rental housing. One study indicated that a private developer in Toronto would need to generate $2200 per month in rental income to meet the same return on investment they would receive from a sale, whereas the threshold for affordability is closer to $930 per month. This is not simply an issue of the profit goals of private developers; underlying land costs, development fees, community amenity contributions, construction costs, and limited supply all contribute to the underlying cost base of development.
This report closes by recommending specific interventions that could address affordable housing in Vancouver and Canada in ways that can involve private investors and impact investors. The report examines: the potential for equity Real Estate Investment Trusts (REITS); land trusts, such as the Vancouver Community Land Trust Foundation, supported by New Market Funds; and, tax incentives from the US, like the Low Income Housing Tax Credit, which has mobilized $100 billion into affordable housing. The report also examines the potential for new corporate structures called Community Interest Corporations, which already exist in BC in a modified form as Community Contribution Companies, to provide reasonable returns to investors while maintaining a locked social mission to support affordable housing. Housing affordability is a concern for most Canadians, and the impact investing sector has a real opportunity to address this issue. However, the success of these interventions requires work at the nexus of the public and private sector, necessitating strong involvement from both sides, creativity, and a willingness to apply new and innovative models that ensure cities remain vibrant and diverse.
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