A Metro Vancouver developer is sounding the alarm that rising interest rates are putting in jeopardy a federal program that encourages private developers, non-profits and municipalities to deliver affordable housing.
Shawn Bouchard is vice-president of Quadra Homes, a private developer that delivered 121 affordable rental units to West Kelowna a year ago with a project called Harbour Ridge.
He said his project was feasible because of a federal program that offers construction loans with highly appealing terms. It was also feasible because of $27-million in fee reductions by the township of Langley. As well, his company – builders of luxury condos – could afford to do it for a small profit, which isn’t often the case. A developer’s profit is usually 15 per cent to 20 per cent.
Inspired by the success of the Kelowna project, Quadra Homes purchased five acres for a 410-unit affordable rental project in the township of Langley. Once it was rezoned, they again applied for the federal government’s Rental Construction Financing Initiative (RCFI), run by the Canada Mortgage and Housing Corp. The four-building project at the corner of 83rd Avenue and 208th Street is shovel ready, with an agreement in place that it will remain 100 per cent below market housing for at least 21 years. Of those units, 283 would be 10 per cent below market; and 127 units would be 20 per cent below market, operated by a non-profit organization.
However, due to climbing interest rates, Mr. Bouchard has had to cut the number of affordable units by half – a measure that would be unnecessary, he says, if the federal government would cap the borrowing rate, so developers have certainty.
Now, the plan is for half market condos, which will subsidize only 210 below-market rental units.
“It’s the unintended consequence of the interest rate policy trying to curb inflation,” Mr. Bouchard said.
“It will stifle supply in those [rental] marketplaces because people will cancel their projects, en masse. I’m not talking a small amount, but a very large amount of projects will be put on hold or completely cancelled.”
Financial adviser Matt Morrish says that renters are going to feel the pain of rising costs in the year ahead.
“The trickle down to renters and those who have inability to adjust cash flow will be felt. There are limits on how much rent can increase each year, but over time, it will be a cost that’s passed on to a tenant.”
The RCFI program has been popular with developers, including not-for-profit, because they could borrow money at a low locked-in rate for 10 years and amortized over 50 years.
Mr. Bouchard knew interest rates would climb when he started the Langley project, so he worked with a 2-per-cent rate in his early pro forma calculations. When he received final commitment of funding three months ago, the numbers still worked.
In the past 10 months, he says he’d already added around $14-million because of inflation on construction costs.
An option would be to go back to the drawing board and apply for an all-condo strata development that could potentially make them around $50-million, but his company doesn’t want to do that. He’d like the government to commit to the 2-per-cent rate that he had been working with two-and-a-half months ago. That was the rate that made the affordable housing project workable, he says. He argues that the point of the low-cost loan, which is part of the national housing strategy, is to deliver affordable housing.
“I found my own solution, but even then it’s pretty painful … I’m going to the mat here, trying to make this work because I care. We are big developers, we have done a lot of work, and everything has to make financial sense of course, but there are limits. Affordability is getting blown up all over the place.”
In an e-mail response, the CMHC said it was monitoring the effects of rising interest rates on home construction, and is working with all its partners “in a challenging environment.”
In a letter, the CMHC told Mr. Bouchard in March that it wouldn’t be possible to offer a lower interest rate because of the government’s loan rules.
Mr. Bouchard has the support of Langley Mayor Jack Froese as well as Conservative MP for Langley, Tako Van Popta.
“The for-sale condo market is so hot and profitable, why would any private enterprise party want to do something like below market rental, unless they were forced to do it?” Mr. Van Popta said.
“All they are looking for is a system whereby they can get a longer term commitment at a lower and secured interest rate. I thought that was very reasonable, and it’s not being taken seriously by the government, who keep saying they are doing so much for affordable housing. I’m saying, ‘No you’re not.’ ”
Mr. Froese said he doesn’t have developers normally knocking on the township’s door, looking to do affordable housing projects.
“I know that the federal government basically calls the shots and the CMHC has to follow. But it’s unfortunate that when we hear these great promises of housing, and when the rubber hits the road, they aren’t there to help these guys.”
Mr. Bouchard is also calling for a 20-year term instead of refinancing with a private lender after 10 years.
Alex Hemingway, senior economist and analyst at the Canadian Centre for Policy Alternatives think tank, agrees that government needs to step up its housing game, but without the reliance on private developers.
He says that while any market rental helps, the private market cannot deliver the scale of affordable housing required. Mr. Hemingway, who studies economic inequality, recently published a report on the dire need for government to acquire or contribute more land for affordable housing.
Homeowners who’ve enjoyed windfall gains can pay more in taxes, he suggests, which could go toward the acquisition of public land, especially in low-density detached house areas where developers aren’t competing. Once built, the rental housing would pay for itself through rents, instead of the owner making a profit.
“We have been through decades of a sort of austerity, certainly a roll back or a freezing of investments in new social programs – a big withdraw from public investment in housing, a weakening of public sector capacity in various ways,” Mr. Hemingway said. “So I think there might be a lack of imagination that needs to be overcome.”
There are those with a major stake in the current system who might not like it, he adds.
“If we got serious about this and we are building 10,000 or 20,000 units a year of not-for-profit or public housing in this province, that would begin to squeeze out some of the private developers. So there’s an entrenched interest there, and then there’s the homeowner lobby, and that’s significant.”
Mr. Hemingway, a life-long renter, until recently had lived with his partner in a cramped 330-square-foot attic suite in an old house. It’s the type of rental that many middle-income households are occupying in order to live in the city. But market rentals, even those deemed below market, are unaffordable to many.
“I think market rental addresses the needs of people like us, who have decent incomes, but don’t have family housing money and aren’t going to be able to buy a house or an apartment. It’s middle income housing and we should be realistic about that and recognize what it is.”
He cites a Coriolis Consulting report that goes deeper into land acquisition without forking out for hefty market prices, such as local governments negotiating for land parcels when they approve large rezoning projects, instead of the usual cash or amenity contributions. These land parcels would allow for stand-alone below-market rental projects. Another approach is through TransLink, which has potential density around transit infrastructure. The agency would have to broaden its mandate, but according to the report, it’s been done in Seattle and Los Angeles. It cites the potential of extra land around or above civic properties, such as community centres, libraries and schools. There are significant provincially and federally owned properties that could go toward truly affordable housing.
Land isn’t the only consideration: Concrete construction adds considerably to rental cost. Coriolis cites the difference between rent for a developer-owned one-bedroom apartment, built out of concrete, on high-cost land, at $2,970 a month. A one-bedroom built out of wood-frame construction, run by a non-profit, drops to $1,813 on high-cost land. If there is no cost for the land, the rent drops to $1,357 a month.
The report says that commitment to a large public housing portfolio is a question of political will, and major capital, and is not likely to happen any time soon.
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