A Metro Vancouver developer is sounding the alarm that rising interest rates are jeopardizing a federal program that encourages private developers, non-profits and municipalities to provide affordable housing.
Shawn Bouchard is vice president of Quadra Homes, a private developer that delivered 121 affordable rental units in West Kelowna a year ago with a project called Harbor Ridge.
He said his project was feasible thanks to a federal program that offers construction loans on very attractive terms. It was also possible thanks to $27 million in fee reductions by the Township of Langley. Plus, his business – builders of luxury condos – could afford to do it for a small profit, which isn’t often the case. A promoter’s profit is usually 15-20%.
Inspired by the success of the Kelowna project, Quadra Homes purchased five acres for an affordable 410-unit rental project in Langley Township. Once it was rezoned, they again applied for the federal government’s Rental Housing Construction Finance Initiative (RCFI), managed by the Canada Mortgage and Housing Corporation. in place that it will remain 100 percent below market housing for at least 21 years. Of those units, 283 would be 10 percent below market; and 127 units would be 20 percent below market, operated by a nonprofit.
However, due to rising interest rates, Mr. Bouchard had to halve the number of affordable units – a measure he says would be useless if the federal government capped the borrowing rate, in order to promoters have certainty.
Now the plan is for half-market condos, which will only subsidize 210 below-market rental units.
“It’s the unintended consequence of interest rate policy trying to rein in inflation,” Bouchard said.
“This will stifle supply in those [rental] marketplaces because people are going to cancel their projects, in droves. I’m not talking about a small amount, but a very large number of projects that will be put on hold or completely canceled.
Financial adviser Matt Morrish says tenants will feel the pain of rising costs over the coming year.
“The trickle down to tenants and those without the ability to adjust their cash flow will be felt. There are limits on the amount of rent that can increase each year, but over time this will be a cost that will be passed on to the tenant.
The RCFI program was popular with developers, including nonprofits, because they could borrow money at a low rate locked in for 10 years and amortized over 50 years.
Mr. Bouchard knew that interest rates would rise when he launched the Langley project, so he used a rate of 2% in his first pro forma calculations. When he received the final funding commitment three months ago, the numbers were still working.
In the past 10 months, he says he has already added about $14 million due to construction cost inflation.
One option would be to go back to the drawing board and apply for an all-condominium strata development that could potentially earn them around $50 million, but his company doesn’t want to do that. He would like the government to commit to respecting the 2% rate with which he was working two and a half months ago. It was the rate that made the affordable housing project feasible, he says. He argues that the purpose of the low-cost loan, which is part of the National Housing Strategy, is to provide affordable housing.
“I found my own solution, but even then it’s quite painful…I’m going to the mat here, trying to make it work because I care. We are big developers, we have worked hard, and everything has to make financial sense of course, but there are limits. Affordability is exploding everywhere.
In an email response, CMHC said it was monitoring the effects of rising interest rates on homebuilding and working with all of its partners “in a challenging environment.”
In a letter, CMHC told Mr. Bouchard in March that it would not be possible to offer a lower interest rate because of government rules on loans.
Mr. Bouchard has the support of the mayor of Langley, Jack Froese, as well as the Conservative MP for Langley, Tako Van Popta.
“The condo for sale market is so hot and profitable, why would a private company want to do something like a below market rental unless they were forced to?” said Mr. Van Popta.
“All they’re looking for is a system that allows them to get a longer-term commitment at a lower, guaranteed interest rate. I thought that was very reasonable, and it’s not taken seriously by the government, which keeps saying it’s doing so much for affordable housing. I say, ‘No, you’re not.’ ”
Mr. Froese said that there are no developers who normally knock on the township’s door, looking to do affordable housing projects.
“I know the federal government basically decides and CMHC has to follow. But it’s unfortunate that when we hear these great housing promises and the rubber hits the road, they’re not there to help these guys.
Mr. Bouchard is also asking for a 20-year term instead of refinancing with a private lender after 10 years.
Alex Hemingway, senior economist and analyst at the Canadian Center for Policy Alternatives think tank, agrees the government needs to step up its game on housing, but not rely on private developers.
He says that while any rental from the market is helpful, the private market cannot provide the scale of affordable housing required. Mr. Hemingway, who studies economic inequality, recently published a report on the urgent need for the government to acquire or contribute more land for affordable housing.
Homeowners who have benefited from windfall gains can pay more taxes, he suggests, which could be used to acquire public land, especially in low-density single-family housing areas where developers are not in competition. Once built, rental units would be self-financing through rents, instead of the landlord making a profit.
“We’ve been through decades of some kind of austerity, certainly a rollback or a freeze on investment in new social programs – a big pullback from public investment in housing, a weakening of public sector capacity in various manners,” Mr. Hemingway said. . “So I think there might be a lack of imagination that needs to be overcome.”
There are those who have a major stake in the current system who might not like it, he adds.
“If we take this seriously and build 10,000 or 20,000 units a year of non-profit or public housing in this province, it would start to crowd out some of the private developers. So there’s a deep-seated interest there, and then there’s the landlord lobby, and that’s important.
Mr Hemingway, a lifelong tenant, until recently lived with his partner in a cramped 330 square foot attic suite in an old house. This is the type of rental that many middle-income households occupy for city living. But market rents, even those deemed below market, are unaffordable for many.
“I think market rental meets the needs of people like us, who have decent incomes, but don’t have money for housing and won’t be able to buy a house or an apartment. This is middle income housing and we should be realistic about it and recognize what it is.
He cites a report by Coriolis Consulting that delves into land acquisition without paying high market prices, such as local governments negotiating land plots when approving large rezoning projects, instead of the usual cash or in amenities. These plots of land would allow for below-market stand-alone rental projects. Another approach is to go through TransLink, which has potential density around transit infrastructure. The agency should expand its mandate, but according to the report, it has been done in Seattle and Los Angeles. He cites the potential for additional land around or above municipal properties, such as community centers, libraries and schools. There are significant properties owned by the provinces and the federal government that could become truly affordable housing.
Land is not the only consideration: concrete construction increases the rental cost considerably. Coriolis quotes the difference between the rent for a developer-owned, concrete-built, one-bedroom apartment on high-cost land at $2,970 per month. A bedroom built from wood-frame construction, run by a nonprofit, drops to $1,813 on high-cost land. If there is no cost for the land, the rent drops to $1,357 per month.
The report says that committing to a large social housing portfolio is a matter of political will and significant capital, and is unlikely to happen any time soon.
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