Do you know anyone looking for an affordable rental apartment in a major Canadian city? If you do, good luck to them.
Rentals are tough to find, and rents are getting very expensive. According to the Canada Mortgage and Housing Corporation (CMHC), purpose-built apartment vacancy rates nationally fell to a 20-year low of 1.9 per cent in 2022, while average rents rose 6.1 per cent. Would-be tenants increasingly find themselves in desperate bidding wars over sub-standard accommodation in areas far from where they want to live.
Canadian policymakers should be very concerned about the rental housing crisis. According to the 2021 Census, 33.1 per cent of Canadians rent. That number is higher in big cities, where about half of all residents are tenants. Renting is the only feasible option for many people looking for a new home, but especially young workers, new families, students, and recent immigrants. High rents and limited availability are also a problem for low-income and other vulnerable individuals who need to relocate.
Market-based rentals are an essential source of housing. As such, they should get as much policy focus as providing subsidized housing for low-income families and improving affordability for first-time homebuyers.
The current situation results from decades of relatively little new purpose-built rental housing construction. Why growth has been so slow in this part of the housing market goes back to the 1970s, when provincial governments introduced laws, such as rent controls, to protect tenants from potentially greedy and negligent landlords. These laws had the unintended — but entirely predictable and predicted — consequence of making rental housing a poor business investment, and building activity slowed dramatically. Alternative assets such as residential housing, commercial real estate, stocks, bonds or GICs look much more attractive to investors than rental housing.
Governments have recently taken a few steps to support rental housing construction. For example, Ontario has reduced regulatory obstacles and provided incentives for municipalities that should encourage the construction of all housing types, including rentals. Ottawa and many provincial governments also offer the “New Residential Rental Property” GST and HST rebate, which reduces those taxes on rental construction. And CMHC has a rental construction financing initiative that encourages construction of “sustainable” rental apartment projects across Canada.
These policies seem to be having a positive effect. Last year in Ontario builders started a record high of nearly 15,000 units intended for rental use. That was great news. But Ontario needs to add 50,000 rental units every year over the next 10 years to address the current shortfall and keep pace with its growing population.
To tackle the rental housing crisis, Canadian governments at all levels must deal with the core problem: rental housing is a poor investment. But there are opportunities to make it a better investment by adjusting the tax system. Income tax credits could be offered to business on costs related to new rental housing construction. Favourable tax treatment could also be provided on earned and re-invested rental income. GST and HST incentives could be strengthened. For example, the federal GST New Residential Residential Property Tax rebate threshold has stayed at $450,000 since 1991. According to a recent C.D. Howe Institute study, that threshold would be $851,300 if it had been adjusted for inflation, which would translate into $52,169 in HST savings for most Ontario new-home buyers. Incentives could be more generous for buildings that are sustainable or have affordable units. Only long-term rental housing would be eligible, with no support for short-term “AirBnB” rentals.
The federal government controls income and sales taxes across most of the country and so is best positioned to deliver this kind of tax incentive. Fixing the tax treatment of rental housing would show strong leadership in an area of the housing market that clearly needs more attention. Sure, housing is an area where provincial governments take the lead, but this has become a national issue. Besides, when have traditional federal-provincial roles ever stopped the federal government from taking necessary actions in the national interest?
Brian Lewis, former chief economist for Ontario, is a senior fellow at the C.D. Howe Institute and the Munk School of Global Affairs & Public Policy.