IMFG

perspectives
No. 3/ 2013

Affordable Housing
in Ontario:
Mobilizing Private Capital
in an Era of Public Constraint
André Côté, IMFG
Howard Tam, ThinkFresh Group
About IMFG
The Institute on Municipal Finance and Governance (IMFG) is an academic research hub and non-partisan
think tank based in the Munk School of Global Affairs at the University of Toronto.

IMFG focuses on the fiscal health and governance challenges facing large cities and city-regions. Its objective
is to spark and inform public debate, and to engage the academic and policy communities around important
issues of municipal finance and governance.

The Institute is funded by the Province of Ontario, the City of Toronto, Avana Capital, and
TD Bank Group.
The Authors
André Côté is the Manager of Programs and Research at the Institute on Municipal Finance and
Governance (IMFG).

Howard Tam is the Principal at the ThinkFresh Group, a consultancy focused on urban issues and new
innovations for city-building projects.
Acknowledgements
The project has been made possible through the support of TD Bank Group.

The authors would like to thank the following individuals, who generously provided feedback on the paper
and other elements of the project: Derek Ballantyne, Derek Burleton, Kate Camenzuli, Alexandra Flynn,
Sean Gadon, Kyle Hanniman, Jon Medow, Adam Molson, Kerry O’Dwyer, Salima Rawji, Tyler Seaman,
Enid Slack, Joanne Taylor, Julius Tapper and Melissa Thomson.

The authors alone are responsible for the contents of the paper and the opinions expressed, which are not
attributable to the reviewers, IMFG or its funders.

Institute on Municipal Finance & Governance

Munk School of Global Affairs, University of Toronto
1 Devonshire Place
Toronto, Ontario, Canada M5S 3K7
[Link]

Series editor: André Côté

© Copyright held by author, 2013

ISBN 978-0-7727-0913-4
Executive Summary

This Perspectives paper considers how to create the conditions for greater private participation in affordable housing
in Ontario. The purpose of affordable housing is relatively simple: to provide adequate shelter for people at a range
of incomes who cannot reasonably afford to pay the market rate. But the economics of affordable housing is complex
and there is no “free lunch.” Somebody has to pay the difference between the affordable rates and the market price.

Traditionally, governments largely filled this gap through large capital and operating investments, shelter allowances
for individuals or other funding. This traditional model appears less suited to today’s challenges, which include:

• A federal-provincial fiscal context that limits the scope for large new investments;

• The strain on social housing providers and local budgets to maintain existing stock; and

• growing need for affordable housing, due in part to rising home prices and the shortage of
A
new rental housing supply.

The housing affordability problem is driven in large measure on the demand side by low and stagnating income
levels. Ultimately, this problem can be addressed only through higher employment incomes, government tax and
transfer mechanisms, or both.

But there are pressing needs on the supply side as well. This paper focuses on two major supply-side objectives where
private participation can have an impact: the creation of new affordable supply, and the maintenance of existing
social housing and private rental stock.

Four pathways to increasing private participation in affordable housing are discussed:

evers to Make Affordable Rental and Ownership Models Work, including tax reforms and
1. L
credits, or inclusionary housing models that use public lands and other incentives.

2. Investment Vehicles for the Social Housing Sector such as mortgage refinancing, Real Estate
Investment Trusts (REITs), or emerging social finance instruments.

3. Incentives to Maintain Private Rental Supply like improved rent dispute processes, expedited
property tax equalization, or enhanced financing for repairs and retrofits.

4. Creating the Conditions for Private Participation by ensuring fair and consistent market
conditions, and by building on the success of public-private partnership (P3) models.

Case studies also highlight affordable housing models in the United States, United Kingdom and Australia, all of
which face similar housing affordability challenges and fiscal constraints.

There are no easy answers. But what is clear is that it is an opportune time for a renewed discussion about how to
mobilize private investment in affordable housing.
IMFG Perspectives

Affordable The vast majority of housing in the province is privately

owned and rented. Of 4.5 million Ontario households, 70
percent are owners. The vast majority own detached houses2

Housing in though a growing number live in condominiums. Renters

tend to live in apartments, often in buildings over five storeys.

Ontario:
Social housing, managed by private and municipal non-
profits and co-operative providers, is an important safety net
for people on low-incomes or requiring special supports. It
accounts for about 5 percent of all housing and 20 percent of
Mobilizing Private Capital in the rental supply.3

an Era of Public Constraint The need for affordable housing continues to grow, not
only among low-income renters, but also increasingly among
medium-income homebuyers. Yet little new affordable and
rental supply is being built. Social housing providers and local
1. Introduction budgets are straining to maintain existing stock, and federal
and provincial governments are facing fiscal constraints that
Access to adequate and affordable housing is an limit the scope for large new investments. New solutions and
essential component of thriving and equitable communities. sources of investment are needed – including an expanded
An important social determinant of health, equality of role for the private sector.
opportunity and community participation, affordable
housing also serves a critical economic function by supporting The question this paper poses is, how do you create the
a productive workforce and reducing social service costs.1 In conditions for greater private participation in affordable housing
large urban centres, where most people live, the concentration in Ontario? Section 2 assesses the problems, describing the
of poverty, income stratification, and homelessness create housing affordability gap, the state of the social housing
demand for affordable housing. This is particularly true in sector, federal and provincial housing policies and fiscal
Ontario, the only Canadian province in which social housing conditions, and the present uncertainty in the housing
is a municipal responsibility. While federal and provincial market. Section 3 presents the challenge: the twin aims of
governments play funding, regulatory and oversight roles, building new affordable housing and maintaining the existing
cities and communities deliver housing. supply. It identifies some pathways to private participation

–1–
Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint

and profiles some international case studies. The last section 2. The Problem: A Housing Affordability Crisis in a
provides concluding observations and reflects on how to spark Time of Fiscal Constraint
a discussion about mobilizing private investment in affordable
housing. The Canadian housing market has shown remarkable
resilience throughout the global financial crisis. While
Important Terms the housing sectors in the United States and many other
developed countries have suffered, Canada’s has remained
Affordability: The traditional measure of housing a pillar of strength. Over the past decade, housing-related
affordability is 30 percent of a household’s before- spending in Canada grew from about 17 percent of gross
tax income. Recently, government policies have set domestic product (GDP) to nearly 20 percent in 2011.4 This
affordability targets as 80 percent of average market prolonged growth has helped underpin economic growth
rents or prices. and increased the wealth of many Canadians. These gains,
however, have been achieved at the cost of declining housing
Market Housing: Housing priced at the full market affordability and a rise in housing-related debt.
rate to buy or rent.
Housing Affordability has been Deteriorating for Many
Social Housing: Mixed-income housing (some rent- Households
geared-to-income, some market rent units) owned
Canada’s housing boom has in part been fuelled
and operated by municipalities, local faith groups,
by demographic factors such as population increases
and other community organizations. Social housing
and changing consumer preferences, notably among
is usually funded by a legally prescribed government
condominium buyers seeking urban amenities and lifestyle
program and technically defined as either: in cities like Toronto.5 But construction activity and rising
house prices have also been stoked by historically low interest
• Non-profit housing, which is community-based
rates that have encouraged household borrowing. This
affordable rental housing provided by non-profit
cycle of escalating debt and housing costs has put a strain
corporations where a percentage of tenants pay on household finances. The average Canadian household
rent-geared-to-income and the remaining pay is shouldering record levels of debt, 80 percent of which is
market rents; or housing-related (see Figure 1).6
• Co-operative (co-op) housing, in which Figure 1: Canadian Home Prices and Household Debt
households are members of a co-operative $400,000 180

corporation that owns the building and elects $350,000 160

from amongst themselves a board of directors $300,000

140

responsible for overseeing the management of the 120

$250,000
building. 100 Average
$200,000 Canadian Home
80 Prices (Left)
Rent-Geared-to-Income (RGI): Units with rents $150,000
60
determined by the tenant’s ability to pay – normally $100,000
Household Debt
to Disposable
40 Income, %
about 30 percent of the gross monthly household (Right)
$50,000
income. The housing provider receives a “rent subsidy” 20

from the government for the difference between the $0

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
0

RGI rent paid and the market rent of the unit (as Source: Canadian Real Estate Association, Statistics Canada

assessed by the government).

In Ontario, two other factors have impacted affordability.
Capital Repairs: Repairs that go beyond normal First, incomes have not been growing for many households.
maintenance, including structural repairs and The average income of the bottom fifth of Ontarians in
improvements to the building envelope and grounds. 2010, after taxes and government transfers and adjusted for
Capital repairs are designed to extend the life of the inflation, was $15,500 – almost the same as in 1990. For
building, increase its energy and water efficiency, and middle-income households, incomes have risen by only 10
address any health and safety concerns resulting from percent over two decades (see Figure 2). Second, the supply of
the age of the building. rental housing has tightened. New construction has focused
almost entirely on the ownership market for single-family
Source: Toronto Community Housing, Ontario Non-Profit Housing Association homes and multi-unit condos, with very little new purpose-
built private rental development (see Figure 3).

–2–
IMFG Perspectives

Figure 2 - Ontario After-Tax Income Quintiles, 2010 Constant $ on average, bachelor apartments in the GTA rent for more
than $800.10
160000
140000
The Canada Mortgage and Housing Corporation
120000
(CMHC) reports that 630,000 Ontario households, or more
100000 Highest quintile
than 15 percent, are in Core Housing Need (see Figure 4). A
80000 Fourth quintile
Third quintile measure of housing affordability and adequacy, Core Housing
60000
Second quintile Need is concentrated among those with the lowest incomes
40000
Lowest quintile
and disproportionately among lone-parent and one-person
20000
0
households, immigrants, youth and seniors. A much larger
proportion of renter households are in Core Housing Need,
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010
Source: Statistics Canada CANSIM Table 202-0703
though more than one-third of the total are homeowners.11
Rising costs for energy and food are increasing the financial
burden on many households.12
Between 2006 and 2010, nearly 90,000 condominium
units were built, compared with about 20,000 rental units. In Figure 4 - Households in Core Housing Need*
the Greater Toronto Area (GTA), this trend has seen condos %
grow to more than 10 percent of the total rental units. More 20

than one in five GTA condos is now rented. Secondary units 18

in single-family homes are another critical source of rental
16
supply. Together, condos and secondary units represent about Canada
one-third of the GTA’s rental supply, with a far higher share 14 Ontario
in the City of Toronto.7 While about half of the new purpose- 12 Toronto CMA
built rental supply during this period was generated through
10
the federal-provincial Affordable Housing Program, this was a 2002 2003 2004 2005 2006 2007 2008 2009
very small fraction of all new housing.8 Source: Canadian Mortage and Housing Corporation
*Factors in affordability based on the 30% household income measure,
suitability based on size and number of occupants, and adequacy based on
state-of-repair, as well as availability of alternative housing.
Figure 3 - Ontario Housing Completions by Tenure
70,000

60,000
Social Housing Providers are Struggling to Maintain their
50,000
Existing Stock
40,000
Freehold
30,000 Rental Social housing provides a safety net for those on low
20,000 Condo incomes, with subsidized rent-geared-to-income (RGI) units.
10,000
There are 270,000 social housing units in Ontario,13 many of
which were built decades ago and require major renovations.
0
1989 1991 1993 1995 1997 1999200120032005200720092011 Estimates suggest that 70 percent of the units have capital
Source: Canada Mortgage and Housing Corporation
reserve shortfalls, creating a liability of more than $1.2
billion.14 Toronto Community Housing, North America’s
second-largest social housing provider, reports a $750-million
The shortage of new private rental supply, particularly capital repair backlog.15 Some units are left vacant because
at the lower end of the market, has put upward pressure on they are in such poor condition.16 Still, there are over 150,000
rents. In the GTA, average vacancy rates for purpose-built households on social housing waiting lists across
rental units have declined over the past decade from 4 percent the Province.17
to less than 2 percent, with average rents increasing to almost
$1,100 per month. Vacancy rates are even lower for condo There is limited financial flexibility for social housing
rental units, which are typically more expensive. Condo rents providers. Under provincial legislation and operating agree-
average more than $1,500 across the GTA and nearly $1,700 ments, they are required to maintain their portfolios and of
in central Toronto. The long-term trend is troubling: between RGI units. This means that they cannot share higher costs
1990 and 2008, rents for one- and two-bedroom private for energy or mortgage debt service with tenants. As a result,
rental units in Ontario grew twice as quickly as the median many have deferred major capital repairs or investments in
income of renters.9 Social assistance rates have not kept up more efficient energy, water, and mechanical systems that
either. The monthly benefit for a single person is about $600; could reduce ongoing operating costs.

–3–
Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint

The pressures will intensify as federal operating subsidies plan. The Working Group’s recommendations signal a shift
for social housing providers gradually phase out over the next towards funding models that embrace market mechanisms
two decades (see Figure 6). As the subsidies are tied to mort- and partnerships with private and non-profit actors.19
gage terms, providers who are paying more to service their
mortgages than they are receiving in subsidies can remain The Federal-Provincial Fiscal Context Limits the Scope for
viable when their mortgages end. For others, notably those Large New Investments
with high ratios of RGI tenants or major capital repair needs,
there will be a funding gap that creates pressures to raise Meanwhile, the longer-term trend has been a diminishing
rents, reduce the proportion of affordable units, or draw on role for the federal and Ontario governments in social hous-
the municipal tax base to cover shortfalls.18 ing. During the 1990s, the federal government – the central
player in the construction of public housing in the postwar
Desperate times are calling for radical thinking. In late period – withdrew funding for affordable rental development
2012, Toronto City Council, on the advice of a Special Hous- and transferred responsibility for administering housing to the
ing Working Group, approved the sale of some of Toronto provinces. Ontario in turn devolved responsibility for social
Community Housing’s single-family homes to address short- housing to municipalities in 2001. More recently, the provin-
term funding pressures, and directed staff to report back in cial Housing Services Act and other reforms have signalled
June 2013 with a five-year social housing capital financing a more limited direct role for the province in housing admin-

Figure 5 - Who Does What in the Housing Sector?

Municipal Consolidated Municipal Service Managers (e.g. cities, regional governments, or counties) are responsible for local
Governments policy, funding and administration of housing and homelessness under the Housing Services Act. Local governments are
also responsible for planning policies, project approvals and building permits, and servicing new developments.

Social Housing Municipal non-profit corporations (e.g. Toronto Community Housing) and private non-profits (e.g. independent
Sector community agencies or religious groups) manage housing portfolios and provide affordable rental for low income
tenants, whereas co-operative housing is owned and managed by resident members of a co-operative corporation.

Government of The Ministry of Municipal Affairs and Housing develops policy and oversees the Housing Services Act (HSA) and
Ontario the Residential Tenancies Act. Other ministries fund and administer some supportive housing for groups like the
frail elderly and developmentally disabled. The Housing Services Corporation, established under the HSA, delivers
province-wide programs and services to the social housing sector, while the Ontario Financing Authority and
Infrastructure Ontario provide mortgage refinancing support and low-cost lending for the sector.

Government of In addition to directly administering on-reserve Aboriginal housing, the federal government provides funding through
Canada social housing operating agreements and housing and homelessness programs, mortgage loan insurance and housing
programs through the Canada Mortgage and Housing Corporation, and regulation and oversight of the housing
sector.

Public, Private and There are a broad range of of housing sector intermediaries. Private sector architects, planners and construction firms
Non-Profit Inter- play a role in the development process. Industry and sector associations (e.g. BILD, the Federation of Rental-Housing
mediaries Providers of Ontario and the Ontario Non-Profit Housing Association) represent their members and undertake policy
and advocacy work.

Residential Residential developers are generally involved in all aspects of a project, purchasing land, finding financing, hiring
Developers architects and planners, securing building permits and zoning approvals, hiring and overseeing the construction, and
leasing, renting or selling the new units.

Financers and Mortgage brokers, chartered banks and institutional investors such as pension funds raise money, provide loans or
Investors make investments in projects. Typically, a project will require term loans to buy the land, construction financing to
build the property, and longer-term mortgage financing that is paid off over 25 to 35 years.

Private Rental Private owners and operators of residential properties can include developers, property management companies or Real
Owners Estate Investment Trusts (REITs). They generate revenues through rents, which must exceed the costs of maintaining
properties and paying down mortgage debts.

Source: Toronto Community Housing, Ontario Non-Profit Housing Association, University of Toronto Cities Centre

–4–
IMFG Perspectives

Figure 6 - Major Federal-Provincial Housing Transfers

Overview Funding and Timing

Canada-Ontario Invest- A cost-shared program that provides funding for new $480 million from 2011-2015 (the 2013 Federal Budget
ment in Affordable construction, renovation, homeownership assistance, announced the extension of the program until 2018-19)
Housing (IAH) rent supplements, shelter allowances, and other
supports. New housing must remain affordable for a
minimum of 20 years.

Federal-Provincial The long-term agreements (25 to 50 years) between Nearly $500 million annually, declining until the expiry of
Social Housing Program the federal government and housing providers provide all agreements by 2032
(operating agreements) operating subsidies for over 200,000 units in Ontario.
The agreements generally end when mortgages are
paid.

Source: Ontario Long-Term Affordable Housing Strategy; Ontario Public Accounts 2011-12; 2013 Federal Budget

istration, focusing instead on increasing flexibility for While a gradual market correction may not significantly
social housing providers while improving their capital asset improve the private development economics of affordable
management.20 housing, it could create private-sector interest in new housing
models and investment opportunities.
Since the financial crisis of 2008, the fiscal context has
also shifted dramatically. The last decade has seen a mod- 3. The Objective: More Private Participation in
est increase in federal and provincial housing investment, Affordable Housing
though increasingly through time-limited programs such as
the Investment in Affordable Housing (see Figure 6). Today, A 2003 report by TD Economics made the case that
with both governments firmly committed to deficit reduction the housing affordability problem must ultimately be ad-
and facing competing spending priorities, the prospects for dressed on the demand side by raising low incomes to levels
new funding commitments for housing on the scale needed that allow people to afford adequate shelter, whether through
are dim. As the Drummond Report on Ontario’s finances better-paying employment, government tax and transfer
made clear, the Province faces a particularly daunting path to mechanisms, or both.26 This diagnosis is no less relevant
budget balance in 2017-18, requiring a “sharp degree of fiscal today. Yet the preceding section illustrates a pressing need on
restraint ... over the next few years.”21 the supply side, with two primary challenges: maintaining
Cooling Housing Markets could Create New Opportunities the existing supply of social housing and private rental stock,
and creating the conditions for investments in new affordable
Concerns about affordability and public finances have units. Addressing these two challenges will require increased
been coupled with uncertainty about the state of housing private-sector participation.
markets. The Economist magazine recently raised alarms about
significant housing overvaluation in Canada.22 The consensus The question this paper poses is, how do you create the
among forecasters, however, seems to be that Canadian hous- conditions for greater private participation in affordable housing
ing markets will experience a modest downward adjustment in Ontario? Private philanthropy or charity is one avenue. But
in the coming years.23 CMHC has suggested that housing if new housing models are to be feasible and sustainable, they
demand in Ontario peaked in early 2012, with house prices must provide a clear business case for private participation.
and new construction activity expected to be flat or in gradual This section discusses some pathways to increasing private
decline through 2013.24 The agency also notes that markets participation in affordable housing, while also presenting
remain stable, with the proportion of residential mortgages in short case studies from other countries.
arrears remaining near the historical average at less than 0.5
percent.25 Some Pathways to Increasing Private Participation

The cooling housing market could offer some benefits. The market preference for building condos compared
Declining prices would ease pressures on lower-income with purpose-built rental development is easy to explain: con-
homebuyers. A slowdown in real estate activity with con- dos are less risky and more profitable. Developers pre-sell the
tinued low interest rates could also present an opportune majority of condo units before they start building. Pre-sales
moment to explore new ways to provide affordable housing. generate cash flow to help finance construction. They also

–5–
Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint

reduce financing risks for lenders who are concerned about Levers to Make Affordable Models Work
the viability of projects when land and construction costs are
high. Reducing risk lowers borrowing costs for developers and Many ways of improving the economics of rental
allows them to use more debt and less of their own equity to development and creating new affordable housing have been
finance projects, increasing returns and freeing up their funds proposed. The federal-provincial Investment in Affordable
to invest in other projects (See Figure 5 for details about Who Housing program provides an important, if inadequate, fund-
Does What in the Housing Sector). ing lever. Substantively improving the economics of rental
development, however, could require more favourable tax
Rental development is riskier and more costly. Develop- treatment for rental properties. The rental housing industry
ers must leave their equity in projects over the long-term, has advocated for the elimination of GST/HST on rental
limiting their ability to revolve their capital into new projects. housing, tax deferrals on rental property sales and re-invest-
There is also less immediate cash flow because they cannot ments and higher capital cost allowance (CCA) deductions.31
generate revenues until the units are built and occupied. Tax credits or incentives are another option. The C.D. Howe
Financers also perceive greater risks, increasing borrowing Institute has proposed a “made-in-Canada” Low-Income
costs, requiring that developers purchase mortgage insurance Housing Tax Credit modeled on the program in the United
and delaying the financing process. A recent study for the States.32 Australia’s National Rental Affordability Scheme
University of Toronto Cities Centre suggests that for develop- (NRAS) is a similar mechanism to encourage affordable rental
ers to generate a reasonable return on a standard rental prop- development (See case studies 1 and 3). At a time of public
erty development, units must be priced at luxury rent levels constraint, however, there are also levers that have less direct
in excess of $2,200 – well above average condo rental rates fiscal impact.
and more than double the average affordable rent level.27
Perhaps the most promising are mechanisms to reduce
development land costs. The 2012 report of the City of
The Low Income Housing Tax Credit in the Toronto Private Sector Housing Roundtable recommended
United States leveraging surplus city lands and infill around existing social
housing or private apartment towers to build rental hous-
The Low Income Housing Tax Credit (LIHTC) ing.33 Inclusionary housing models – which incorporate some
underpins 90 percent of all affordable rental develop- affordable rental or ownership units as part of private devel-
ment in the United States.28 In use since 1986, it is a
opments – have proven successful where the costs and risks to
permanent federal tax credit that supports new con-
developers can be offset by incentives like land grants. Experts
struction and rehabilitation of existing affordable rental
agree that incentives are not enough to make these models
housing. The credit is a dollar-for-dollar tax deduction
viable where units are targeted at very low-income house-
against investors’ income when they invest in eligible
holds. Yet they can work if the affordable units are priced
affordable properties. LIHTC-qualified projects must
closer to the market rate – at about 70 to 80 percent of mar-
meet certain minimum affordability requirements for
ket rent or sale prices.34 In highly unaffordable cities like New
up to 30 years – with 20 to 40 percent of units oc-
cupied by households with incomes at or below 60 York, such policies are aimed at middle-income households.
percent of the area’s median income. Rents are set Research by Gladki and Pomeroy has found that in On-
based on a percentage of an area’s median income as tario, inclusionary models that include 15 percent affordable
determined by the US Department of Housing and units in new developments can be economical if developers
Urban Development.29 are provided increased building density and exemptions from
Each year, the federal government allocates a set municipal fees and charges to offset the costs. As a recent
number of credits to states. Typically, an affordable IMFG Paper suggested, Section 37 agreements that trade
project will receive credits when it has been deemed as additional density for benefits from developers, as permitted
qualified by a state housing agency. The project then al- under Section 37 of the Planning Act, can also be used for
locates these credits to equity investors, who are eligible affordable housing.35 As the conditions and costs are unique
to use the credits to make income deductions for a for each development, voluntary, incentive-based municipal
period of 10 years. Large organizations like Enterprise policies that give developers latitude in negotiating offsets and
Community Partners play an important “syndica- adjusting unit sizes have been effective.36 In other jurisdic-
tor” role, acting as market intermediaries that connect tions, these models have created private investment opportu-
groups of investors to projects with available credits. nities while encouraging denser, mixed-income communities.
In addition to harnessing capital for affordable hous-
ing projects, the model has helped non-profits build Affordable ownership models have also proven effective.
financial capacity and discipline in due diligence and Non-profit developer Options for Homes and Home Owner-
underwriting.30 ship Alternatives, a non-profit financier, offer a shared-appre-
ciation second-mortgage – a form of down payment assis-

–6–
IMFG Perspectives

tance that is paid back with market appreciation when the nity Housing recently announced that, with Infrastructure
owners sell their units.37 The Daniels Corporation, a private Ontario’s assistance, mortgage refinancing terms had been
developer, offers homebuyers gradual deposit payment plans negotiated for 18 social housing properties that would free
and rent-to-own programs. Toronto’s Private Sector Housing up nearly $100 million for capital repairs.43 As the first social
Roundtable noted that there could be opportunities to scale housing real estate investment trust (REIT) launches in the
up these types of affordable ownership models.38 United Kingdom (See case study 2), the City of Toronto is
also assessing whether a REIT model could leverage Toronto
Community Housing’s portfolio of market-rental units to
Case Study 2: Austerity and a Growing Role raise capital.44
for Private Investment in the United Kingdom
Another proposal, outlined in a report by the Housing
In the wake of the financial crisis and the deterio- Services Corporation (HSC), calls for the creation of a Social
ration of the United Kingdom’s public finances, the Housing Capital Fund. Managed by Infrastructure Ontario
central government imposed severe austerity measures or a chartered bank, the fund would provide social hous-
that reduced the housing budget by 50 percent in ing service managers with reliable and low-cost financing
2010.39 These cuts increased pressure on non-profit for renovations and capital improvements.45 Along similar
Housing Associations (HAs) that manage much of the lines, major financial institutions are assessing the viability of
social housing stock. HAs bid to operate public (or social finance instruments. Social housing repairs and energy
Council) homes, or build new affordable and market retrofits offer appealing investment opportunities as they can
units by securing public grants and private financing generate returns while achieving positive social and environ-
mental outcomes. Limiting investor risk through government
through loans or debt issuance. The largest of the HAs,
loan guarantees or first-loss provisions could make these
Sanctuary Housing, manages 64,000 supportive and af-
models more attractive to investors.
fordable housing units.40
An important prerequisite, however, is reliable data on
With public funds limited, housing policies in the the social housing stock to inform the underwriting of invest-
United Kingdom are focusing on attracting private ment decisions. The Province is taking steps to support asset
investment. The Affordable Homes Programme, the management planning and building condition audits, but
government’s major funding vehicle for new supply, data can be unreliable and there is no province-wide baseline
is leveraging smaller public capital grants by raising assessment of social housing assets. In addition, expiring op-
affordable rent limits from 50 to 80 percent of market erating subsidies threaten municipal budgets and the viability
rates and providing landlords with greater flexibility in of some providers. Maintaining the affordable rental stock
offering tenancies. A Build to Rent Fund that will grow could require that the Province consider offering greater flex-
to £1 billion offers recoverable public loans for private ibility on social housing service standards and RGI rates.
rental development, providing both bridge financing
and public risk sharing. Another program will guaran- Incentives to Maintain Private Rental Supply
tee housing provider debt to make affordable housing
projects commercially viable.41 As most renters live in private apartment buildings,
maintaining these units is also a priority. The economics of
The United Kingdom is also experimenting with acquiring existing rental buildings have generally been better
social housing real estate investment trusts (REITs). than building new rental housing. Older properties can be
The first social housing REIT, Houses for Homes, is acquired for significantly less and provide stable cash flows
targeting returns in the 6 percent range and will be immediately.46 Yet, certain factors have limited investments
listing on London’s junior stock exchange. Focused in maintenance and capital improvements. Older buildings
on supportive housing, Houses for Homes acts as an generally have lower rents and higher energy costs. Deferred
intermediary between institutional investors and lo- capital repair costs are difficult to assess, increasing risk for
cal authorities or small housing providers. It provides investors. Property tax inequities for older rental buildings,
access to low-cost financing and creates economies of rent controls on occupied units, and inflexible tenancy rules
scale in new housing projects, sharing up to 40 percent are further disincentives.
of the return on capital appreciation.42 For policymakers, one option would be to compel a
greater focus on the quality and state-of-repair of private
rental assets through firmer enforcement of building stan-
Investment Vehicles for the Social Housing Sector dards or by mandating capital reserve funds, as required for
New investment vehicles are also needed to finance the condominiums. A more collaborative approach, however,
refurbishment and retrofitting of existing social housing. could focus on improving the incentives for private invest-
A number of models are being explored. Toronto Commu- ment. This could include improving the lengthy and cum-

–7–
Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint

bersome landlord-tenant rent dispute process, or expedited At the same time, public-private partnerships (P3s) have
equalization of property tax rates.47 It could also focus on been increasingly common in Ontario for public infrastruc-
promoting or enhancing the available financing incentives for ture projects. While it is important to note that P3s are a
repairs and retrofits, such as forgivable loans through expan- project financing mechanism for delivering capital projects
sion of the federal-provincial Ontario Renovates program rather than a source of funding, they offer a number of
or the Toronto Atmospheric Fund’s (TAF) insured capital potential benefits. These include risk-sharing, pay for per-
financing program for energy retrofits. Under TAF’s program, formance, asset lifecycle planning, and the application of
loans finance energy performance improvements in residential private expertise and ingenuity to public objectives.50 The few
buildings, with the building owner and the lender sharing in examples of Canadian housing P3s – such as Toronto’s Regent
the ongoing operating savings. Park revitalization – highlight some success factors: private-
sector leadership, trust and commitment by the partners,
Case Study 3: Australia’s National Affordable and binding contracts that set out roles and responsibilities.51
Rental Scheme Ultimately, successful models of private participation require
a sense of shared interests among public, non-profit, and
Faced with housing shortages and severe afford- private organizations, and openness to new ideas and partner-
ability issues, the Australian national government, in ship opportunities.
partnership with the states and territories, launched
the National Rental Affordability Scheme (NRAS) in 4. Concluding Observations and Questions
2008. NRAS is an incentive program that aims to gen-
erate 50,000 new affordable units by 2014. Rather than While the need for affordable housing continues to grow
creating social or public housing, NRAS is designed to in Ontario’s cities, little new affordable rental supply is being
make investment in affordable rental homes competi- built. Existing social housing is aging and straining munici-
tive with other asset classes. pal budgets, and the federal and provincial governments face
long-term fiscal constraints. To build affordable housing and
NRAS provides financial incentives to private and maintain the existing supply, new solutions and sources of
non-profit businesses and community organizations investment are needed – requiring increased private-sector
that build and rent homes for at least 20 percent below participation.
market rents to eligible, government-approved tenants.
Individual investors may also participate by invest- There are a number of pathways to increasing private
ing in larger entities that own NRAS properties. For participation in affordable housing. On the one hand, there
each qualifying unit, the program will pay the investor are opportunities for substantive reforms, potentially borrow-
about Au$10,000 per year for 10 years – indexed to ing from the models in the United States, the United King-
inflation – through a combination of income tax- dom and Australia. But are these types of reforms feasible
exempt refundable tax credits and payments through and fiscally attainable at this point in time? On the other
the national and state/territorial governments. Inves- hand, there are existing levers and incentives at the disposal of
tors must stay in the program for at least 10 years, Ontario policymakers – for instance, surplus public lands, in-
after which time the property is free from any rental or clusionary housing models and retrofit financing instruments
resale restrictions.48 – that can be put to use quickly and with less incremental
cost. Do they provide more immediate opportunities?
Creating the Conditions for Private Participation
It is an opportune time for a renewed discussion among
Private-sector representatives commonly stress the need public, private and non-profit stakeholders about how to
for fair treatment and certainty about their operating envi- mobilize private investment in affordable housing. It should
ronment. These conditions are critical in the housing sector, be premised on two key notions. First, private participa-
as investments are long-term and can be risky. Government tion will be sustainable only if partnership models offer
actions, such as abrupt changes to housing policies, regula- adequate returns on investment. Second, given the scrutiny
tions and tax structures, or time-limited government fund- of public transactions, partnerships with government require
ing programs that provide little ongoing certainty, can create that private players accept new ways of doing business. The
instability for private market actors. For example, the residen- discussion should begin with an honest assessment of shared
tial construction and development industries recently raised interests, current barriers and potential opportunities. The
concerns about the uncertainty caused by slow municipal following questions provide a good starting point:
implementation of planning policies under the province’s re-
gional growth plan for central Ontario.49 Governments need • What are the major barriers to private participa-
to reassure private participants that they can have confidence tion in affordable housing development, mainte-
in the rules of the game. nance and financing?

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IMFG Perspectives

• Are substantive reforms needed to create the 18. Keith Ward, Courage Under Fire: Addressing the Challenges and
conditions for private participation? Opportunities of a Post-Operating Agreement World in Social Hous-
ing, prepared for the Canadian Housing and Renewal Association
• Can existing levers and incentives provide and the Housing Services Corporation, Ottawa, June 2011.
immediate opportunities for increased private 19. The six financing options to be explored are: mortgage refinanc-
participation? ing; bond borrowing; Real Estate Investment Trust (REIT) oppor-
tunities; energy retrofits; and value capture from new public-private
• What opportunities should be pursued – both affordable housing. City of Toronto, Putting People First: Trans-
immediately and over the longer term? forming Toronto Community Housing, Special Housing Working
Group Report, September 2012.
20. Government of Ontario, Building Foundations: Building Futures
Endnotes – Ontario’s Long-Term Affordable Housing Strategy, Toronto, 2010,
9-11.
1. Wellesley Institute, Precarious Housing in Canada, Toronto,
2010, 1-5. 21. Commission on the Reform of Ontario’s Public Services, Public
Services for Ontarians: A Path to Sustainability and Excellence, Gov-
2. Single-detached, semi-detached, or row houses. ernment of Ontario, Toronto, 2012, preface.
3. Canada Mortgage and Housing Corporation (CMHC), 22. The Economist, “Home Truths,” 12 January 2013.
Canadian Housing Observer, interactive data tables, [Link]
observer/, accessed 14 March 2013. 23. TD Economics, Long-Run Rate of Return for Canadian Home
Prices, Special Report, 11 March 2013.
4. CMHC, Canadian Housing Observer 2012, 10th edition, 2012,
3-14. 24. CMHC, Housing Market Outlook – Canada Edition, Ottawa,
Q4 2012, 10.
5. Francis Fong, Toronto – A Return to the Core, TD Economics
Observation report, Toronto, January 2013. 25. CMHC, Canadian Housing Observer 2012, 10th edition, Ot-
tawa, 2012, 2-5.
6. International Monetary Fund, “Canada,” Selected Issues Paper,
February 2013, 21. 26. TD Economics, Affordable Housing in Canada: In Search of a
New Paradigm, Special Report, June 2003, 20.
7. CMHC, Rental Market Report – Greater Toronto Area, 65-66.
27. This section leans heavily on research by Jill Black, The Financ-
8 Linda Lapointe, Where’s Home: The Need for Affordable Rental
ing and Economics of Affordable Housing Development: Incentives and
Housing in Ontario, Toronto, Ontario Non-Profit Housing Associa-
Disincentives to Private-Sector Participation, Cities Centre Research
tion and Co-Operative Housing Federation of Canada – Ontario
Paper 224, Toronto, September 2012, as well as John Gladki and
Region, September 2011, 48.
Steve Pomeroy, Implementing Inclusionary Policy to Facilitate Afford-
9. Lapointe, op. cit., 27. able Housing Development in Ontario, Ontario Non-Profit Housing
10. CMHC, Rental Market Report – Greater Toronto Area, Ottawa, Association, 2007; these studies provide analysis of the economics
Fall 2012, 2, 16, 62. of affordable housing, and include modelling of condo and afford-
able rental development.
11. CMHC, Canadian Housing Observer 2012, 10th edition, 2012,
5-4 – 5-17; CMHC, Canadian Housing Observer, interactive data 28. Nixon Peabody LLP, Low Income Housing Tax Credit, online
tables, [Link] accessed 14 March 2013. brochure, [Link] accessed 28 February,
2013.
12. Lapointe, op. cit., 30-32.
29. US Department of Housing and Urban Development, LIHTC
13. This includes 141,000 units under municipal non-profits and
Basics, online guide, [Link]
local housing corporations, 83,000 under private non-profits (e.g.
program_offices/comm_planning/affordablehousing/training/web/
faith groups or community agencies), and 44,000 co-operative
lihtc/basics, accessed 28 February 2013.
housing units. Housing Services Corporation, data from February
2009. 30. Enterprise Community Partners, Low-Income Housing Tax
Credits Portfolio & Approach, online guide, [Link]
14. Stewart Pearson, Financing Capital Improvements and the
[Link]/financing-and-development/low-income-housing-
Renovation of Social Housing in Ontario, Housing Services Corpora-
tax-credits/portfolio-and-approach#, accessed 28 February 2013.
tion, Prepared for the Asset Leveraging Working Group, Toronto,
December 2010, 10. 31. Canadian Federation of Apartment Associations, CFAA Politi-
cal Goals, webpage, [Link] accessed
15. City of Toronto, “Supplementary Report: Additional Informa-
25 March 2013.
tion Regarding the Sale of Toronto Community Housing Stand-
Alone Units,” City Manager, Toronto, March 2012. 32. Marion Steele and Francois Des Rosiers, Building Affordable
Housing in Unaffordable Cities: A Canadian Low-Income Housing
16. Robert Murdie, In a State of Good Repair? The City of Toronto’s
Tax Credit, Commentary N. 289, C.D. Howe Institute, May 2009.
Public Housing, Neighbourhood Change Research Partnership
Policy Brief #1, August 2012, 2. 33. Private Sector Housing Roundtable Report, Housing Makes
Economic Sense, Toronto, 2012.
17. Lapointe, op. cit., 30.

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Affordable Housing in Ontario: Mobilizing Private Capital in an Era of Public Constraint

34. See Gladki and Pomeroy, op. cit., 12; Alexandra Moskalyk, 43. City of Toronto, “Infrastructure Ontario Refinancing of To-
The Role of Public-Private Partnerships in Funding Social Housing in ronto Community Housing Mortgages,” Staff Report to Executive
Canada, Canadian Policy Research Networks (CPRN) Research Committee, 6 March 2013.
Report, September 2008, 17. 44. City of Toronto, Putting People First: Transforming Toronto
35. Aaron Moore, Trading Density for Benefits: Toronto and Vancou- Community Housing, Special Housing Working Group Report, 17
ver Compared, IMFG Papers on Municipal Finance and Gover- September 2012.
nance, No. 13, Toronto, 2013. 45. Stewart Pearson, Financing Capital Improvements and the Reno-
36. Gladki and Pomeroy, op. cit., 37. vation of Social Housing in Ontario, Prepared for the Asset Lever-
37. Tracy Hanes, “Offering a Handup not a Handout,” Toronto aging Working Group, Housing Services Corporation, Toronto,
Star, 8 June 2012. December 2010, 38-40.

38. Private Sector Housing Roundtable Report, Housing Makes 46. Jill Black, op. cit., 2.
Economic Sense, Toronto, 2012. 47. Ibid., 33.
39. Barclays Bank PLC, UK Social Housing Sector Outlook -Third 48. Australian Department of Families, Housing, Community
Quarter 2012, accessed online 28 February 2013. Services and Indigenous Affairs, National Rental Affordability
Scheme - Information for Investors, webpage, [Link]
40. Sanctuary Housing, [Link]/perfor-
au/our-responsibilities/housing-support/programs-services/national-
mance-information, web page, [Link]
rental-affordability-scheme/national-rental-affordability-scheme-
[Link]/performance-information, accessed 25 March 2013.
information-for-investors, accessed 28 February 2013.
41. Barclays Bank PLC, UK Social Housing Sector Outlook -Third
49. BILD and Ontario Home Builders Association, Submission to
Quarter 2012; United Kingdom Homes and Communities Agency,
Ontario Growth Secretariat regarding proposed amendment 2 to the
[Link] ac-
Growth Plan for the Greater Golden Horseshoe, 7 February 2013.
cessed 22 March 2013.
50. Canadian Council for Public Private Partnerships, Public-Pri-
42. Houses for Homes, Our Objectives, webpage, [Link]
vate Partnerships: A Guide for Municipalities, Toronto, November
[Link]/local-authorities/our-objectives/ accessed 22
2011, 5.
March 2013; Mazars UK, “Interview with Phil Shanks,” http://
[Link]/user/UKMazars?feature=watch, accessed 22 51. See Moskalyk, op cit., v.
March 2013.

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