THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, October 25, 2023
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:17 p.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Honourable senators, to our witness and to those watching this meeting today, it is with deep regret that I convey to all of you the news that the Honourable Senator Ian Shugart passed away earlier today.
He was appointed to the Senate in September 2022 by Prime Minister Justin Trudeau, after a career in government spanning over 40 years. Senator Shugart served as the twenty-fourth Clerk of the Privy Council and secretary to cabinet. He also served as deputy minister for the federal environment, employment and foreign affairs departments throughout his career. Even though his time with us was short, he made a powerful and positive impact for all Canadians.
There will be an opportunity to pay tribute at a later time in the Senate Chamber, but at this time I extend our deepest sympathies on behalf of all senators and all associated with this meeting to his wife Linda, his son James, his daughters Robin and Heather and their entire family.
I would ask that we now pause and join with me in a moment of silent tribute.
(Those present then stood in silent tribute.)
Thank you very much, senators, for your consideration.
Let me welcome everybody to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin, and I serve as the chair of this committee.
I would like to introduce the members of the committee with us here today: Senator Loffreda, our deputy chair; Senator Bellemare; Senator C. Deacon; Senator Gignac; Senator Marshall; Senator Massicotte; Senator Miville-Dechêne; Senator Petten; Senator Galvez; and Senator Yussuff.
Today, we will continue our ongoing look at housing affordability and the housing crisis in this country. We have the pleasure of welcoming, in person, Mr. Jon Love, Chief Executive Officer at KingSett Capital. Thank you for joining us today. We will turn the microphone over to you, and you can begin with your opening remarks.
Jon Love, Chief Executive Officer, KingSett Capital: Thank you, Madam Chair. Good afternoon and thank you for the opportunity to speak with you.
I am the founder and Chief Executive Officer of KingSett Capital, Canada’s largest private equity real estate investment business, with over $17 billion in assets in Canada that we have through a series of funds, including growth, core, credit and affordable housing. We own interests in 10,000 multi-residential units. We have a $12-billion residential pipeline of projects currently on hold. We own 400 affordable units and have a further 3,000 units in our pipeline currently waiting for any number of approvals. Our total pipeline under construction and pre-construction is some 8,000 units. We are also Canada’s largest non-bank real estate lender. We lend to all forms of multi-residential projects throughout Canada.
Suffice to say that, from our perch, we see the challenges and opportunities impacting Canada’s housing crisis.
The housing crisis results from a lack of supply, as we simply do not have enough housing — a crisis some decades in the making. To service a growing population, we need to accelerate the supply of more housing.
The housing shortage is the result of a series of factors, including gridlock, excess planning requirements, excess taxation, tax disincentives, escalating development charges and chronic labour shortages.
The recently announced exemption of new multi-residential buildings from GST/HST is long overdue. This welcome news will make an impact. It is an important first step, but much more needs to be done.
We need to have a strategy to accelerate the creation of all forms of housing — single family, missing middle and high-density. We need a strategy that can impact the short, medium and long-term. We need a strategy that includes a focus on more affordable housing.
There is no silver bullet, but the federal government could make a substantial impact to create more supply by addressing four key themes: people, capital, innovation and alignment.
First is people. We simply don’t have enough skilled trades to accelerate housing supply. We need to target immigration to skilled construction trades and support domestic trade education programs for high school graduates. We need leadership for a national strategy on skills training, integration and interprovincial movement of skills and labour. To be clear, without more skilled trades — carpenters, plumbers, electricians, welders, et cetera — we simply cannot build more housing.
Second is capital. While equity is readily available, debt is more scarce, uncertain and expensive. Let’s expand the mandate of Canada Mortgage and Housing Corporation, or CMHC, to extend Government of Canada guaranteed insurance to accelerate new supply of purpose-built rental projects. Let me provide some recommendations.
First, we need to simplify and accelerate the CHMC approval process — one form, 30 days. That is a big idea. Perhaps include the chartered banks to help implement this strategy and program for greater reach and resources.
For these loans, the developer — the borrower — funds the 10% of equity requirement first. The CMHC guaranteed financing funds the balance of the approved project costs, with the interest rate fixed at the first loan draw at the Government of Canada bond rate.
I would recommend for consideration that, for affordable housing — defined as those with at least 40% of the units being 100% of the average monthly rate or less — the interest rate drops to the Government of Canada bond rate less 1%. Then, change the financing amortization to a 20-year term with a 50‑year amortization, all while having typical bank-style credit protections: completion guarantees, equity top-ups, et cetera. This opportunity has negligible cost and would have intense benefit.
Third is innovation. To effect innovation, we need to modernize and nationalize the building code. We currently have hundreds of different building codes across the country. This frustrates innovation, as nothing can be done at scale given the myriad of building code requirements and limitations. If we want breakthroughs and innovation, we need one building code so that we can scale the most promising ideas. We need a code that supersedes all of the existing NIMBY codes.
Fourth is alignment. While there is a growing political consensus on the need for more housing, bureaucracies at all three levels of government frustrate progress. We need leadership to effect alignment around the common objective of adding more housing supply — from the policy through the regulations and enabling legislation.
Housing is a crisis. We need a warlike focus to gather all stakeholders and gatekeepers to coalesce around a common objective, which is to accelerate the supply of all forms of housing, including affordable housing — all needed to meet the surging and unmet demand. This is the only way we can get price stability and affordability.
Thank you for your time. I would be delighted to answer any questions.
The Chair: Thank you very much. I think you’ve solved all the problems. No, I’m kidding. You’ve raised some very specific points, and I know there are lots of questions here.
I’m interested that you said the housing crisis is an issue that has been decades in the making and you did not mention interest rates.
Mr. Love: Interest rates, in the narrow sense, are not actually the core problem. It’s more complicated than that.
If you look at a rental building from a capital perspective, the developer has to acquire the site, go through the extensive process of preplanning and all of that, which might be three or four years. Then you have to start a building without knowing what your rent will be — you can guess — and without knowing what your cost of capital is until the building is completed because that’s when you get your interest rates fixed.
In my proposal, I asked whether it would be possible for the CMHC to allow draws and fixing the rate when you start the project so that you can know with some certainty what your capital will be. While interest rates are elevated — which has put pressure on the industry and halted a lot of activity — it’s less about the level of interest rates than about the uncertainty of the interest rates.
The Chair: Thank you very much for that. We will begin our questioning. You’ve given us much fodder to discuss. We’ll start with our deputy chair, Senator Loffreda.
Senator Loffreda: Thank you, Mr. Love, for being here.
Great opening. You covered all the bases. You hit a home run from the get-go.
You stated that it’s lack of supply. You and I discussed this issue previously. CMHC estimates that 3.5 million housing units are needed by 2030 to restore housing affordability. You did say there is no silver bullet, but you made numerous recommendations in four key areas: people, capital, innovation and alignment.
Without getting into your recommendations — which I find to be very insightful, and if only we could put all of them in place very quickly — where do you see the biggest challenge? What insight could you give us to get around those challenges?
We discussed previously that the various levels of government become an issue and how we might incentivize the municipal and provincial governments to create more housing.
Could you share some of those insights? What are the largest challenges going forward? I’m certain my colleagues will continue on with that discussion.
Mr. Love: Let me start with labour.
If you look at the statistics historically, Canada, in any one decade, has never had more than 2.5 million housing starts. Our housing starts run at around 250,000 housing starts a year. CMHC rightfully says we need in addition to that an extra 3.5 million. Well, there are simply not enough people to do that and what that does is put on a tremendous cost pressure. When you have a shortage of labour, it accelerates the cost of the projects. We have to have a greater focus on skills-based labour. We’re a fast-growing country and we just don’t have enough people to do anything.
Just let me give you a thought process on the housing starts because in Canada we talk about housing starts, but they’re gross, not net. In other words, they’re not the net addition, they’re just the gross addition. So let’s just imagine if we will; today, there are 15 million dwelling units in Canada. If we assume the average house lasts 100 years, you need 150,000 new housing starts a year just to stay even. But if you assume the average house lasts 50 years, that’s 300,000, so let’s pick 75 years. That’s 225,000 units. Basically, all we’re doing is maintaining the existing stock.
If we go back a relatively short period of time, 20 years, the population in Canada was 32 million. Today, it’s 40 million. So we have 25% more people and we have not been able to accelerate the housing. That’s why it has been decades in the making.
The number one issue — it is a federal government issue, I think — is thinking about how we attract tradespeople to the country. Recruit people into the trades and then integrate them quickly. We don’t need carpenters driving Uber. We need them making houses. I appreciate that crosses other lines of jurisdiction, but we just need more people who can build all the things we need built.
The second thing that I will mention, the whole alignment issue, which ranges from what I’ll call permission — we don’t need tax incentives, we need permission. Now, that’s not a federal issue. But I can tell you from our affordable housing fund how difficult it is to actually get something done.
Just to step back, our affordable housing fund is targeted and owned by major institutions and high-net-worth individuals, and they’re quite prepared to take a suboptimal economic return on their investment for the social purpose — the social purpose being producing affordable housing, which everybody agrees is a critical issue for the country.
So the equity capital is there. It’s a small fund. We raised $180 million for a $1 billion program. We could raise $1 billion. There is not a shortage of capital. That will take a suboptimal economic return in exchange for a social purpose: affordable housing. But we have to get out of our way.
We have a project in Etobicoke that we’re approaching five years in pre-development because we continually struggle to get things done. This site is across the street from a school, down the street from a shopping centre with a grocery store and so on and on public transit. We had a nearly 12-month fight with the city over the parking requirement. We wanted less parking because we thought our customers would not need the parking, but the city insisted on having more parking. We felt our customers looking for affordable housing would be more interested in public transit, there are schools across the street, et cetera. They perhaps don’t need the same number of cars. Here is the economic impact.
The issue for us was if we could just build one level underground, we would have so many parking stalls and that is a reasonable thing to do. But the requirement meant we had to go to two levels underground, and that second level is super expensive and has no economic return. Effectively, you have to get more rent — well, we’re trying to have affordable housing and having excess parking just didn’t work.
Just on the same project, if I can take a sidebar, we also decided as owners to make it zero carbon — we’re using geothermal — and that has an economic cost to it. I would ask partners, and this is how people think, no one can build today in my world of building that is not zero carbon. We’re sacrificing yield to do that; it’s the right thing to do. To have an affordable building, geothermal, zero carbon, that ticks all the boxes on the social purpose construct. We were ultimately able to get more parking and so on and so forth. But that’s just one small example of the torturous journey we’ve been through.
The Chair: That’s a wonderful example. I think you’re setting the stage, but we’re trying to get around the room here.
Senator Bellemare: I guess we are facing a real market failure here. The housing sector is a market failure in the domain of social action, social decision making. It involves a lot of governments, provinces and municipalities. Who can take the leadership? I don’t think it is governments, but are there any institutions that could take the leadership to have all those stakeholders together and maybe — and I’m not kidding — maybe with the support of EI, you will be able to find solutions.
Mr. Love: Well, it is a very good question and it is very difficult and very frustrating for many of us. I think leadership has to start with municipal leaders and has to have the support of provincial and federal leaders. Clearly, the mayors of the big cities are all, politically, getting aligned around the need for more housing. Different mayors have different views on how to do that. I don’t think there are sufficient public funds to solve the housing issue. It has to involve private capital and private sources of capital because there’s just not enough. We can’t ask the government, whether that’s the municipality or others, to be the developer of the nation. That’s just not a viable strategy.
What is possible is to get alignment and remove the barriers and the regulatory gridlock. I have very high regard for Romy Bowers and what she’s doing, but CMHC is somewhat overwhelmed so everything takes a long time. And time is risk in our business because you start with one set of facts and then over time things change quickly. So the resource question — which is why I suggested maybe adding the chartered banks to assist in administering a program would be helpful. There are many of us in the industry who would be delighted to work on affordable housing. The simple economics are that if I’m building an apartment building with affordable housing, I know I have all my customers because they’re lower rents than a market building.
It actually has a very compelling economic outcome, but to do that we need to take advantage of some of the programs which exist and try to streamline those programs so we can move them into action.
Senator Bellemare: It has to start at the municipal level?
Mr. Love: Well, if we don’t have any people, if we don’t have the labour, it doesn’t matter. I would start there. I think what the federal government has done with eliminating HST and GST has been a meaningful step in the right direction.
Next up is labour. I think there needs to be a multi-government coalition in terms of alignment and working together to get this going. That is why it has been so difficult and why there has been less progress than we all might have hoped.
[Translation]
Senator Miville-Dechêne: Thank you, Mr. Love, for being with us. Your comments are most interesting.
I have a slightly more practical question. According to Abacus, when baby boomers were old enough to buy their first home, it took them five years to come up with a down payment equivalent to 20% of the property’s value. Today, young adults have to work for 14 years, full-time, to reach that same amount.
In the solutions or possibilities you propose, is there anything that could help these young people — and I even have some in my Senate office — acquire a home?
[English]
Mr. Love: I’m not sure that we will be able to solve that problem. The affordability issue has become so difficult. We can’t roll it back. Making everybody’s house worth half as much doesn’t solve anything.
In the future, we will see more purpose-built rental where people are rent by choice. That can be a constructive interim step to a full housing decision.
There are programs. We’re working on a rent-to-own solution. It is interesting because it allows someone to take the rent and use some of the rental payments to ultimately be able to own an apartment.
As we get into a high-density environment, if we think of a European model — because people often refer to that — you don’t find endless green lawns in downtown Paris, London or wherever. People live in apartments, and there is nothing wrong with living in an apartment. Sometimes you own them and sometimes you don’t. That can work quite well.
Rent control in different provinces has had different impacts. I would say there is good rent control and there is imperfect rent control. What I would call “better rent control” can work, and that is a provincial issue.
We have to stabilize housing prices. Once we stabilize housing prices, then it is reasonable that those coming into the market — young people — will, in time, have an opportunity to buy a house. Stabilization has to be key.
Senator Miville-Dechêne: And “in time” is the word. It will take more years.
You talked about building codes. Isn’t it provincial jurisdiction? When you say that you want one great building code, obviously it is complicated.
Mr. Love: In a single city — what we call a city — you might find that there are five different building codes.
I will give you one example. The width of a door in Vancouver, depending on where you are in Vancouver, has to be 32, 34 or 36 inches wide. You can’t mass-produce doors.
The innovations that we seek are things like modular housing, off-site housing — doing things at scale where you hope you can do them less expensively. Quicker, faster, cheaper. But in the absence of standardization, it is hard to see that.
Is it possible that we could have a national housing standard that would, as I said, trump — bad word — supersede — better word — all the municipal codes, many of which are 100 years old? No one ever takes a code away; they just add codes on.
We do have a lot of dysfunctionality that is standing in the way of innovation. The only way we can get to innovation in housing is not to have every housing be bespoke, with a carpenter measuring, cutting and nailing. There have to be manufacturing and so on, which just do not work in Canada.
Senator Galvez: Thank you very much, Mr. Love, for your speaking notes. This is very interesting.
It is so funny. We are in the Banking Committee and we are not talking about interest rates; we are talking about building codes and labour.
I could not agree more with you on the fact that we need technicians. We need people in the trades. The schools are fighting. I’ve worked in the university. I am a civil engineer. I remember when we were fighting with the other engineers to pick them up, and then we needed doctors. Then they started to pick up our engineering students to become doctors.
This is a bigger problem. It is not just the fact that there is no labour for construction, but there is no labour for anything.
You talked about immigration, bringing them in. But there is heavy government paperwork. There is a long period for engineers to get their papers.
You are active with Leadership in Energy and Environmental Design — or LEED — buildings and zero-carbon buildings, talking about building codes that maybe at one point will say that you cannot build here or there because there is water — the floodplain and all of this. How do you think we can solve this problem?
Mr. Love: Yes. That is a super difficult federal issue. I think the issue is around alignment. It is possible to deliver far more housing, far more quickly, if everybody — from the politician to the regulatory environment through the specific enabling legislation and every other piece of the puzzle — all got aligned around the same objective.
We find that many people are protecting their turf. By protecting their turf, they frustrate — let me give you one example.
I am a big fan of secondary suites. I think that secondary suites, in the short-term and medium-term, can unleash all sorts of affordable housing — basement apartments, alleyway apartments, things like that.
However, you end up with situations like where the Province of B.C. — Premier Eby — thoughtfully came up with a strategy to give an interest-free loan of up to $40,000 for a homeowner to convert their basement to a secondary suite. But when you get through all of the enabling legislation, you find out that at the bottom it says that to qualify in Vancouver, you have to have a household income of less than $209,000. There are not a lot of people who own a home in Vancouver who have income less than $209,000. What was — I think — a very strong strategy gets taken away in the enabling legislation.
These are the issues for which we, as a society, have to come together and say that if we all want more housing — and more affordable housing — how do we get these things out of the way so that the great policies that are talked about can actually get done?
I’ll provide another thought on interest rates. We went through the 2008-09 crisis and then we went through 10 years of 0% interest rates with no new housing supply, so massive house price inflation. That was a prime cause because the interest rates were too low and there was too much fiscal stimulus. Those two factors conspired.
There is nothing wrong with 5% interest rates. In my 43 years in this business, if you told me that we could have 5% interest rates, I would be quite happy. When you put in 0% interest rates and really escalate that demand — and you don’t have the ability for supply because we didn’t have enough people, and all of the barriers for new housing — prices get out of hand.
We cannot unwind that, so we are where we are. But we can move forward. CMHC has a very constructive role to play. The fact of using Canada’s balance sheet to guarantee rental housing, and perhaps at a discount — affordable housing — can be very instructive.
We are taking the Royal York hotel to zero carbon. It will be announced November 15. As part of that process, we needed the Canada Infrastructure Bank to help us with financing, which they did. They subsidized the rate depending upon how good our decarbonization is. It is our risk. If we don’t achieve our targets, it is a high interest rate. If we achieve our targets, we get an attractive interest rate, which then makes that project viable. The Royal York hotel will be the only zero-carbon-certified hotel in Canada. That is a big milestone.
Senator C. Deacon: Mr. Love, thank you very much for being with us today. Your comments are concise, precise and helpful.
You spoke about the challenges we have in providing homes for Canadians today and how big of a barrier we’re facing. We also have the greening of our existing stock that has to happen. The Senate is in the middle of a process of fulfilling a commitment to become a carbon-neutral organization by 2030. We are hoping to go down the path that you have gone down with the Royal York.
I think that 56% of our emissions come from our buildings. Despite the fact that, as senators, we do a lot of travel across this country every week, it is our buildings that are our biggest cost.
We need labour to start to fill the gap between the housing stock we have and the housing stock we need, but then there is the greening of our existing stock. Can you speak to that? In terms of the number of trades that we need to get into this country, it is an astonishing growth rate. Have you contemplated that as well?
Mr. Love: Zero carbon is super important to our business strategy. It is not obvious that it is that important today because everybody talks about targets in 2030, 2050 or whatever. But it takes a long time, a lot of capital and a lot of very detailed engineering to figure out how to do this.
I am of the view that our customers — not regulators — will ultimately demand it. It is my view that the regulations will always trail the customers. I am more focused on the customer response because that is what is leading those investments. We have a $100-million program with our office buildings. Scotia Plaza is a 2-million-square-foot building, zero carbon. We have a variety of other things that we are doing. It can be done. Regulation is not the issue; it will be public pressure.
Europe is quite a bit ahead of us, and zero carbon is much more on their agenda. We see the U.S., where this is largely a divisive issue. It is a difficult area for people like us to wade into. Canada is in the middle.
It is my view that, in time, tenants in office spaces and people staying at a hotel will value that. I look forward to hosting at the Royal York all of the conferences in 2024 that are talking about sustainability and climate change.
Senator C. Deacon: In terms of the amount of labour needed to do that additional task — not just the new builds, but the greening — have you spent time thinking about that shortage?
Mr. Love: I haven’t spent any specific time. There is a shortage of two things: first of all, the people who know how to do it. To some degree, we have corralled a lot of the best resources to help us to do it because it is not necessarily on others’ agendas, and we’re hogging the resources. But then to actually do the work, it is a lot of work. It comes back to targeting the immigration strategy.
Science, technology, engineering and mathematics, or STEM, are important. I’m not dismissing that at all. But I think it has crowded out our interest in recruiting trades as immigrants and figuring out how to slipstream them quickly into production. I think the federal government could play a constructive role.
On a national basis, I don’t think that our young people in high school are being presented with the kind of business opportunity there is to be in the trades. Somehow, we look at that as not as successful as getting an arts degree. If you are a plumber in Toronto, at age 22 or 23, you should easily be making $125,000 or $150,000 a year. Then you hire a young person to work for you and you’ll make 50% more, put your name on a truck and away you go.
There are huge opportunities for small businesses here. We just have to talk to our young people and say that this is a viable option. That should be in all of our thought processes.
In Germany, if you say that your son or daughter is in the trades, everyone would say, “Great for you.” We don’t do that here. We need to change that.
Senator C. Deacon: Hear, hear.
The Chair: Thank you for that pointed commentary.
Senator Yussuff: It is refreshing to have an honest conversation about a complex problem because we tend to talk about things without trying to solve them.
Housing, for the most part, is municipal and provincial, and here we are having a conversation about some of the things we could do at the national level to figure this out. It will take some time.
I live in Toronto. I understand one thing: there is no new land. In the absence of no new land, you have to figure out that the most obvious solution is density. How do we do that? How do we overcome NIMBY? More importantly, how do we do the things that are necessary to get people to live in the city and feel that they can actually afford it at the same time as they try to raise their family?
This is a huge challenge. It is not a complex issue. Thank you for all that you are doing in that regard.
The broader question you raise is around building codes. This is probably the most archaic thing we have done in the history of this country. I don’t know why it would take a different set of rules to build a building that is safe in one part of the country versus another part of the country.
I worked in the automotive industry in my younger days. A safe car is a safe car. There is no complexity to it. It simply has to have some basic tools, otherwise it is not safe.
I know it is hard to get the provincial, municipal and federal governments to do this, but it is doable. The objective is to build more housing quickly without having to jump through hoops.
In the context of my own neighbourhood, there is one thing that I see too often. Every time somebody wants to build something, there is a requirement for a public hearing. Everybody and their brother has to come and speak about it. Then the municipality will decide if it is too political or not political, and city council decides.
How do we build the capacity recognizing that we do not have a choice? In the city of Toronto, there is a huge housing shortage. A lot of poor people are struggling in extremely difficult circumstances. They want to live and work in the city, but we do not have enough affordable housing for them. This is right across the country, not just in the city of Toronto.
Mr. Love: Let me touch on three different things.
First, we are not going to try to attack the municipal process because that is beyond this scope. But when the federal government makes contributions to public transit — rapid transit and so on — it has the ability to say, “We’ll give you the money for that, but we want increased zoning on all of those transit lines as a part of the funding condition.” If I had a wand, in a city like Toronto, on every boulevard, there would be “as of right” zoning for a 10-storey or 8-storey building. That is the missing middle.
When you look at all the public transit being built, when we look at the Eglinton Crosstown LRT, which the federal government has contributed to, there has been no upzoning.
In Scarborough, we own Eglinton Square in the Golden Mile area and the crosstown will be finished at some point. We are just now, on the eighth year of our rezoning application, to be able to start something. We haven’t built it yet because we don’t have all the approvals. That’s where the federal government could say funding as conditions.
The other thing, just as a sidebar, if we look at the crosstown and every stop, what surrounds the entrance to the subway? Parking. It’s indescribable. They should all be part of an apartment building.
The other thing I would like to reflect on for a moment is the whole issue of social infrastructure because our view on social infrastructure has to change. The definition of what makes a public school has typically been a two-storey building on four acres of land. Well, that doesn’t exist anymore. We need to have schools that are in a denser environment so they can go in a building or whatever.
You think of daycare. I think the government put together a thoughtful strategy on $10-a-day-daycare to allow more women into the workforce, but as you go through the regulations and you get to the bottom, you find out that the daycares have to be sprinklered. You might not think that is a bad idea, but do you know how many daycares in Newfoundland have sprinklers? Not one. This is where the regulations take away what the policy tried to put in place.
I’m a huge fan of daycare because it is a super important part of our ability to deliver a good product. It is super difficult to put a daycare in an office building or an apartment building because the regulations for a daycare are so prohibitive, you have to be near a park and all those sorts of things. It frustrates the ability to do daycare. Daycare and seniors care, these things are hugely important, obviously schools.
Senator Petten: Since you mentioned Newfoundland and Labrador, I would like to talk a little bit about that because they’ve just recently announced a five-point plan — as the government is calling it — to improve the availability of housing that is affordable. Their actions included the removal of the GST/HST on new purpose-built rental housing, a low-interest financing program using available provincial government-owned land and buildings for construction or conversion, a home ownership assistance program for first-time homebuyers and a secondary and basement suite incentive, which I just heard you say you’re in favour of.
In your opinion, to what extent will these programs be helpful to the goal of improving availability of affordable housing?
Mr. Love: I like three out of five.
So HST/GST, by removing that, that has got the shovels going in our Etobicoke project. We were pens down before that announcement; now we’re pens up. Pens up, shovels up, whatever. We’re going. That’s important.
Building affordable housing on government land, I’m not in favour of. I don’t think the government should ever give away land and it’s not going to work if it’s just free land. That doesn’t work.
The financing issue is super important. As I talked about — whether it’s CMHC, the federal government or the provincial government — if we can borrow the government’s balance sheet to reduce the cost of interest, that by itself makes affordable work.
The last item, which you didn’t mention, was development charges. In some municipalities, they are extremely high. That, again, puts a cost burden that has to be paid for by the end user because there’s no way to avoid it.
Incentives to help young people buy a house, all that does is accelerate demand. We don’t have any supply. With respect, that to me is probably popular on the stump, but I don’t think it addresses the core issue. It just inflates the price of houses.
Senator Petten: We probably have the province with the highest home ownership of anywhere as well, so putting it in that context.
Senator Gignac: Welcome, Mr. Love.
Just before asking my question, I wanted to congratulate you on your 2023 Business Leader of the Year from Western University. You are a true entrepreneur who creates wealth in Canada, so you deserve recognition for that.
In your opening remarks, you provided us a road map on the supply side with many options, but they have imbalance between demand and supply. Can I have your feedback on the demand side because we have two new phenomena in the last five or seven years in Canada called Airbnb, like many other countries, and foreign students who contribute.
Let’s start about Airbnb. Ottawa considers, like some other countries, whether to limit the short-term rentals because basically that puts pressure on the affordability to rent. You have a huge portfolio. Is it small peanuts or a significant phenomenon? What is your thinking regarding that?
Mr. Love: Again, there is no one silver bullet. I’m not an Airbnb fan because it is taking housing stock and adding to the hotel stock. I don’t think we’re short of hotels, but I think we’re short of housing. In Toronto, there are 8,500 Airbnb units. If I waved a wand and said, “You’re free to rent it but it must be a minimum of 30 days,” then all of a sudden that would be open to the rental market. I know people who have bought a condominium just to Airbnb it. I know people who have rented a condominium to just Airbnb it, which, of course, is the worst of all worlds.
So I’m not an Airbnb fan. Now, I should say I’ve shared some of these views on my LinkedIn profile and the responses are charged. So it’s a tricky political issue, but we need some leadership here. The fact is we’ve got lots of hotels, but we need houses for Canadians. That’s the mandate. I think that is a short-term supply issue that I think can make a big difference.
Senator Gignac: — real estate agent because I know they have something.
Foreign students, it’s now close to 1 million in Canada, it’s up 50% I think since 2015 — correct me if I’m wrong — but they have to stay somewhere. Any solution or thinking because these people, if I remember when I was a student, do not need too many square feet. I did not need 1,200 square feet, just a little studio. Any suggestion — and you have a huge portfolio — a project with a university or CMHC to do something? If people have a little studio, maybe that will help. I’m just trying to find a solution.
Mr. Love: Well, I would put student housing in the same financial framework as rental housing because it’s really the same thing. The foreign student issue is particularly tricky because they pay for the rest of the Canadians to go to university. So we have to be careful what we wish for.
The fact is universities have been so defunded at every level that they’ve had to rely on non-Canadian students who pay a big sum of money. It turns out the parents of those students are quite happy to rent them an apartment that is not like the basement I lived in when I went to Western. I came from a very nice house, but I loved my basement because it was my basement room. I had bars overlooking the driveway. It was fantastic. It was 8 by 9 square feet — it wouldn’t have been that big, 8 by 8. But the foreign student, typically they’ll pay $3,000 or $4,000 a month for an apartment too.
Senator Gignac: I appreciate your remarks regarding foreign students. We need them. I tried to find it — is it like Harvard University in Boston which has a real estate subsidiary for development or something like that? I don’t know. Maybe this could be in the second round if we have time.
Mr. Love: I’m not a big fan of subsidies in sort of the normal sense because they distort the market. I’d rather just look at the market and say, “What do we need?” If we get permission to build, if we could, for the right kind of housing, borrow a balance sheet. I don’t need free land. I can pay market price for the land. I can make those numbers work.
The Chair: Just let you do it?
Mr. Love: Right.
Senator Marshall: Thank you for being here today, Mr. Love.
A couple of times you mentioned the government’s balance sheet. That’s always interested me because of the exposure with the mortgage insurance and all the guarantees.
My particular interest is in CMHC. There’s quite a lot of money flowing through that corporation, in the billions of dollars.
In your opening remarks, you talked about simplifying the CMHC approval process. For all the money that’s going through CMHC, I would have expected more than what we seem to be getting. It seems like they should be able to soar like an eagle or whatever. I don’t know what the problem is.
When you talk about simplifying the CMHC approval process, what do you mean? Could you elaborate on that? They’re such a big player in the housing sector, and we’re going to have them as witnesses within the next couple of meetings. I would certainly appreciate your views on CMHC, if you’ve dealt with them.
Mr. Love: Everything I say is fraught with risk, for two reasons. One is that we are both a CMHC borrower and our business is a CMHC issuer. This year, we’ll do $3 billion worth of CMHC loans. We’ll do that volume of loans because we’ll turn around an application super quickly.
I’ve got a lot of time for Romy Bowers. I think she’s a strong executive, and it’s a good business. How can it become more responsive — resources and so on? I want to be clear. I’m not throwing them under the bus because I think CMHC is a great organization and has a very important role to play because it doesn’t cost anything to borrow the government’s balance sheet. If the government is giving insurance on loans that are properly organized, the borrower is not going to default. Even if the borrower did default, the government should be happy to take that building back, and they can keep it or sell it. It’s actually a super low-risk, low-cost way to be an accelerant.
The changes that I would advocate for are de-risking that source of capital for the borrower. De-risking is where we get a CMHC loan and, instead of the 10-year term — which begins when you start construction, which means you have seven years after the building is open, and year eight you’re crossing your fingers and hoping the cliff is not too steep — make it 20 years and allow the ability to fix the interest rates for affordable housing but also for regular rental housing. That would make a huge difference.
If we look back over a period of time, we see a lot of rental housing and then all of a sudden it fell off a cliff and it has all been replaced by condominiums. Condominiums are a bad rental stock substitute because your landlord is a person; if your fridge breaks, you have to track down that person. It can be a very uneven process for the renter. They don’t have security of tenure and so on. We need more rental stock.
If you think of European cities, look at the degree to which they have large, sophisticated, organized rental stock. That’s where we have fallen short as the market has gone to all condominiums. As a developer, you start the condominium, fix your construction price, sell out your units and you’re good to go. You’ve eliminated your risk.
Senator Marshall: Is that what you meant by simplifying the CMHC approval process?
Mr. Love: Now I’m getting out of my depth a bit, candidly. But often the process is excessively long, I suspect, because of some of the regulations they have to live with. The regulations they have to struggle through have meant that the approval process and so on is overly complicated.
Sometimes what I would think should take a short period of time could take years. Understand that time, for me, I look at my watch and not my calendar. Time is always the risk from the developer’s side.
Senator Marshall: Their accelerator program was supposed to be implemented back in 2022 and it’s just starting to get off the ground. It seems like something happened, and I can’t get a reason from them as to why it took a year. I’m trying to twig into this thing where you’re saying simplify the CMHC approval process.
When you talked about 400 affordable units, what do you mean by the term “affordable”?
Mr. Love: That’s a great question. There are a number of different definitions of “affordable,” and they are based on either one of two things.
There is what is called AMR, which is the average monthly rent in that particular area. CMHC has this postal code is that and so on. That’s the AMR context.
The other is based on income in that particular area. It’s a different set of measures.
To give you some math, our affordable project has some market rents and some affordable rents in the same building. The market rents will be around $2,600 a month for a two bedroom and the affordable will be $1,600 a month. While $1,600 a month is still a big number in some places, for a two bedroom in Toronto, that’s quite attractive.
The units are the same. We have a contract for a long time — I think it’s 40 years — to keep those units at 100% AMR, and that’s the average monthly rent in the area. That’s quite an attractive proposition.
For us, one thing we know for sure is that we can lease those all day long. We get to pick the tenants, so we’ll be looking for working Canadians. It’s not social housing, but it’s working Canadians. Some of those are people who work in the local restaurant or might clean our office building or whatever. These are people I would be happy to have over for dinner. These are working Canadians. They’re perhaps closer to minimum wage, but they can afford $1,600, and that’s perfect. Hopefully, not too many of them have a car, so that we don’t run out of parking. That market is extremely deep and there is lots of interest in addressing that market from our side of the street.
Senator Marshall: And you still make money?
Mr. Love: Yes.
Senator Marshall: Sorry.
Mr. Love: It’s a good question because if you can’t make money, you can’t scale it. We will make a suboptimal return.
Here is what’s going on in this project. We’re taking advantage of the City of Toronto’s Open Door program. They’re waiving development charges. With the HST and GST gone — bear in mind that, in Toronto, if you built an apartment building for $150, $50 were taxes. Let’s say $150 million for a building, including land; $50 million were taxes. For the affordable units, we get rid of that 50. Therefore, you can take 40% more rent and it works. The return is a little skinny, but that’s okay because the fund it’s in is very scalable. There are two bottom lines: economic and social purpose.
Senator Massicotte: Thank you, Mr. Love, for being with us today.
Not to remind you of your age, but in 1981, the Canadian Institute of Public and Private Real Estate Companies, or CIPPREC — which is an organization we both belonged to — produced a report from the fact that MacEachen had terminated our program. With interest rates of 81 or 82%, we all rushed down to Ottawa. I remember drafting that report, and it got all the members’ approval.
It’s kind of odd that several years later we have the same problem because we stopped the supply side and all construction of affordable housing.
When I go through your issues of what you recommend, I fully agree. Our Quebec premier has made a couple of speeches now of attracting different trades. He’s probably going to achieve that, but, unfortunately in Quebec, he will have a problem in another sector — it could be nursing. There is so much need. Therefore, some people are on side, but the municipal side of the equation is not on side. They’ll make a bit of noise, but it doesn’t get you there.
Now, what do we do with that? We know where we want to go, and being good politicians, they’ll make some noise to make you feel you are getting you there, but they will not persist or do so over the next 10 years which is what they have to do. What do you do with that and how do you motivate them to get there?
Mr. Love: There’s no simple answer. If you look at Vancouver versus Toronto, Vancouver councillors are elected city-wide and in Toronto they’re elected in wards. So the Toronto councillor is stuck with these meetings where nobody wants change. Everybody is happy with housing, just not near them. So you end up with that issue.
But we have a fast-growing population. We need the labour, we need the people and we have to house them. There needs to be a national conversation. You can’t touch the Greenbelt in Toronto, apparently. Premier Ford found out how toxic that was. Frankly, I don’t think it is needed. I wouldn’t have touched it either. When you fly to Toronto and look around, you see there is no shortage of land. There is just the wrong things on some of the land. We have to go to intensification, and we have to accept as a society that we’re going to have a more intense urban construct. It’s the only way it can work.
If you think from a green perspective, sprawl is the worst thing that you could possibly do. Density and soft density, gentle density, it doesn’t have to be all point towers because they’re not the solution. But gentle density is the solution. Again, if you look at the European cities, they’ll have eight-storey buildings as far as the eye can see and somehow those societies seem to function. We need more of that.
The Chair: We’re going to do a very quick second round here. As I said, we’re over an hour already. Please, senators, keep the preambles short. Just have a question for our witness, and I will ask you, Mr. Love, to shorten them as well, although it has been very helpful when you’ve given us examples.
Senator Loffreda: Thank you, Mr. Love, this has been so insightful. There is a Colliers Talks episode, which is so interesting and I’ll share it with my colleagues and all Canadians listening to us, called “KingSett’s Jon Love doesn’t shy away from CRE’s biggest challenges.” You talk about leadership, and we both agree in the absence of offering solutions, it’s just a complaining session.
Looking for solutions — and you covered so much in here in your talk — you talk about strong immigration, law of supply and demand. We all know that. You talk about back to work. You feel office space, no issues, three, four or five days, the same office space will be needed. But something that really jumps out at me is:
If you look at Yonge Street in Toronto, you’ll see all these small shops that are vacant. It’s not because of retail reasons; it’s because their property taxes have gone up three to five times over the last three years. Small businesses have lost all their ability to make a living.
You talk about tax, and go on and say:
So, when your politician says they want affordable housing, just ask them: What are they prepared to do to reduce the tax and development burdens?
If we do reduce the tax, will it not get rolled up into profits? Will it solve the people, capital, innovation and alignment issues? The programs, the government incentives we have in place, won’t — do you believe it will solve the supply issue?
Mr. Love: Yes.
I live in a margin world, right, and if the costs go down so I can afford to rent at a lower price, I’ll fill the building, get my margin, life is good. It just defies gravity, in my view, that you find yourself in a situation where because there are lower taxes, there are higher profits, because the revenue changes because you’ll have more supply and with more supply there’s competition. Competition is what we need to stabilize and moderate prices.
I think the transfer of tax revenue to profits, as dirty a word as that might be, won’t happen.
Senator Galvez: When you construct buildings, it’s not just the building. It has to come with electricity, water, wastewater. When you talk about the permits and what it takes, it takes the municipality to plan the increased capacity to the water treatment plant. How much do you implicate your company in that process?
Mr. Love: I would look at it this way. Every time a building is built, it pays taxes forever, property taxes. That annuity stream is an enormous sum of capital that goes to the municipality. I accept the fact that you need services, whether it’s hard services or social services, they’re all needed. The fact is that more housing pays more taxes.
Let’s just pretend for argument’s sake that we had a million more housing units in Canada. Let’s snap our fingers. The average housing unit would pay $10,000 a year in taxes. That’s $10 billion a year in revenue that we’re missing because we’re not building those houses.
Senator Petten: With your vast experience, what would be your quickest solution to fix the affordable housing issue?
Mr. Love: I think for affordable, it needs three things. One is that the programs that different municipalities have to waive or moderate development charges. Second, the CMHC Rental Construction Financing Initiative program, which is a really well-put-together program, and I actually think those two — and we need labour because, again, we have to build these things. Again, with those three pieces in place, there is a huge appetite in the industry to build affordable housing. Because remember, if I can rent my product to you at a lower price, I’m always going to be full. So it’s a much better business model.
Senator C. Deacon: The federal government can use its investments to lever changes at the municipality-provincial level. Without that, we’re not going to get the changes to catalyze the market. Building code alignment; access to labour and apprenticeships in a way that gives you what you need; regulatory and zoning approvals at a reasonable rate to upzone on high transit areas as part of an infrastructure. We have a minister now who’s housing and infrastructure. That’s kind of handy.
The development fee, help me understand that again. How much is that? I mean, you blew my mind, one third of building a building is taxes. That’s the current taxes, not the future tax revenue, just the current taxes. So GST/HST has helped that a bit, but the development charges, can you just give us a number or some examples of the development charges you’re facing per door?
Mr. Love: Sure. Just to understand the HST issue. Building a rental building was the only thing you would do where you pay HST on land you already own, you pay an appraised value after the building is finished and it’s the government’s appraiser. That was really — anyway. So that’s off the table.
Now, the development charges. Take the City of Toronto. There are 30 or 40 different charges, all sorts of different things. There is section 37, which is really a negotiation with the councillor how much money you have to pay the councillor to get their support and they can take that money and do stuff with it. In Toronto, there is over $1 billion in the section 37 account that hasn’t been spent. It’s not a bribe, but it’s a bribe. So there is that issue.
I’ve seen our guys have detailed all these charges. It’s an alphabet soup. It is, again, a $150 million building. Basically, $25 million was development charges and $25 million was HST; that $25 million is gone. So you still have a huge burden of development charges.
A three-bedroom apartment — everyone wants a three-bedroom apartment in Toronto, and the development charges are $148,000.
Senator C. Deacon: Wow.
The Chair: There are reasons why we have a problem with housing affordability.
[Translation]
Senator Bellemare: My question is very simple; I’m going to take the other side of affordability, the client side.
If mortgage fees were tax deductible, do you think that would encourage young people to become homeowners more than they do now?
[English]
Mr. Love: Lower interest rates would make housing more affordable, but it would also increase demand, which would accelerate prices. It is tricky.
Personally, I’m not in favour of mortgage tax deductibility. There is a reason that 2008-09 was a made-on-TV recession for Canadians because for most Canadians, if you have a mortgage, the first thing that you do is pay it off. You would know these numbers better than I, but roughly one third of Canadians do not have a mortgage and another 40% or 50% have a modest mortgage because we all pay it off. I think that protects all of us. I like the fact that my neighbour is paying down their mortgage so that they do not run into a financial problem. Americans, on the other hand, “up-finance” all the time because you have the tax deductibility, and why wouldn’t you do that? It’s the same thing in the U.K. Personally, I don’t think that is a good strategy.
Senator Gignac: Thank you. You have a lot of experience. You have some grey hair like me, so I will to go back to what happened in the mid-1960s to mid-1970s. I have a chart here that I can share with you and my colleagues. At that time, we shifted from a lack of supply in the mid-1960s to oversupply in the mid-1970s. One economist explained to me that, apparently, the depreciation rate was changed in the mid-1960s to create huge incentive because you can depreciate on 15 or 20 years rather than 40 years when you build multi-family.
Is the depreciation rate a route that the government should explore on the fiscal side to stimulate supply?
Mr. Love: The multi-unit residential buildings, or MURBs, program, which you might recall was the program of the late seventies and early eighties that accelerated depreciation, did lead to some additional capital going into the industry, but it did so when there was no — or virtually no — institutional capital.
I live in a world that is very different than that. The biggest pools of capital in our country are non-taxable. They’re all the large pension funds. To address the housing crisis, you need scale capital. That will only come from the institutional market, which is largely non-taxable.
Most MURBs — three-storey walk-ups and so on, tax shelter things put together by Bay Street — yes, they picked up supply, but we’re in a totally different world today. We need a different scale. We need to attract scale capital. Giving people tax incentives wouldn’t be my preferred way. I would much rather have your balance sheet than your accelerated depreciation.
Senator Massicotte: Mr. Love, when you look at all of the ideas, we all buy into them because it is logical. By the time you get there, though, it is probably at least five or ten years away. You need a lot of effort. What do you do in the interim to make sure that housing prices don’t go up by another 50%?
Mr. Love: To focus on short-term, medium-term and long-term solutions is fundamental. The supply case, to your point, is three, four or five years out or, as one would say, another election cycle.
To deal with short and medium terms, in the short term, I would be very aggressive on finding out how we build secondary suites. Remember, the secondary suite for a new home owner who is allowed to rent their basement and get $800 a month for the basement suite, it helps them pay their mortgage and helps a young person going to college, a new family or a new Canadian. But we have so many rules and regulations around what you need to have a secondary suite. I don’t know how many of you lived in a basement as a child. I did, and I lived in a basement when I went to university. It turns out that I didn’t have two exits from my basement, and I lived through that. We need to see what the barriers are for that secondary suite. Because a secondary suite is, in my view, the secret sauce of what could happen quickly.
That is number one. Airbnb is number two. Number three, in the high-density markets, we have rail lines everywhere. Why don’t we put trains on them? If you think of Toronto, think of a world where we had, on a 15-minute basis, non-stop trains to Barrie, Hamilton and Oshawa. We would open up an enormous amount of geography that is commutable to downtown Toronto. In Vancouver, you can take the train out to Chilliwack. Montreal, of course, has done the new route.
There are things that we can do. We need to be thinking about more than just building new supply. We need to be delivering more supply. The secondary suites, I think, are a huge untapped market where people can be encouraged. That is why I loved Premier Eby’s strategy until it was taken away with the $209,000 thing. I loved that strategy to help to people put a fridge, a bed and a cot in the basement. We need things like that because that should be affordable house.
Senator Yussuff: We all grew up in a reality that owning your own home, regardless of what the home is — apartment, condo — is something that we all strive for. Given the challenges for young people, how can we accelerate this reality? I don’t think that it is fair to them that they are not able to do that. I recognize that it will be different for them than it was for me and my parents. How do we change this reality and make them feel hopeful that they’ve got some skin in the game and we’re thinking of them at the same time?
Mr. Love: I think that giving tax incentives for young people to buy their first home just builds more demand, accelerates the price and creates more dysfunction in my view.
We have to present functional rental options for young people. There can be some programs — and we’re working on an idea for a rent-to-own program, which, again, relies on having some financial — we don’t need financial assistance, we just need to borrow the balance sheet. It won’t cost the government money, but it will reduce our cost of debt, which allows us to do this. There are ideas like that.
Giving people money to help them with their down payment, I think, just aggravates the problem. If we do not have enough supply —
The Chair: I think that you made the point we need to change the psychology that homeownership may not be the be-all and end-all.
Mr. Love: Perhaps it sounds like a cop-out, but we are where we are. One million dollars does not buy you what it did when we bought our homes, and we can’t change that. If we were to change that for the 69% of Canadians who own a house, they would be impoverished and that would really be a mess.
Let’s focus on more supply and encourage renting. Let’s get our kids into trades, and let’s redo our immigration strategy.
Senator Marshall: Your fourth suggestion on aligning the three levels of government — federal, provincial and municipal — they all have so many rules and regulations, how you would even attempt that? How would you do that?
Mr. Love: I will tell you what I tell my investors, which is that Canadian rental housing is such a good investment because the three levels of government will never be able to cooperate on how to fix it.
That said, alignment is two things. One is the levels of government, but the other is in the bureaucracy. So many of these programs, by the time you have the regulations and the enabling legislation, they take away everything you tried to achieve. Alignment has to go through the whole machine.
We need a regulatory review. I do not have a simple answer. Ultimately, we need collective leadership to say we’re done.
Senator Loffreda: I was not going to ask a question, but I want to ask about your last statement: supply encourages rentals, more trades and less immigration. Do you really believe that immigration is an issue at this point?
Mr. Love: I didn’t say, “less immigration.” I said, “targeted immigration.”
Senator Loffreda: So not less immigration.
Mr. Love: No, no. To be clear, I’m a big fan of immigration.
Senator Loffreda: So am I.
The Chair: It’s the people we need.
Mr. Love: On balance, I think our immigration strategy is pretty solid. I would have the points base be a higher percentage, personally. Instead of the low sixties, I would probably make it low seventies, given a choice, because we need to focus on those people who can hit the ground running and be economic participants. But we also have to look at all the barriers that stop those people from achieving their economic skill value. I say that because we all know there are too many professionals, whether it be in health care or other things, who are driving —
Senator Loffreda: We’re both fans of immigration. Thank you. It’s nice to end on that note.
The Chair: Mr. Love, you have been extraordinarily generous with your time and insights. You have really helped us focus in on some very practical things that need to be done. Thank you so much for being here and taking all these questions. We are truly indebted. Thank you.
Mr. Love: Thank you very much for having me.
The Chair: The meeting is adjourned, senators.
(The committee adjourned.)