Urban Renaissance Institute

Lawrence Solomon
National Post
May 8, 2003

Rent control has helped a great many homeowners. Because it all but ended the building of new apartment buildings in Toronto, Winnipeg, and other rent-controlled cities, potential renters, with nowhere to go, have been streamed into condos and houses, pushing up residential real estate values.

Rent control has helped upwardly mobile tenants, those who planned to abandon their apartments as soon as they scraped together enough money for a down payment on their starter home. These ambitious transients had the security of knowing their apartment rents wouldn’t rise much, and their apartment buildings wouldn’t degrade much, in the short time they made their rental their home. After they bought their home, continuing rent control would help it appreciate further.

Rent control has even helped landlords, especially those good at gaming the system after picking up distressed, rent-controlled buildings at a discount. With rent control guaranteeing them automatic rent increases year after year, whether they deserved them or not, and without new buildings able to steal disgruntled tenants away, these landlords could prey on their captive tenants, freed from the expense of keeping their buildings in good repair.

Before rent control condemned rental accommodation to an ever-diminishing market share, this industry provided limitless rental accommodation of all descriptions, from the most luxurious of suites to the humblest of abodes. Today, the rental construction industry has all but disappeared in major Canadian markets. In Toronto, one of Canada’s most hostile environments for tenants, virtually no new apartment buildings have been built in a decade. In Winnipeg, which rivals Toronto for its maltreatment of tenants, rent control led to the mass conversion of well-maintained, respectable rental districts into decayed, often boarded up or crime-ridden buildings.

Rent control wasn’t entirely responsible for the collapse of an exemplary industry providing shelter to Canadians – punitive taxes on apartment buildings and other anti-tenant legislation also played a part. But nothing more chills apartment building investors – typically small businessmen with the bulk of their life savings entrusted to one or two low-rise buildings of perhaps 10 to 20 units – than the prospect that rent control could appropriate much of their life’s work. Says the Canadian Housing and Renewal Association of the simple wants of private proprietors, who own 85% of Canada’s rental units: “Half the private rental stock is owned by small investors who are in the business for the long term. In terms of maintaining and upgrading the existing rental stock, the main suggestion put forth by these investors was to remove any artificial barriers to rent increases, thereby improving the potential returns to investors for maintaining the condition of the stock.” Small investors want to maintain their properties and indeed, says Statscan, they spent an estimated $3.8-billion on repairs and renovations in 1995. “Nevertheless, says the housing report, “the perception of investors involved in the study was that the rental stock was not being maintained to the same degree as ownership housing.”

While rent control helps some homeowners and some landlords, it overwhelmingly hurt tenants, including many among the middle-and upper-class. Though well-off tenants can afford their own homes, many prefer to put their capital elsewhere. Entrepreneurs building a business often want to maximize their investments in their business, to grow them faster; those in or approaching retirement often want to maximize their dividend or interest income, without needing to resort to gimmicks such as reverse mortgages; people of all ages often want the simplicity of renting – no mortgages to renew, no roofs to repair, no neighbourhood associations or condominium committees to contend with or join.

But the biggest victims of all become the poor, those without the option of buying a home. Before rent control, the poor had consumer clout: Apartments were generally in abundant supply and landlords courted them with moderate prices and extra services. After rent control, rental markets tightened in markets such as Toronto, wresting renters of their consumer sovereignty in favour of their landlords, who could now pick and choose among the most credit-worthy applicants and leave the rest for public housing or the street.

Rent control is based on the illusion that it protects renters. It does, but only on the short term. In truth, although circumstances vary greatly with locales, cities and their residents almost all become long-term losers. Without the choice of suitable apartments, many tenants reluctantly leave the city to seek inexpensive homes in working class suburbs. They then commute to city jobs, using city facilitates without paying for them through city taxes. Meanwhile, as apartment buildings become dilapidated and devalued on city tax rolls, city treasuries see shortfalls, which they make up by raising taxes elsewhere. A 1996 report published by the Professional Property Managers Association found that Winnipeg homeowners paid, on average, $673 extra in taxes that year, and $13,000 over the previous 25 years, because their politicians’ housing policies had led to the ruin of the city’s apartment stock.

In the end, rent control serves no one well, save slumlords.

Related articles:
Homeless by decree
Homeless in paradise
Parasites in the walls

Lawrence Solomon is executive director of Urban Renaissance Institute and Consumer Policy Institute, divisions of Energy Probe Research Foundation. www.Urban.probeinternational.org, E-mail: LarrySolomon@nextcity.com; Part of a series.

Livio Di Matteo
National Post
April 30, 2003

If Ontario Premier Ernie Eves makes good on his promise, today’s Throne Speech may outline a provincial plan for mortgage interest income tax deductibility. This plan echoes a proposal that the federal Tories have made nationally.

The proposal has little economic merit. It will not help tenants, a group that government claims to be deserving of protection, and it will do nothing to help the overall Ontario economy.

The concept of mortgage interest deductibility is a simple one. Homeowners with mortgages would be allowed to deduct a portion of their interest payments from their income tax. This is already a common policy in the United States, which provides 100% deductibility of mortgage interest under the federal income tax.

Given that the average home mortgage in Canada reached a value of $108,700 in 2002, and that nearly two-thirds of Canadians own homes, the political calculus underlying this policy is obvious. For a homeowner with a mortgage, this tax break could be worth thousands of dollars. However, this tax break would not assist those individuals who rent. The subsidy to homeowners effectively lowers the cost of housing for non-renters relative to renters. A mortgage interest deductibility plan amounts to government bias against tenants and towards home ownership.

Because it tilts the housing market towards ownership, mortgage interest deductibility has serious economic implications. Because people see housing as an investment as well as a need, mortgage interest deductibility subsidizes both the consumption of housing by homeowners and their wealth accumulation. This subsidy accentuates the existing differences in wealth and income between homeowners and renters.

In 1999, equity in the principal residence accounted for about 40% of the average net worth of homeowners. The median net worth of owners of housing was $171,150 in 1999, up 21% from 1984, whereas the median net worth of non-owners was $10,201, down 41% from 1984. To add to the inequity of subsidizing the housing of this far more affluent group of Canadians, mortgage deductibility also promotes suburban sprawl: Rates of home ownership are much higher in rural areas and smaller centers with populations below 10,000, encouraging people to leave cities by transfering wealth from large metropolitan areas to lower-density areas.

A mortgage interest deductibility policy implies a social consensus that owning your own home is a superior form of housing than renting. B ut why should one form of housing receive preferential tax treatment over another? After all, home ownership is not in any way endangered. Ownership rates for households in Canada in 2001 were at nearly 66%, up from 64% in 1996. For the past three decades, the number of households owning their homes has grown faster than the number of renter households. Home ownership rates range from a high of 78% in Newfoundland to a low of 58% in Quebec.

The housing market is robust with national single detached housing starts at 125,374 in 2002, up from 77,996 in 1996. The growth rate for single detached housing starts was 4.2% in 2001 and 30.6% in 2002. A mortgage interest deductibility scheme will add economic fuel to an already robust housing market and create the possibility of a housing price bubble. Should this bubble burst, it would hurt homeowners with mortgages as well as those without mortgages who were unable to take advantage of the latest government subsidy scheme.

If anything, it is the rental market that needs some help, given low vacancy rates and the fact that the average rent for a two-bedroom apartment in Canada has risen 17% since 1996. Apartment vacancy rates in Canada in 2002 were 2.1%, down from 4.5% in 1995, making for a tight market.

Of course, mortgage interest deductibility dangles the dream of home ownership to renters. However, to get a mortgage interest deduction break on your income tax, it helps to have a secure job and income high enough that you pay sufficient taxes to apply your mortgage interest deduction against. In other words, a mortgage interest deduction will not provide much tax incentive to boost home purchases among those with low incomes or those with insecure employment. The average annual income of renters is approximately half that of those who own their housing.

A mortgage interest deductibility program can cost Canadian government treasuries hundreds of million of dollars – in the United States, where homeowners deduct mortgage interest from their income taxes, the cost exceeds US$60-billion a year. According to a study by the Joint Committee on Taxation of Congress, taxpayers with incomes over US$50,000 claimed 89% of all the tax benefits from mortgage interest deductions.

In Canada, home ownership rates currently are not much different than those in the United States. On either side of the border, mortgage interest deductibility is bad tax policy that creates a subsidy to already advantaged homeowners and does nothing for renters.

Livio Di Matteo is a contributor to the Urban Renaissance Institute. He teaches in the Economics Department at Lakehead University.

Related articles:
Homeless by decree
Homeless in paradise
Parasites in the walls

Readers respond

May 12, 2003

Livio Di Matteo asserts that mortgage interest deductibility would not help tenants and implies that owning your own home is not a superior form of housing.

The fact is that homeownership is superior to renting. Study after study has shown that in the long run, the net worth of homeowners is far higher than tenants, thus homeowners are far more secure and comfortable in their retirement, which surely is a good thing.

As for the suggestion that mortgage interest deductibility would not help tenants, the Greater Toronto Home Builders’ Association proposal was a direct response to a province-wide poll of renters which showed the majority of renters aspire to homeownership. The only thing holding them back is lack of a downpayment.

Our association has proposed that renters who purchase homes should be allowed to deduct their mortgage interest for the first five years, starting with a 50% deduction in the first year, when the assistance is most needed, declining to 10% in the fifth year, after which they would be on their own. We have also suggested that the existing Ontario Home Ownership Savings Plan be enhanced to help renters save for their first home more quickly. Both of these proposals go with the grain of market forces and would be far more cost-efficient than government-built housing.

I fail to see how a proposal that would turn tenants into homeowners amounts to “government bias against tenants.” The worst thing that could happen would be that our apartment vacancy rates would increase and rents would decrease.

Our federal and provincial governments already encourage citizens to save for their retirement through RRSPs. Since home equity represents the ultimate retirement nest-egg, mortgage interest deductibility should be looked upon in the same light. And on that basis, extending mortgage interest deductibility to existing homeowners should also be considered.

Joe Valela, president, Greater Toronto Home Builders’ Association, Toronto.

April 30, 2003

It is hard to believe the column opposing mortgage interest deductibility (page FP 17, April 30) was written by someone who apparently calls himself an economist. His argument fails for the simple reason that tenants already enjoy the benefits of mortgage interest deductibility.

Unlike private homeowners, landlords may deduct mortgage interest, a cost reduction which, in an open marketplace, is passed along to tenants (if Mr. Di Matteo disagrees with that statement, ask him what he thinks would happen to rents if landlords were suddenly unable to deduct mortgage interest).

Deductibility of mortgage interest on private houses would therefore inject equity into a situation which is now biased toward tenants and against homeowners.

Lakehead University, where Mr. Di Matteo teaches economics, should re-name its economics faculty the Faculty of Left Wing Political Activism.

Dave Wreford, Winnipeg, Manitoba.

Lawrence Solomon
National Post
April 24, 2003

“We cannot have homeless people in our society. It’s just wrong,” Governor-General Adrienne Clarkson stated three years ago during one of her tours of the country. “As long as there are any, it will be on our agenda.” With her term as Governor-General now running out, Her Excellency has decided to make good on her vow by taking on another tour, this one focused on Canada’s cities and their homeless shelters.

“How can the richest city in Canada have people slipping through the cracks,” she asked of Calgary, the first stop. After bestowing the Governor General’s Caring Canadian Award on Albertans who have demonstrated the best of intentions – eight such received awards in Calgary alone – Ms. Clarkson and her entourage left. She will later be visiting Saint John, Quebec City, Saskatoon, Toronto, Montreal and Vancouver in her Cities and Homelessness Tour.

Since her time left in the official service of her country is short, and the needs of the homeless great, let me remind her how the homeless got that way. Governments created homelessness. Before governments became involved in issues of homelessness, in fact, the modern concept of homelessness didn’t even exist. A homeless person was a hobo or a vagabond, someone without roots, often by choice.

The type of homeless people we trip over in the downtowns of our major cities today – those too poor or mentally ill to manage a roof over their head – were scarce a generation ago. A team of Columbia University researchers who tried to find people sleeping in Manhattan parks in 1964 could find only one. The New York Times didn’t reference the homeless in its index until 1983, Maclean’s magazine didn’t reference it until 1985, the Toronto Star until 1986. Homelessness as we know it was all but non-existent until two decades ago.

Then governments, generally with the best of intentions, changed their policies and created the human misery that now shames and appalls us all. By the 1980s, the homeless became ubiquitous in the downtowns of New York, Chicago, Toronto, Vancouver and other large cities.

Many blame the homeless problem on “deinstitutionalization” – the eviction from hospitals of the severely mentally ill in the belief that granting them their independence was doing them a favour. But deinstitutionalization only accounts for a handful of the homeless. More than 90% of homeless people lack decent shelter for quite another reason: The government forbade housing for poor people.

Through regulations and expropriations, governments embarked on massive slum clearance projects in the 1960s and 1970s that wiped out much of the low-value housing stock in major population centres across the continent. New York City’s Bowery had 10,000 beds in 1965. By 1980, only 3,000 remained, and by 1990, New York City had lost almost half of its low-rent housing. The story was similar in Chicago, which lost all but 600 of the 10,000 spaces in the Loop area’s cubicle hotels, and 20% of its total stock of low-rent housing. Toronto lost virtually all of its 500 flophouse beds and one-third of its rooming houses. Between the mid-1970s and the late 1980s, the number of unsubsidized low-cost units fell 54% in the typical large U.S. metropolitan area.

At the same time that governments demolished substandard private sector housing, they regulated the poor out of many residential districts through restrictions on boarding and basement apartments. In one area alone did governments relax standards – they legalized vagrancy. Many of those ousted from their low-rent accommodations then found free housing in the form of streets, back alleys and parks.

The consequences of these government policies, which produced many visible losers and no evident winners, are now tragically with us, borne mostly by homeless victims of invisible government policies. According to a 1997 study by the Clarke Institute in Toronto, depression and other mild forms of mental illness burden the great majority of homeless, their plight exacerbated by alienation and a lack of community. In earlier decades, such social misfits lived in tenements, seedy hotels and rooming houses. Or they lived with relatives who would take them in. Or they would sublet rooms in exchange for cash or household services, typically babysitting for women, odd jobs for men. The arrangements were generally imperfect for both landlord and tenant – alcoholics, the mentally ill and other social misfits tend to make for poor company – yet they made do. They often maintained relations, however poorly, with those in their neighbourhood and were, as we might say today, integrated into the community. Relatively few people relied on shelters.

Those who urged governments to demolish substandard private sector housing expected higher-quality public housing to fill the void. But public housing became an abject failure. Much of the public housing that was built became breeding grounds for crime and despair and is now being torn down. But even if public housing was not soul-destroying, governments are unable and unwilling to provide enough cash to make a dent in the homeless problem.

Canada’s leading homeless advocates, and the governments that have their ear, have come to understand this. Many now demand that the government provide substandard housing for the poor, on the sensible rationale that poor housing is better than no housing. Housing for the poor is making a comeback in Toronto and elsewhere.

Substandard government-built housing is a start, but a poor one – the government record at building affordable housing of any kind has been abysmal, as virtually all housing advocates acknowledge. Much better to stop more serviceable buildings from being torn down by tearing out of rule books bureaucratic requirements that undermine their preservation. Much better to allow private developers to build units that aren’t up to modern codes that require more parking, or a better-equipped kitchen. Much better to promote a society of truly caring Canadians by stripping away rules – like prohibitions on boarders and basement apartments – that prevent homeowners from voluntarily supplying a crying need.

Homelessness is wrong, Ms. Clarkson, and it does belong on your agenda. But handing out awards won’t solve it. The agenda I’ve described – nothing more than a return to pre-politically correct times – would put the problem to bed.

Lawrence Solomon is executive director of Urban Renaissance Institute and Consumer Policy Institute, divisions of Energy Probe Research Foundation. www.urban.probeinternational.org, E-mail: LawrenceSolomon@nextcity.com

Related articles:
Parasites in the walls
Homeless in paradise

Readers respond:

Monday, May 12, 2003

Lawrence Solomon is right to keep homelessness in the public debate. Yet, in acknowledging the Governor-General’s own commitment to this pressing issue, he may have created a misleading impression of Her Excellency’s visit to Calgary, requiring clarification on three points.

First, the purpose of the visit. The Governor-General launched the first of seven Urban Visits with a five-day stay in Calgary last month. These visits examine “The Good City,” considering issues such as citizenship, diversity, creativity, social justice and urban planning. While the issue of homelessness is pressing, it is not the main focus of the visit. This is not, to use Mr. Solomon’s words, the Governor-General’s “Cities and Homelessness Tour.”

Second, the Caring Canadian Award. Her Excellency’s visit began, as Mr. Solomon states, with eight presentations of the Governor-General’s Caring Canadian Award. This award honours those “unsung heroes” whose tremendous volunteer efforts make our communities better. However, Mr. Solomon may have left readers with the impression that this award is specifically related to homelessness. This is incorrect: The recipients of this award help individuals, families and communities in countless ways.

Third, the scope of the visit. Mr. Solomon also states – incorrectly – that the Governor-General then left the city right after presenting the awards. In fact, she stayed four more days, meeting with social service agencies, innovative philanthropists, urban planners, developers, immigrant associations and students to get a broad picture of the city. The visit culminated with a public roundtable forum attended by several hundred people who discussed the strengths and challenges of civic engagement in Calgary.

The Governor-General takes seriously her role as a catalyst for dialogue, and will continue to encourage thoughtful and useful engagement on the issues – including homelessness and affordable housing – that currently face Canada’s cities.

Lachlin McKinnon, special advisor to the Governor-General, Ottawa.

Lawrence Solomon responds:

In my column, I portrayed the Governor-General’s trip to Calgary as “focused on Canada’s cities and their homeless shelters.” The Governor-General’s special advisor acknowledges the former but disavows the latter. I cannot explain this error on the special advisor’s part. Perhaps he is unaware of who and what the Governor-General was visiting during her Calgary tour.

The morning after she arrived in Calgary, Her Excellency visited the Calgary Urban Project Society where, her own publicity department reports, she met “with front-line staff and homeless families.” From there she went to a noon meeting at One World Child Development Centre, which featured “a discussion with homeless mothers.” At 3 p.m. she was at the Back Door Project, “Meeting with the Executive Director, volunteers and street youth to discuss the project’s alternative, innovative model to helping young people get off the street.” Next, a 7 p.m. discussion with Social Venture Partners Calgary, which has assisted more than 300 young women renounce (as the organization puts it) their “former lifestyle on the streets, thereby breaking the cycle of abuse for generations to come.”

Her Excellency had no other scheduled appearances that day. The next morning saw her at The Mustard Seed Street Ministry, which describes itself as “a non-profit Christian humanitarian organization that has been providing services for the homeless, street people of Calgary since 1984.” Other people she met in Calgary, including two recipients of her Caring Canadian awards, are also prominent for their work with the homeless. As Her Excellency’s PR department announced, one “helped to establish a youth shelter” and another “regularly patrols the streets of Calgary to offer advice and friendship to people struggling with addictions, disabilities and poverty.” I did not write, as the special advisor seems to think, that the Governor-General left Calgary “right after” handing out the awards. Neither did I characterize them as homeless awards. I called them awards for people “who have demonstrated the best of intentions.” Canada has no shortage of such people.

Thursday, April 24, 2003

I have read with interest your article in this morning’s National Post.

Some years ago I recall that a developer wished to build a block of apartments in Vancouver that would be affordable to people of low income. Permission was not granted because (to my recollection) the granting authority said that, because the apartments were so small the apartment block was likely to become a slum.

When I graduated from university it was difficult to find living accommodation in Vancouver. Single people usually lived in a succession of boarding houses and what were termed “housekeeping” rooms. By the time that the proposal for the low-income apartments was put forward I had moved up-scale. I remember, however, that when I read about the proposal I thought it a splendid idea and I still do. Many people of limited income would be very pleased to have available small self-contained living quarters. A beginning might be made to permit blocks of small apartments – not government funded – that would remove the stigma associated with small size. Such apartments could be attractive to many people, who for reasons not necessarily financial, wish to have a small abode.

I trust that your article will stimulate thought on the problem of housing and look forward to seeing the next in the series.

Beryl E. March, Vancouver, British Columbia