CFAA REPORT
KEY ISSUES IN HOUSING AFFORDABILITY Addressing recent concerns and misconceptions BY
JOHN DICKIE, PRESIDENT, CANADIAN FEDERATION OF APARTMENT ASSOCIATIONS
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his article addresses various housing concerns and misconceptions that have become important recently in the setting of public policy, including the rent control rules in Ontario, mortgage insurance policy and housing supply policies.
THE IMPACT OF RISING RENTAL ASSET PRICES
Some housing observers are concerned about the current high prices of rental housing assets, and believe that those prices work against housing affordability. However, economic analysis and modelling strongly suggest that the opposite is true. Higher rents are associated with high asset values, but the issue is, which causes the other. The values and prices of rental housing assets are primarily determined by two factors: market rents, and the net capitalization rate, which turns a stream of net income into a capital value. The net cap rate is determined by current and expected interest rates, and by the market expectation about the future path of the net income stream (rents less costs). Rental housing asset values are high and rising because interest rates are at historically low levels and may still fall more, and because rental housing is the real estate asset most resilient to 8
FAIR EXCHANGE | NOVEMBER/DECEMBER 2020
the impacts of COVID-19, since everyone has to live somewhere. Higher rental asset values draw in new investment and construction, and when the larger supply of rental units is available, the additional supply results in a lower rent for the use of rental property to live in (assuming the same demand). In other words, everything else being equal, higher asset values lead to lower market rents, not higher rents. Lower rental housing asset values work against rental housing affordability because lower values discourage investment in rental housing, both in the new construction sector, and in preserving and refurbishing existing rental housing. In the long run, the costs of providing rental housing (and the services that come with it) substantially affect rents. However, in the short run, costs do not drive rents; instead, demand drives rents. Discouraging investment in rental housing would reduce rental
