Imagine paying an affordable rent each month for a brand-new apartment that you’ll own in a few short years—without having to save every spare penny for a down payment that might never be big enough.
You transform from renter to owner.
That’s the most controversial piece of the provincial-federal initiative announced in June, when the two levels of government introduced a plan to convert 2,200 developer-owned, unsold, vacant condo units into affordable housing. The plan, Prime Minister Mark Carney said, is to turn those unloved units into rent-to-own properties for first-time buyers who previously could only dream of owning a home one day.
Those 2,200 units—a seemingly arbitrary number—represent a fraction of the unsold new housing inventory that has come to symbolize the biggest market downturn B.C. has seen in years. In total, 6,016 new condo units are empty throughout the province. The bulk of those units, 4,470, are in Metro Vancouver, according to urban planner and Simon Fraser University associate professor Andy Yan. He notes that each month, as new units come online, the numbers increase, including new unsold semi-detached housing such as duplexes and townhomes.
Premier David Eby announced that the scheme would not apply to the pricey city of Vancouver, where a condo could easily cost around $1,000 per square foot. But Vancouver proper isn’t a hotbed of unsold condo units, anyway. According to Yan, only 472 new condos remain unsold, or slightly more than 10 percent of Metro Vancouver’s new inventory; Richmond, Burnaby and Coquitlam hold the concentration of unsold condos. Prime Minister Carney said at a press conference in June that the province had initiated the idea to buy the distressed condos at or below construction cost, in order to convert them to rent-to-own.
View this post on Instagram
“Why aren’t they selling?” Yan asks, rhetorically.
The answer, of course, is that they’re simply too expensive and too small for the average income earner who might want to lay down roots. They were built instead for an investor-driven market buoyed by low interest rates, a low vacancy rate and high rents, and that market has been dumped on its head. Yan sparked an uproar when he uncovered CMHC data in May showing that one-third of those units were priced at more than $1 million across Metro Vancouver. When the government announced a month later what appeared to be a bailout for developers, the timing couldn’t have been worse.
Earlier in the year, the nonprofit sector had already been hit hard when the province paused the Community Housing Fund, which had delivered housing for those who most needed it.
“The data illustrated the build-up of newly built and unsold housing supply that had disconnected from local household incomes and housing needs,” says Yan.
“And then the announcement to buy condos triggered a powder keg of public rage about government’s recent actions—and inactions—around affordable and livable housing in B.C.”
Premier Eby responded with a little more information, and promised a full rollout of the plan by fall.
“What we see as an opportunity right now is to buy products below the cost of construction,” Eby said at a follow-up press conference. “The numbers don’t work in Vancouver, but they do work in places like the Fraser Valley, the Okanagan and Vancouver Island.”
So far, we know that the province is looking for a bulk discount on distressed units that would, over time, otherwise get snapped up by bargain-hunting institutional investors. First-time buyers shut out of the market would get an opportunity to rent at highly affordable rates, and presumably have the option to one day own their unit at a below-market price. If it’s anything like a typical rent-to-own program, a portion of the rent would go toward a future down payment, like a forced savings program.
Mortgage broker Alex McFadyen, hasn’t helped finance a rent-to-own agreement in many years, largely because sellers only resort to them when they can’t sell their property, he says. Also, lenders tend to avoid them because they’re complex.
In a typical private agreement, McFadyen explains, the buyer and seller agree on a fixed price to be paid at the end of a rental term. A term might be two or three years, during which time the buyer pays a monthly market rent with an additional amount that goes toward their future down payment. Often, there’s also an upfront deposit. The cost, he adds, can therefore be much higher than just paying rent. And at the end of the term, there’s no guarantee the buyer will qualify for financing on the balance.
“One of the common reasons that someone would do this is because they don’t have enough money for a down payment. Another reason is credit—if someone had a credit issue but they have good income, they can improve their credit and pay off their debts,” says McFadyen.
The government model will likely give tenants a pathway to purchase, but without the same standard of legal obligation. That raises a question: What happens if they don’t buy and instead stay renting?
“Isn’t that called non-market housing?” asks Yan with a laugh.
Developers are just as confused, and industry representatives have made it clear that they’re not behind the idea.
“It will not succeed because it requires developers to agree to pricing, and they will only agree to pricing that suits them,” says developer Jonathan Friesen, chief executive officer of Kelowna-based Mission Group. “As a government, they will have to make up the gap between what it costs to own these things and what they are able to get from revenues for affordable housing. And I think those two numbers can’t coexist.”
The only developer who might go for it “would be somebody who’s deeply underwater, just to partially pay off the bank,” he adds.
“But really, what they’re talking about is buying nearly half the available inventory right now—and I’m having a hard time understanding how that’s going to work.”
Developer and real estate consultant Michael Geller proposed rent-to-own agreements for a project a few years ago because he wanted to get it passed by making the project more palatable to city councillors, he says. Developers have been known to incorporate rent-to-own agreements, such as Anthem’s 341-unit Seymour Estates project in North Vancouver, which included 25 rent-to-own homes. And although Geller’s rent-to-own project could have been a success, he doubts the government scheme will ever get off the ground.
View this post on Instagram
“They are doing it because it sounds seductive, the same reason I did it,” he says. “But I think they will drop it because it just doesn’t make sense. The rent-to-own model is fraught with potential problems.”
One problem with government buying up units cheap and selling them at a discount, Geller notes, is that it will be seen as unfair to those in the building who paid market price. In that scenario, one group benefits from government policy while another group takes a financial hit. Buyers who get discounted units could also easily sell them for a hefty profit when the market cycles back up.
Government would have to put stipulations in place, such as covenants or land trusts, to keep the properties affordable.
Thom Armstrong, chief executive officer of the Co-op Housing Federation of BC, says that rent-to-own schemes “seem like a poor use of scarce public capital.”
“The most perplexing question no one has been able to answer so far is this: If developers are willing to sell vacant condos at a price that would be politically palatable, why haven’t they done so already without the assistance of government?” he says.
Geller notes that government is spending a lot and going to a lot of bother when the funds could be better spent elsewhere—such as fast-tracking the foreclosure process so that low-cost housing comes onto the market.
“Ultimately, these units will get sold without the government, and that’s how it should happen,” he says.
“And if there are government funds available, then start funding more nonprofit projects.”
