What it takes: Solving the rental housing crisis in Greater Vancouver
Updated: Dec 5, 2020
Rental rates for housing in Vancouver are so high renters are spending far in excess of the recommended 30% of income. These high rents squeeze low income earners ability to buy food, and other necessities.
Why it matters:
Statistics Canada reports 4.8 Million Canadians live below the poverty line. The most difficult aspect of poverty is the effect it can have on mental health. The poor suffer constant stress and anxiety about how they’re going to pay their bills and how they’re going to put food on the table.
‘Rent is the first priority, because things get a lot more complicated without a roof over your head’ explains Elaine Power, an associate professor at Queen’s University
Tackling the rental housing crisis is high value in reducing interconnected societal poverty issues.
Vancouver has 41% of populations with less than $60k per year income. At 30% of income, the average $2000 per month 2 bedroom apartment requires $83,000 household income. This creates an affordability crisis. If your family income is $30,000 per year, you are paying 67% of your income to have average rent leaving not much for food and other essentials.
If rents for low income households were subsidized to limit rents paid to 30% of income, the rest of the household income could be prioritized for other family needs. The amount of subsidy calculates roughly to about $2 Billion per year. This is based on subsidizing an average of $12,000 rent to each of over 161,000 households in Metro Vancouver. Supporting calculations can be found here, but the point is a significant amount of subsidy funding per year is required.
If we employ the ‘Save before spending’ rule we need an endowment of 25 times the $2 Billion a year, or roughly $50 Billion in endowment. That is a lot of money and would take many years of savings to raise. Since we need housing subsidy spending immediately, we’ll modify ‘Save before spending’ to be ‘Save while spending.’ The trick is to build a savings account that eventually pays back all the expenditure running in parallel with the subsidy spend. We want ideally to do this without raising taxes.
Here is how: The governments (Federal, Provincial, Metro and City) collectively borrow $100 Billion, which is about double the size of endowment needed. This borrowing does not to add to budget deficits, nor the national net debt, as these funds are invested in stocks and the financial markets; they are not spent to finance general annual expenditures as they are investments.
The interest payments for the borrowed funds at the GoC rate of 2.3% equals $2.3B a year can come from investment earnings. With this approach to borrowing, no taxes are required to fund the investment.
The expected return from investing averages 7.2%. This is typical long term returns and may vary over specific periods. The interest cost of 2.3% is deducted from the 7.2% creating a net 4.9% return. At a growth rate of 4.9% over a period of 14 years, the investment grows from $100 B to $204 B by the year 2033. In that year, the original borrowed $100 B is paid back, leaving $104 B to fund the ongoing rental subsidy.
Now the $104 Billion funds become the principle we are now able to spend. To spend on a continuous basis, the rule is to spend just 4% per year of the $104 B principle, which is a little over $4 B each year.
Paying back the debt: Spending $2B per year as housing relief over the first 14 years creates an advance spending debt of $35 B. Going forward in year 15, the new endowment funding $4 B per year provides $2B to cover the on-going subsidy plus $2B to repay the advanced spending debt. By the 31st year, in the year 2050, the advanced spend is fully paid back, and housing subsidies could continue at $2 B or even rise to the full $4B per year.
Result: No taxes have been raised and the endowment of $4B per year continues.
Hey, what about the rest of Canada? Metro Vancouver is about 7% of total Canadian Population. Without reworking all the numbers, roughly the same for all Canada could be done with an annual subsidy of $ 80 Billion based on an endowment 25 times larger of $2 Trillion. Investing $4Trillion would enable the same time periods, fully paid off by 2049 and an on-going endowment spend of $160 B.
Could Canada borrow $4 Trillion? Maybe not. However our Canadian Federal Government net debt is projected at $757 billion in 2023. This debt is spent money, not an asset earning income. If Canada can borrow that much without any collateral beyond our good name, borrowing at least a trillion for an income portfolio is not likely a problem.
Assuming a $1 Trillion borrow instead of $4T requires an added 8 years to start paying out $80 B. As we are paying out a lower amount, the accumulated advance payments are paid off in the year 2062, twelve years longer than in the Vancouver case.
Result: In either the Metro Vancouver or Canadian scenario, housing poverty is immediately eliminated with no added taxes required.