BTL 2022

How city-owned developers can confront the crisis of housing affordability

Municipalities can establish their own real estate development corporations to build market housing and drive down rents

Economic CrisisHuman Rights

Using a city-owned developer to build out more housing supply is a more durable strategy than other potential solutions to the affordability crisis, writes economist Roshak Momtahen. Photo from Shutterstock.

It is widely recognized that Canadian cities are experiencing a massive housing crisis. Rents are too high relative to income and quality housing is getting harder and harder to find. The causes of the crisis are well understood. In an era of stagnating wages, asset price inflation (particularly of real estate) is the primary path to prosperity for large parts of the population in places like Canada, the United Kingdom, the United States, and Australia. This structural feature of modern economies is interlocked with the material interests of many constituencies, which also benefit from ancillary phenomenon like mortgages and construction. Over time, the gap between stagnant wages and inflating asset prices has grown, with urban property price increases now larger in most years than an average worker’s entire annual salary. Those who do not currently own property in major cities are essentially locked-out from ever being able to, unless through inheritance.

Progressive analysis of the housing crisis has underlined the urgent need for new social housing. Despite this being the most consequential solution to the crisis, the balance of political forces is still against it. Ultimately, any attempt to decommodify housing will require the financial power of the federal government. Considering the low likelihood of the federal government harming the interlocked interests that benefit from asset price inflation (or a pro-tenant party winning national elections), the political path to more social housing is fraught. But even within the confines of the market, there is another mostly-overlooked solution that can be immediately undertaken by municipalities without the support of the federal government: cities can establish their own real estate development corporations that build market housing. These city-owned developers can serve two primary functions. First, they could build a massive new supply of housing that would fundamentally alter rental markets. Second, the profits from the city-owned developer could be used to finance social housing, other municipal programs, or more housing development.

More supply

Net increases in housing supply lead to increased vacancy rates, as growth in housing supply outpaces population growth. Higher vacancy rates leads to profitability pressures on landlords and more options for tenants. This changes the underlying bargaining power of tenants vis-à-vis landlords, who now risk losing rental income if more of their investment properties remain vacant. Clearly, landlords’ power to increase rents is significantly curtailed if tenants can easily find substitute housing.

This is similar to the underlying logic by which new social housing can reduce market rents. In that case, demand for market housing falls as tenants leave market housing for non-market housing. As a result, the proportion of supply increases relative to demand, leading to higher vacancy rates and lower rents.

The effects of net increases in housing supply are conditional on where and what type of housing is built. A major benefit of a city-owned developer is that it can be used directly by the city to build the kind of housing it wants where it wants, rather than trying to shepherd developers. It can avoid replacing existing affordable rentals or building in areas at risk of gentrification. Conversely, the city can exempt its developer from exclusionary zoning that preserves large swathes of cities for luxury single-family homes, thereby directly densifying these neighbourhoods. For example, a city-owned developer in Vancouver could build high-density projects in the city’s wealthy, extremely-low density, and highly desirable Westside.

The nature of the housing market in places like Toronto and Vancouver essentially guarantees the profitability of a city-owned developer. Importantly, the developer can become operational without financial support from higher levels of government. As it is engaging in profit-seeking activities, it can borrow money from banks or the bond market. The profits from these projects then flow to the municipality, where it can fund city programs or new social housing. This is already standard practice in the UK, where profits from municipally-owned developers compensate for dwindling funding from the national government.

Why not private developers?

There is a growing consensus that supply increases are a necessary part of a wider solution to the housing crisis. While some are critical of any new supply that isn’t social housing, others argue for letting a thousand flowers bloom—including axing exclusionary zoning and letting private developers build more freely. While the latter is necessary, it won’t be a silver bullet. Private developers are purely profit-maximizing and their priorities will never align with a progressive municipal government. The current sharing of interests on more supply is reflective of the extremely tight housing market in city centres. Once this situation changes, even a little, a gap will quickly emerge between private developers and a progressive city. A city-owned developer is needed to ensure that housing construction continues at a rapid pace even if prices begin to decline. Additionally, there are major distributional differences between a private developer and a city-owned developer. The profits of private developers accrue to the wealthy owners of these companies, while the profits of a city-owned developer would benefit the entire city.

Beyond its positive impacts on housing affordability, a city-owned housing developer has a variety of other strategic benefits. The ongoing pandemic has exposed the hollowing out of state capacity in countries like Canada. While socialist and developmentalist states like Cuba and Singapore were able to respond more effectively to the pandemic, neoliberal states were not capable of much beyond half-hearted lockdowns and quantitative easing. It has become clear that restoring state capacity is needed in order to confront the multi-faceted challenges and crises we face in the coming decades—particularly climate change. A city-owned housing developer can be an incremental and easy step on that path. It would develop the institutional capacity for the state to participate more fully in economic life. For example, a city-owned developer can serve as a blueprint for later establishing a provincial or federally-owned telecommunications company.

The city could also require that its own developer exclusively hire union labour. Such a mandate would transform labour relations in the construction sector broadly. The city-owned developer could also formally recognize tenant unions, empowering them to bargain collectively on behalf of residents in city-owned developments. This would organizationally and financially consolidate tenant unions, perhaps even allowing them to establish collective bargaining in privately-owned developments.

Using a city-owned developer to build out more housing supply is also a more durable strategy than other potential solutions to the housing crisis. A less progressive municipal government can always reverse rent control or renoviction bans, but it cannot do much about housing that is already built. Solutions like rent control and renoviction bans also do little to change underlying market dynamics. They require perennial enforcement because it will remain profitable for landlords to evade controls or to organize politically for their removal. In contrast, building out enough supply will fundamentally alter those markets, reducing the amount that landlords can charge—with or without rent control.

A city-owned developer can confront the crisis of housing affordability through multiple mechanisms. The first is through reducing prices via more supply. If the amount of market housing constructed fails to reduce rents, then the city-owned developer is guaranteed large profits. These revenues can in turn finance social housing development. New social housing allows people to leave the rental market for more affordable non-market housing. This also benefits those who continue to live in market housing—as demand falls relative to supply. Taken together with its various strategic benefits, a city-owned developer can be an effective and immediately-achievable solution to the housing crisis in Canadian cities.

Roshak Momtahen is an economist and researcher. He tweets at @r_momtahen.


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