Housing controversy a classic economics case study

One of Ronald Reagan's favourite jokes was that there was nothing scarier than a guy in a suit saying, "I'm from the government and I'm here to help.

One of Ronald Reagan’s favourite jokes was that there was nothing scarier than a guy in a suit saying, “I’m from the government and I’m here to help.”

The latest people to be alarmed by government “help” are the Yukon Residential Landlord Association and the Yukon Real Estate Association. They are worried about the Yukon government’s plans to, as they see it, “give new developers 50 per cent of their costs to directly compete against existing landlords.”

They are referring to the government’s plans to subsidize the construction of a hundred or more new rental units.

The initiative has so many pros and cons that the economics prof at Yukon College should pick it up as a real life case study for next semester’s class.

A few facts before we consider the issues. The Yukon government has access to $13 million in federal money from the Northern Housing Trust. Rather than building units itself, it will double the budget by matching private investment 50/50 and letting private developers build and own the units. A condition will be to rent the units for 10 years with rents capped at 95 per cent of the median (as of December that worked out to a maximum rent of about $850 a month).

From 2003-13, median rents rose about 3.3 per cent per year, a bit faster than inflation. Vacancy rates a decade ago were often above 5 per cent, then dipped to a very tight 1 per cent from 2010-12 during our resource boom. They have now risen to between 3-4 per cent.

Oh, one other fact: a Yukon election will probably occur in 2015 and it would be really nice for the ruling party if lots of people had construction jobs for the next year or two.

Let’s look at the pros. The real estate associations mentioned above estimate that $26 million will build around 130 units, which assumes an average cost of $200,000. This will increase the supply of housing and also (depending on who builds them) the average quality of the housing stock, which will be good as our population grows. The units will be aimed at the lower half of the market, providing more affordable housing options.

It will also create construction jobs and opportunities for Yukon investors.

Depending on your perspective, it might also be a good thing to have more private landlords rather than a bigger government housing agency. The latter would have happened if the government had taken the traditional approach of just giving the money to Yukon Housing to build apartments.

Another pro from the government’s point of view is that the risk of cost over-runs is held by the private investors, not the taxpayer.

The landlord and real estate associations, however, outline some serious negatives. Their narrative is that the government bungled the last decade, failing to offer enough lots for development as the housing market surged. Now that new construction has finally caught up to demand and vacancy rates are rising, the government wants to dump another 130 units into the market.

They are worried this will hurt existing landlords, both big landlords and also “mom and pop” investors who have bought condos or maybe put an income suite in the basement to help with the mortgage. A slump in rental prices would hurt these investors, possibly quite seriously depending how much they have borrowed to invest in housing.

So do the pros or the cons win? It all depends on your point of view. If you are a renter, this is an excellent scheme. It is also a great idea if you are one of the developers who is getting a share of the $13 million, assuming you can keep construction costs down and make money at the capped rent (or sell the unit at a gain in 10 years when the subsidy lock-up ends).

If you have invested your own money in rental housing, it is very annoying to have the government giving $13 million to competitors and telling them they have to charge low rents you will have to compete with. If you end up with your condo empty for six months, or with lower rent that doesn’t cover your costs, this could be devastating financially.

This is not really a debate between a theoretical purely free market versus central planning. In reality, the Yukon housing market is a mixed model. Yukon Housing has offered housing for years, and both protesting real estate associations recently told the Yukon News they were “wholeheartedly” in support of some kind of social housing program. The argument is about how much government intervention we want.

Only time will tell if this policy was a sensible addition to the housing stock, or a government over-reaction that discouraged subsequent private investment in housing.

This won’t be any solace for real estate investors whose returns go down because of new competition, but the overall impact of the scheme may be relatively small. Even if the scheme results in 130 new units, which might be an over-estimate, the Yukon already has over 1,000 rental units in buildings with three or more units according to the bureau of statistics. And that doesn’t count many more duplexes, suites, houses or government-subsidized housing. Yukon Housing points out that it has built over 200 units since 2009. The market may be able to absorb a hundred or more new units without major disruption.

Equally annoying to the real estate industry is the fact that the Yukon government continues to monopolize lot development. They also lowered the small business tax rate in the last budget, but didn’t touch the high marginal tax rate on rental income. Some think that changes to these policies might help lower housing costs in the long run.

One irony, which I am sure is not lost on the real estate industry, is that it is the allegedly pro-business Yukon Party that has come up with this scheme to favour renters over investors. Oh well, you can always write in “Ronald Reagan” on your ballot next time.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s “Yukonomist” show or Twitter @hallidaykeith