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HPD 0604 Vandyk
HPD 0604 Vandyk
HPD 0604 Vandyk
Abstract
This article examines the mechanisms used since the 1970s to finance social
housing in Canada. It reveals that direct government assistance has proven to
be the most cost-effective mechanism. Experimentation with alternative
mortgage instruments such as the graduated-payment mortgage and the
index-linked mortgage has also been central to the attempt to minimize
subsidy and financing costs.
Introduction
Background
1992 Subsidy
Category No. of Units (Thousand Can$)
Social housing
Cooperative housing 50,937 163.7
Low-rent housing 117,254 21.0
Nonprofit housing 155,699 558.5
On-reserve housing 13,197 68.4
Public housing 205,752 495.6
Rent supplement 46,032 96.7
Rural and native housing 23,535 126.2
Urban-native housing 9,355 81.2
Subtotal 621,761 1,611.3
Rental residential rehabilitation assistance 17,402 1.4
Market housing
Federal cooperative 13,578 31.3
Total 652,741 1,644.0
2 These low-rent units are in limited dividend private rental properties similar
to Section 236 rental projects in the United States. They are discussed in
detail later in this article.
818 Nick Van Dyk
Before the early 1970s, most assisted housing was provided and
managed by public housing authorities funded jointly by federal
and provincial governments. Through the 1960s much of this
public housing was developed in areas of urban renewal and was
seen as a panacea for urban blight.
Number of Households
Household Type 1988 1991
Pre-1973 programs
3 A parallel nonprofit housing program was also developed under this legisla-
tion involving similar terms, although the limited return on equity was
nonapplicable. These nonprofit low-rental units account for two-thirds of the
units identified under this line in table 1.
4The prepayment option did not exist for projects built before 1969 (about
20 percent) but was subsequently extended to these owners.
Financing Social Housing in Canada 823
The impact of the tax expenditure programs was not fully appre-
ciated until the 1980s, when a number of housing economists
analyzed these instruments (Gau and Wicks 1982; Jones 1983).
The general assessment of MURBs suggested that these stimuli
were less effective than claimed. The benefits were quickly
capitalized into land prices, neutralizing any change in rates of
826 Nick Van Dyk
A major flaw in the design of the GPM was its combination with
the Canadian term mortgage, specifically the use of a five-year
term after which the mortgage is renewed at a new prevailing
market rate. The GPM assumed that the mortgage payments
would increase at a fixed rate (e.g., usually 5 percent per year)
for 10 years, without considering the impact of an increased
interest rate resulting from this five-year renewal. The GPM’s
lower initial payments resulted in negative amortization—the
outstanding principal amount was increased since payments did
not fully cover the principal and interest. At renewal in the early
1980s, interest rates were at their historical peak, exceeding
20 percent. The combination of increased interest rate and in-
creased loan balance substantially raised monthly payments.
Many households and rental project owners could not afford the
increased payment after the renewal, and the default rate was
extremely high.
The major shift in financing was from one of direct lending using
government funds to one of private lending facilitated by mort-
gage insurance. In effect for rental investors since 1954 and for
homeowners since 1964, public mortgage insurance had devel-
oped a strong system of housing finance in Canada. Extending
this system to include social housing was a natural progression.
CMHC began insuring mortgages for 100 percent of project
capital costs. The mortgages were provided by lenders and inves-
tors (e.g., pension funds) at market interest rates. They followed
the usual Canadian term mortgage practice of terms of one to
five years and amortization periods of between 25 and 35 years.
Under the Canadian term mortgage, the interest rate changes
with each renewal.
some viability problems, with the result that the design is not
risk free to the Mortgage Insurance Fund (MIF). Provisions have
been put in place to protect project viability through various
workout provisions, some of which involve a deferred payment
loan from the MIF, with accumulated interest forgiven in the
event of compliance with loan conditions. Because of these work-
out provisions there have been no defaults. The cost of these
remedies and their impact on the mortgage insurance fund is not
publicly available.
Post-1985 programs
In 1985, the programs were once again changed. Like the 1973
amendments, this change followed a government-wide program
review instigated by a new Conservative government elected in
1984 as well as a national consultation process. A key outcome of
these reviews was a return to increased targeting, as fiscal
constraints dictated allocating limited funds only to those in
need. (The 1978–85 programs had been castigated for housing
“nonneedy” middle-income households.) The other important
change was a new spirit of cooperative federalism in which the
government wished to induce greater provincial involvement in
what had become almost a unilaterally funded area. Thus,
federal-provincial cost sharing reminiscent of the public housing
era returned.
Current situation
Although the 1985 social housing programs have not been offi-
cially terminated, federal government budgets over the past few
years have regularly reduced the level of new subsidy funding
available. This culminated in the February 1993 federal govern-
ment budget, which froze CMHC’s total annual assistance
budget at about $2 billion, starting in 1994. Development, in
terms of new social housing supply under the main social hous-
ing programs, last occurred in 1993, with limited program activ-
ity from 1994 on. The February 1994 federal government budget
did not reverse that decision, although it did reinstate the RRAP
for homeowners, a program that assists in the remediation of
under this program occurs in rural areas and small towns, since
that is where a large portion of homeowners in core housing need
live. Approaches that maintain the existing dwelling can be
effective in reducing the demand for new social housing.
Under the Home Buyers Plan, individuals who have not owned a
home for the past five years can withdraw up to $20,000 from
their Registered Retirement Savings Plan (RRSP) to purchase a
home. While separate from the FHLI program, the Home Buyers
Plan can be used to provide the 5 percent down payment for the
FHLI.
Data on the actual target group are not available, but CMHC’s
housing affordability indicator shows that in most urban centers
a large percentage of renter households (over one-third in all
areas except Toronto, Vancouver, and Victoria) could afford to
purchase a starter home.7 Households in core housing need
would typically not have enough income to qualify.
Index-linked mortgages
When interest rates rose in the early 1980s, assistance costs for
projects also rose. Even small increases in the interest rate
resulted in major increases in assistance costs. The impact of
inflation on nominal interest rates became a serious problem,
and the discussion of alternative mortgage instruments prolifer-
ated in the housing literature (e.g., Follain and Struyk 1977;
Gau and Jones 1982; Goldberg 1983).
There has been some discussion in the third sector about poten-
tial savings through more efficient and effective operations;
however, there are few incentives to encourage or support such
endeavors, aside from the general desire to keep costs down to
842 Nick Van Dyk
Except for a brief period in the 1970s, Canada has not experi-
mented with using the tax system as a vehicle for stimulating
the production of affordable housing. The results of these en-
deavors suggest that this is not an efficient mechanism, a find-
ing also confirmed through analysis of the real cost and benefits
of the low-income housing tax credit in the United States. Ac-
cordingly, this is not a desirable area of attention for the Cana-
dian housing sector.
Author
Nick Van Dyk is an independent housing policy consultant with a special
interest in social housing development and management. He has worked for
the Co-operative Housing Federation of Canada, the Canadian Housing and
Renewal Association, and Canada Mortgage and Housing Corporation.
References
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