End of an Era: Does Social Housing have a Future?

Keynote Presentation to the Manitoba Non-Profit Housing Association Annual Conference Nov 22nd, 2013Steve Pomeroy Focus Consulting Inc. & Carleton University Centre for Urban Research and Education

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Key Observations• Past decade has been a period of fundamental change in the

housing market and this has important consequences for the way governments (re) shape housing policy

• What happens in housing markets has impacts and implications for the affordable-social housing part of the housing system

• The scheduled termination of substantial federal housing subsidy similarly has profound implications for social housing

• This creates both challenges and opportunities for social housing providers and advocates

• Can you envision and reinvent a more sustainable future?

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Housing Bubble?

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4No, because fundamentals support prices

Fundamentals drive prices

• Demographics: Natural growth and migration

• Labour market: number of workers in labour force

• Income of workers (households) • Cost to finance: interest rates• Underwriting: mortgage insurance policy

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Growing Population- Migrants

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6Net migrants predominantly families and international

More people working, earning

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Since 2000, yr-yr % change in wages has exceeded yr-yr change in pop = growing economy

Corroborating impacts: income gains and low interest

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8Average earned income of “economic families”

Policy Changes - Amortization• Federal policy change to increase maximum amortization on

insured loans

• 2006: reduced DP to 0%• 2008: LTV 75% to 80%; reintroduce min 5% DP• Maximum LTV on refinancing reduced from 85% to 80%

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Ownership affordability

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Amount that average family income can borrow at prevailing 5 yr. mortgage rate

Added effect of new borrowing rules, at 40 yrs increases leverage by about $40k

Dramatic improvement in ownership affordability

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Demand stimulates constructionEmerging condo; strong rental

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12Note approx 15% new condo starts are investors = rental

Different pattern in starts Winnipeg vs. National

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• Since 2001, 19% starts are rental; but renters = 33% all HH

• Starts not significantly impacting total rental stock = mainly replacement

Homeowner market growth

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15Census data: No net growth in number renter households

Migration impacted rental, but only partly

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Rental vacancies below 2% since 1999, but not as tight as expected

Key factor in changing vacancy rate was migration, not starts

Migration impacted rental, but only partly

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Tightening Rental Market

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But again, less than might be expected

Vacancies down, rents up

Easy access to ownership key factor releasing pressure from rental market

• Released potential pressure on the rental market

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Will this continue?

• Key policy question is whether this ownership “release value” will remain in effect

• Suggest it will not• Will place new pressure on rental sector with further

tightening of vacancies and more upward pressure on rents

• Main variable is how migration trends as we go forward

• If city economic development wants growth, and province wants to attract international migrants, need to manage impacts (invest in housing supply)

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Rental and Affordable Housing• Overlooked sectors during ownership

boom• Will now emerge as critical policy issues• Minimal growth in rental (mainly

replacement & some 4,000 affordable) • Serious erosion of lower rent part of rent

stock • And federal subsidies now starting to

expire

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Rent increases exceed inflation

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Erosion of lower rent units

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• Reducing availability of low rent units impacts most vulnerable

• What are policy options?

Nominal rent categories, not adjusted for inflation

And declining federal subsidies on existing social housing

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• To date subsidy expired on 3,900 units, reducing federal spending by $14 million;

• Next 6 years additional 8,500 units with $21 mill in subsidy will end

Federal subsidy linked to mortgage amortization: 50 yrs on PH and early NP; or 35 years on NP & Co-op since 1978

Is the sky falling?

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• Federal subsidy ending, but so are mortgages• Some projects will face a challenge – Province may help• Many will have new opportunities• (more details in separate workshop to follow)

End of an Era: opening of a new one?• As Federal subsidies end & market trends

continue to evolve, the social/affordable sector will be impacted

• Need to have a strong presence and role – but what is it?• 50 years of activity• Some ownership and management capacity• Some assets & some liabilities

• New provincial association – setting a new course, new strategic direction, a new era?

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Is the existing social housing sector sustainable? • I think not:

• Amalgam of individual providers vs. strong sector• Fragmented ownership – many small providers• Highly dependent on public subsidy (and renewal thereof) • Limited capacity to revitalize and redevelop properties • Limited capacity to leverage existing assets (credibility to lenders,

strength of security, professionalism and expertise) • Perverse subsidy and rent system that:

• Undermines sustainability• Creates disincentives to work and fails to support better outcomes

for residents

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A new vision: a sustainable sector• Characteristics of sustainable sector:• Capable – professional, human resources /expertise• Less reliant on government – a partner not a dependent• Investible – attractive partner for lenders, philanthropic

investors, government to achieve their goals• Resourceful and entrepreneurial – able to leverage existing

assets• Compassionate but business focused – with a social mission • Exist to preserve and expand opportunities for low-income

and vulnerable households to secure appropriate and affordable housing

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Apologies to JFK

• Ask not what government can do for the social housing sector; ask what the sector can do for government

• How do we reinvent ourselves as a strong vibrant effective professional sector that government will WANT to invest in

• How can we position social/affordable housing as a platform to create better outcomes for low income families and children? • Health, education labour market outcomes

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Learn from Mistakes of Past• Build cheap inexpensive housing for poor people or build

sound good quality, but modest housing?• MUPs to control cost (utility and maintenance impacts)• Can’t create affordable housing – create housing then add

assistance so it can be affordable (e.g. early sec 15/27 no subsidy, then added RS)

• Project based subsidy highly inefficient (admin oversight)• RGI model (especially with income assist minimum rents) robs the

asset of viability• Cannot build equity, cannot build reserves cannot be sustainable• Wrong type of government support (became dependent)

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Create Opportunity: International examples • UK housing associations• Netherlands Housing Companies• South Africa Social Housing Institutions• US “vouchering out”/moving to opportunity• with gov’t, but lever their accumulated assets

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Lessons in International examples • What makes them different and inspiring?

• All separate asset from rental support• Use their asset base and corporate balance sheet

to lever financing for expansion• Partner with gov’t, but lever their accumulated

assets (i.e. not wholly dependent on govt $)

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Insights and options• Create capacity to build equity for reinvestment (long term

sustainability and increased self reliance)• With low rents, valuations are low or negative (but can rectify)• What’s necessary to optimize potential financial leverage?

• Reform subsidy model, separate personal rental assistance from project based

• Reform social assistance minimum rents• Post expiry, not social, so max shelter component

• Need scale to be professional and investible• Explore consolidation of single project providers • Explore group structures, land trusts to hold assets

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Insights and options (cont’d)• Examine existing assets and opportunities to

intensity/redevelop• Benefit of rising house prices

• Your property values have increased (underlying land values) • Selection disposition of valuable assets to reinvest elsewhere?

• Value of NP ownership in in preserving long term affordability• Break-even costs rise slower than market rent (Ekos/Ottawa)• At low end market rent achieve leverage but can also offer

government some competitive advantage (e.g. cost of stacked rent supplements)

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Role of Government(s)• Fundamentally housing affordability is an income issue

• Income redistribution remains important• Provide subsidies to household not projects (province?)

• Argument for some capital funding for retrofit (e.g. under CEAP) = federal role

• EOA maturing mortgages creates federal direct financing room• Use to for low cost financing for renewal and expansion

• Responding to declining federal subsidies• Some important issues (especially underfunded capital renewal) • But pursue as opportunity, create attractive proposition for

investment (political win win)

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A Bold New Social Sector

• Don’t settle for just preserving what you have • Set the bar higher – dream and think big• Create new opportunities for low income and

vulnerable people to live and succeed• Become more self reliant and sustainable

• Challenge yourselves and government

• Together you CAN DO BETTER!

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Thank you

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Additional background reports available at www.focus-consult.com

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