New Brunswick needs rental reform—and fast

Moncton Mayor Dawn Arnold sounded giddy. “We have $270 million plus in new building permits,” she told the CBC, noting Moncton was “the hottest real estate market around.”

The sudden surge in interest amongst property investors in New Brunswick’s multi-family residential sector is pushing up housing costs in the province, especially for renters.

Yet, in the face of a looming crisis, the province’s political leaders assume the market will “adapt.”

That remains to be seen.

In the absence of a concerted public effort—one that would include public investment as well as rent controls and tenant protections—the province is on the cusp of an even greater housing affordability problem.

Faced with an unprecedented situation in its rental market, the provincial government continues to rely on staid and discredited supply and demand platitudes offered up by neoclassical economics.

Here’s some basic economics: Classically, housing is viewed as an immovable asset tied to the places people work and live that is difficult and costly to sell. Its price in perfectly competitive markets depends on local labour market conditions.

This is no longer the case. Both, the supply and demand for housing, have changed since 2008 in ways that significantly transform the future of housing in New Brunswick. Classical conditions no longer apply, if they ever did. Public policy needs to keep pace.

On the demand side of rental housing, vacancy rates have dropped and apartment building construction has expanded over the last decade. While some of this could be due to people moving here from away, the numbers do not bear this out. The Telegraph Journal reported Dec. 24 that net interprovincial migration to New Brunswick is only about 1,000 for this year, not a significant change over the last several years. International immigration is way down.

There is another explanation: the growth of single-person households. This is now the most common household form in Canada as of the 2016 census. Single-person households are more likely to rent than other household forms.

In the 1991 census, New Brunswick had 272,915 dwellings, and an average household size of 2.8 people. Today, there are more private dwellings (319,770 in 2016), but also smaller household sizes (2.3), meaning the overall availability of dwellings has declined. This is the main reason for the housing crisis, a problem that was acknowledged by the McKenna government back in 1995 (see pp. 22-23).

On top of these household demographic changes, there are also socio-economic ones. Since the early 1980s, Canada’s population has become markedly more unequal. This means that the composition of demand for housing has changed, with some people able to afford high rents in newbuild housing, and others less able to afford rents in older buildings.

The coronavirus crisis has made this inequality even worse. Record levels of unemployment and surging real estate prices have led to a national housing affordability crisis that is now spreading beyond Toronto and Vancouver.

New Brunswick’s housing market was relatively affordable compared to the rest of Canada, but the province also has higher levels of unemployment, lower labour market participation rates, an aging population (many on fixed incomes), and lower average incomes than other parts of Canada.

New Brunswick has the lowest median household income in Canada and the high levels of child poverty. Thirty-six per cent of New Brunswick renter households spend 30 per cent or more on rent and utilities, the common limit of housing affordability.

Inequality should be a concern to policymakers as the real estate market heats up. Rapidly rising prices will reduce affordability most for those on lower or fixed incomes.

Higher-income groups, however, may not even notice the affordability crisis—or their options may even expand. For example, although Airbnb owners may have suffered this year, the number of Airbnbs have increased consistently in New Brunswick since 2015.

According to AirDNA, an Airbnb consultant, landlords can double their income from properties if they can fill their units 2/3 of the time at ‘market rates.’ According to them, there are currently about 180 properties on Airbnb in Moncton despite the pandemic—70 per cent of them entire homes. The majority are in the high-amenity downtown area, where Real Estate Investment Trusts (REITs) have recently bought older, more affordable rental buildings and increased rents by as much as 50%. Still, Moncton recently took a pass on regulating Airbnb.

Financialization comes to New Brunswick

This brings us to dramatic changes in housing supply, which have accelerated since the 2008 global financial crisis.

The main new market actor influencing housing supply is the REIT and other private equity firms specializing in the purchase of ‘multi-family residential housing,’ e.g. rental housing.

Killam is the largest REIT operating in New Brunswick and its market size is growing. CMHC counts just under 35,000 rental units in multi-family dwellings in New Brunswick in October 2019. According to Killam, they own 4,900 of those units. On its own, it accounts for about one of every six rental units in Moncton and Fredericton.

That gives Killam significant market power—the ability to set its own price. It is not a monopoly, but because it owns such a large percentage of the market, its decisions influence all other rental suppliers. That power is much more significant in the tight rental market now developing in New Brunswick, and will grow as Killam purchases more properties.

Market power also allows companies like Killam to avoid dropping prices if and when vacancy rates rise, since it can absorb vacant units more easily across its vast portfolio, and does have a near monopoly on rental units in certain choice, high-amenity neighbourhoods.

New Brunswick is also very important to Killam. Eighteen per cent of its net operating income over the first 9 months of 2020 came from New Brunswick residential rentals. Only the Halifax portfolio generates more income.

But significantly, Killam draws 34 per cent of its operating income—nearly twice the amount for New Brunswick as a whole—from only 5,814 units in Halifax, just 900 more than they own in New Brunswick.

Killam’s November 2020 investment statement specifically states that its strategy is to increase earnings from its existing portfolio.

That can only mean increasing the rent.

They will do this as they have done – by buying older buildings and repurposing them for higher-income demand. Killam’s revenue-generating strategy targets ‘strong occupancy,’ in other words, tenants who pay higher rents.

It is important to understand that REITs like Killam are not technically in the business of renting. They are in the business of packaging rental income streams and selling them off to investors.

Rental housing in Canada has been ‘financialized’ as an asset class, which can be bought and sold seamlessly by investors across Canada and around the world.

Even before the Covid-19 crisis, large institutional investors were switching their portfolios from bonds to REITs, searching for higher returns.

Killam and other REITs are eager to invest in New Brunswick because there is strong demand for what they are selling: not rental units, but relatively safe asset-backed securities that generate returns derived from rental properties that are higher than bond yields.

Modernizing tenant protection

Which brings us to the issue of rent control and tenant protection. New Brunswick’s tenants are unprotected, providing REITs like Killam with an important advantage in their rental portfolio. Big investors in REITs know this, and pay attention to the underlying rental contracts they are investing in.

But what is good for REITs is not necessarily good for New Brunswickers. Rising rents don’t necessarily mean more investment in the rental sector and it won’t improve affordability by increasing rental supply. It just means higher returns to REIT investors—many of whom are not even in New Brunswick.

The financialization of housing in New Brunswick will lead to new affordability problems that will transform our cities and cost the public money as we deal with the downstream effects of greater housing insecurity such as homelessness.

The debate about rent controls and tenant protections deserves more than lazy references to neoclassical economics. It requires better knowledge of how the rental market is changing, and it requires public officials to make decisions in the best interests of the public, rather than investors.

Matthew Hayes is a professor of sociology and the Canada Research Chair in Global and International Studies at St. Thomas University.