By Andrey Pavlov, Ph.D., Goodman Report

Vancouver Mayor Kennedy Stewart apparently had a very productive visit to Seattle a couple of weeks ago. In an interview during his visit the mayor said he would like “to get a better understanding of how Seattle has built so much rental housing.”

The Mayor is right to be curious: Seattle built 17,450 purpose-built rental units in 2018. A Seattle Times article from earlier this year gave telling examples of landlords offering incentives to tenants. One struck me in particular: “2 months free plus a $1,000 gift card if you move in within 1 week!”

Compare this to the near-zero vacancy rate in Vancouver, where the Goodman Report counted only 1,364 new rental units were built in the same year. Seattle is bigger than Vancouver for sure, but it’s not 13 times bigger!

So Mayor Stewart is correct to be curious, but he is incorrect to look for the answer in Seattle. The 17,450 new rental units is the normal and expected free market response to rising demand.

So instead of asking how Seattle has built so much rental housing, the Mayor should be asking what we have done in Vancouver to prevent the same outcome.

It’s not rocket science. When the demand for apples goes up, normal people plant more trees. It takes a few years, but sooner or later there’s enough apples to meet the higher demand. Perhaps even enough to ship some to China and add capital to the local orchard.

But when the demand for housing, especially rental housing, in Vancouver increases, we don’t build more. On the contrary, we do everything we can to sabotage new supply:

Rent control

Rental-only zoning used to “downzone”

12-year old moratorium on the demolition of rental buildings in Vancouver

Sales taxes on land purchase and on construction costs

School Tax on development land while waiting for permits

Years-long development review process

Hostile City Councilors

It’s hard to pick the biggest villain from the above long list, but let’s start with rent control. A recent paper on the topic published in the American Economic Review, the most prestigious economics journal, uses data from San Francisco to find that: “In the long run, landlords’ substitution toward owner-occupied and newly constructed rental housing not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply toward less affordable types of housing that likely cater to the tastes of higher income individuals.” The authors further conclude: “Taking all of these points together, it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal.”

It’s not just rent control. The provincial government gave cities the power to introduce rental-only zoning. It was meant to ensure that new projects that promise to provide rental units, perhaps in exchange for a density bonus, keep their promise. This was supposed to be a way to incentivize new purpose-built rental development. Instead, cities like Burnaby, New Westminster, and Victoria are considering or have already implemented rental-only zoning on existing buildings, without the consent of the owners and without an appropriate density bonus. This has exactly the opposite effect of the intended goal – it turns rental housing into a toxic asset. Most investors like to keep their capital away from such assets. The companies which seek them out are called “vulture funds.” As the name suggests, they do not make for good landlords.

Ok, so we abuse current landlords because they are stuck with us. They can fume and complain, likely sell, but they cannot move their buildings elsewhere.

What really puzzles me is why we treat new development projects the same way. Rental-only zoning, even just the possibility of it, not only expropriates from the current owners but also ensures that we will not get a rental building on any property that does not already have one. Why would anyone in their right mind risk such a severe down-zoning of their land? So the only possibility for an increase in rental supply is to re-develop existing rental buildings. But that has also been ruled out by a 12-year old moratorium on demolishing rental buildings that covers over 95% of Vancouver. In other words, we can neither add new rental buildings nor redevelop existing ones.

Even if somebody somehow manages to make a rental project work (how is beyond me), we hold their application at City Hall for years. A recent Altus Group report shows that about 1/3rd of units in development applications in Vancouver submitted in 2016 are still under review in 2019. Nearly ¾ of applications submitted in 2017 are still under review two years later.

So you wait two, three, or more years for your development application to get reviewed, during which time you’re paying interest on the land purchase, property taxes, and even the so-called School Tax on the entire property. Sooner or later, usually much later, you get to City Council for final approval. That’s when you get yet another insult. Your project gets questioned, and possibly denied, because market rents are too high! You read that right – we block new rental housing because we don’t have enough rental housing. This doesn’t just defy basic economics; it defies basic common sense.

So, Mayor Stewart, it is not surprising that Seattle got 17,450 new purpose-built rental units in 2018. What is surprising is that Vancouver got 1,364 new units given how we treat current and new landlords at both the provincial and the municipal level. If we keep this up, we’ll get zero next time.

Andrey Pavlov, Ph.D.

Professor of Finance

Beedie School of Business

Simon Fraser University