Benjamin Tal, CIBC’s Deputy Chief Economist, talks to the Hon. Lisa Raitt about his recent paper on why modular housing could be part of the solution when it comes to tackling the supply side issue of housing affordability.
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Lisa Raitt: Thank you for tuning in to The Raitt Stuff. I’m your host Lisa Raitt and in this podcast I’m going to share insights on current hot topics in the areas of public policy, politics and business, with some guests along the way. Welcome back to The Raitt Stuff. Today we’re going to talk about housing because that is a topic that is near and dear to so many people’s hearts. And I have a fantastic guest for us to discuss this with. It’s Benjamin Tal, who is the Managing Director and Deputy Chief Economist here at CIBC. You may very well know him from his groundbreaking published research topics on labor market dynamics, on real estate, credit markets, business economic conditions. He not only contributes to the conversation, but a lot of the times as he has in this particular topic, sets the agenda. He’s a member of the Economic Committee of the Canadian Chamber of Commerce and the Economic Development Committee of the Toronto Board of Trade. Benny, thank you very much for joining me here today.
Benjamin Tal: It’s a pleasure, wonderful to be with you.
Lisa Raitt: We talked about housing in the past and everybody talks about housing because you could be a parent who has kids who wants to get into the housing market or you could be a homeowner worrying about whether or not your value of your home is going to go up or go down or you could just be somebody who’s interested in investing in the area. It’s definitely the hot topic. Give us an idea if you could about where we stand today in Canada. Have we moved the needle at all with respect to the supply of housing? Have we figured out how to crack the problem we have here with respect to affordable housing for Canadians in general?
Benjamin Tal: Yeah, the short answer is really no, that’s the short answer. Quite frankly, I’m very concerned about the situation. We have to realize that we have a generation of Canadians that cannot even dream about owning a house. I think that we are in a full blown affordability crisis and I’m not using this term lightly. I do believe that if we don’t deal with it, urgently, urgently, the way we dealt with COVID urgently, we are going to have pockets of civil unrest. We are going to have anti-immigrant sentiments because you have to blame somebody. We are going to have renter strikes. It’s starting already. This is a major issue. And from too many years, we have been using demand tools to deal with what is actually a supply issue. And that’s something that was misguided, quite frankly, subpar. Now for the first time, and that’s really positive, all governments at all levels realize that the supply issue is the major factor and they’re willing to do something about it. Why? Because everybody knows that the next election will be all about housing. So there is a sense of urgency to do it. The question is, are we doing it in the right way? That’s a key question.
Lisa Raitt: So tell me and give us an example of a demand tool that didn’t work with respect to housing. Tell us what the mistakes were we made in the past so that we can figure out how to not make them in the future.
Benjamin Tal: Yes, so basically what happened over the past 15 years is that people say housing is unaffordable, house prices are too expensive, people cannot afford it, young people cannot enter the housing. So let’s make it more affordable for them. How? Well, let them increase amortization, do all kinds of other tricks to make the mortgage payments lower. That’s the opposite of what you want to do, because it means that more and more people will be qualifying to buy the house, even if they cannot afford it, they will put upward pressure on house prices and affordability is being lost. That’s exactly how we created this affordability crisis. The issue is not demand, the issue is supply. We need to build much more than we are building now, much faster, much smarter. This is not just to give goodies to first time home buyers, it’s actually building affordable housing supply. So supply is the best affordability policy in my opinion.
Lisa Raitt:And that’s exactly why we’re actually speaking today because you have a new paper that came out where you’re talking about a new model and on the supply issue of trying to get supply, I would assume more quickly, you write about modular temporary housing. Tell us a little bit about that. It’s not what you think of. It’s not a trailer park on the outskirts of a community. This is something different.
Benjamin Tal: Absolutely, it’s very different and it’s doable. What I mean by that is the following. If you look at countries like Sweden, about 80 % of their new units are modular, are factory-made, 3D printed. So it’s not science fiction. The technology is there. In the US, they are very advanced in that. Now, why is it important? Because what’s happening now, Lisa, that’s extremely important. We have hundreds of developers, big developers sitting on a lot of land doing nothing. This land is doing nothing because they’re not building for many reasons. Now this land is accumulating nothing and basically costing the developers because they have to pay property tax and all this business and they have to maintain it. What if Lisa, if you lease that land to a non-profit, you lease that land to a municipality and then they build factory-made housing on a temporary basis for let’s say five years, 10 years.
It takes six months to build, by the way. The cost is not significant. Six months, can connect it to the infrastructure, to the sewage, to the water, whatever it’s doable in many sites. Then you cut the price of, of selling the land and you basically give developers a win-win situation because instead of sitting on nothing, they’re sitting on something that generate income, increase the productivity of their land. And then you can use that temporary housing to house refugees, non-permanent residents, students, foreign students, solve the issue that we are facing now because again, this is a crisis. We have to think outside the box and that’s one way of doing it.
Lisa Raitt: The specific aspect of crisis you’re talking about there is the one you defined at the end, which is it’s not just about houses affordable to an average Canadian family. We’re talking about affordable housing, meaning that some folks just have no ability even to pay the rent in the terms of what market rents look like in Ontario.
Benjamin Tal: Absolutely, absolutely. It’s a disaster, quite frankly, and I’m not using it lightly. And I’m very worried about the impact, the social impact of this reality. People simply cannot afford housing. If it’s rental housing, clearly not to buy housing. We need to think differently using the module model is so attractive in this environment. You create housing for a portion of the time and the cost municipalities can accelerate the process. The technology is there. Developers are happy because they’re getting something for their land. It’s a win-win-win situation. I think something that we have to consider. And I would like to see governments entering this space on a PPP basis in order to stimulate that in terms of taxation and many other ways.
Lisa Raitt: So you say that you think developers would welcome it. Are developers not sitting on the land though, just waiting for the right set of circumstances to build something that would be more lucrative for them?
Benjamin Tal: Absolutely, but many of them can wait for five years, no problem whatsoever. They have a plan to not to do anything for five years. Five years is a long time. If you can build something for six months, six, seven stories to basically house so many people, so many families that desperately need that housing, I think it’s a win-win. And then you get it back. And by the way, as far as the environment is concerned, you disassemble it and you reuse it. So it’s not expensive when it comes to the environmental cost.
Lisa Raitt : So if the land isn’t lost to the project, the land can come back to the developer should they desire?
Benjamin Tal: Absolutely. That’s the lease, the lease is ending. You disassemble the building and you build the permanent building there. I think it makes sense.
Lisa Raitt: Have you tried to have you run this past any current politicians? I’m a former politician and I think that’s it’s interesting, but have you run it by any current politicians?
Benjamin Tal: Not yet. I run it by many developers. They love the idea. I run it by many nonprofit. They love the idea. Municipalities, I spoke to Olivia Chow about it. Interested politicians? Not yet. We’ll see. That’s the last on the list.
Lisa Raitt : That’s the last hurdle to get through. What other advice would you give to folks in charge of making these decisions about how to encourage more supply on the market? Is there something else that you see as, I wouldn’t call this low-hanging fruit, but it does seem really simple and logical to get things done quickly. Is there anything else you can point to?
Benjamin Tal: Absolutely a lot. First of all, in addition to building differently, because the way productivity in the construction sector is in the basement. And let me ask you a simple question. You take a pilot from 50 years ago and put them in a plan today, they will be totally overwhelmed on all those buttons. You put the construction workers from 50 years ago in today’s side, they will be one of the guys immediately. So that’s something that we have to change. We cannot continue to build like 50 years ago.
That’s why you need this model. But in addition, we have to think differently. As I said in the past, a very big element of the solution to the affordability crisis is the rental solution. I want to create a situation in which you are 35 years old, you are married, you have two kids and you are renting, nothing is wrong with you. The way it is in Manhattan, Berlin, London. And I think that we have to change the way we think about this kind of environment.
Benjamin Tal : And the only way to do it is to increase the supply of purpose-built rental, not condos, purpose-built rental. We need to provide incentives. We won the war on the GST, HST. We were pushing for it. We got it. We’re going to get something else, I hope, in terms of the treatment of capital gain, 1031 exchange. Let’s hope that that happens. But I’m talking about much more significant incentives in terms of development charges, property tax, and that’s where it’s not so simple. And that’s my focus now in terms of the energy going to the public sector.
Lisa Raitt: Benny, thank you so very much for joining me here today. We covered a lot of ground in a short period of time. Is there anything out there, Benny, that you’d like to tell us about now? You’re very good at seeing into the future. You were very prescient when you told us about how many students that we had in Canada that we were probably unaware of, quite frankly, and now there’s government action on it. Anything like that that you can share with us.
Benjamin Tal: Yes, I think we have a window of opportunity in which both parties are eager to please the housing marketing, including construction and developers. Use this window of opportunity in which they are willing to accept your suggestions and push and push and push. That’s what I the industry because that’s something that will not repeat itself after the elections.
Lisa Raitt: Well, thank you very much. Appreciate your words. Thank you for joining us on The Raitt Stuff.
Benjamin Tal: Thank you, a pleasure.
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