Conclusions Based On Flawed Assumptions

Conclusions based on flawed assumptions are ultimately flawed conclusions. That makes sense. But when governments are involved, they don’t seem to adhere to that basic law of nature.

Real estate developers will soon have to create or fund social and affordable housing if they want to build in Montreal.

Projet Montreal passed a new housing bylaw in June of this year, following through on a campaign promise to give Montrealers more affordable housing.

The new bylaw aims to regulate the real estate market and improve upon its current vacancy rate of 1.9 per cent, the lowest in years.

Developers would have to enter into an agreement with the city to build affordable and social housing units, and family housing units, or give land to the city or make a financial contribution in lieu of building the finished units.

The Mayor is hoping to get land for free out of the new rules. On a big project for example in downtown Montreal, The Mayor hopes it's going to be more interesting financially for developers to give the city land so the city can develop social and affordable housing.

The number of units required to be social, affordable or family will depend on how many are being built overall and the location in the city.

For example, for a building with 50 or more units downtown, a developer would have to build:

- social housing equal to 20 per cent of the project

-  affordable housing equal to 10-15 per cent of the project

-  family housing equal to 5 per cent of the project

The city expects condo prices to rise by 2 to 4 per cent because of the bylaw.

I have to tell you that as a developer, it’s increasingly difficult to make the numbers work in today’s environment. This is simply based on the rising cost of construction, increased taxes and levies from government. For example, the development charges from the city have been steadily increasing and growing much faster than the rate of inflation. Only a few years ago, the federal government significantly reduced the value added tax rebate on new construction. This means that a developer needs to charge a 13% sales tax on the sale price of a new property. There is a small rebate, but most of the tax gets passed onto the end-buyer. Since the resale market has not gone up by 13% to compensate for this, it has had the impact of reducing or outright eliminating the profit margin for developers who build new housing. The industry still has not fully absorbed the additional tax. Many builders have exited the business entirely because the numbers no longer make sense. The smaller number of builders has created increased competition for fewer resources in the construction industry, which in turn has increased labor costs for construction.

If we now have to build a significant proportion of the project that will introduce a loss and negative cash flow, the number of viable projects will decline.

What government officials fail to recognize is that investment money has no geographic restriction. People who live in a geographic area don’t want to move. They are often anchored in their community. Money has no such restriction. The greater Montreal area is made up of several municipalities. If prices in the downtown are going to go up by 5% to accommodate this new bylaw, some will simply choose to live in one of the neighbouring communities.

The truth is that if you take 1/4 of a project and make it unprofitable, you need to compensate for that in other parts of the project. My financial models show that the real impact to maintain parity would require a price increase of 10% on the remaining units in order to make a project viable with the loss of profit from the affordable units.

This is yet another example of government using flawed math to justify their position. Conclusions based on flawed assumptions are ultimately flawed conclusions.