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HousingFinancing Social•Housing

Policy Debate Volumein

6, Canada
Issue 4 815
© Fannie Mae 1995. All Rights Reserved.

Financing Social Housing in Canada

Nick Van Dyk

Housing Policy Consultant

This article examines the mechanisms used since the 1970s to finance social
housing in Canada. It reveals that direct government assistance has proven to
be the most cost-effective mechanism. Experimentation with alternative
mortgage instruments such as the graduated-payment mortgage and the
index-linked mortgage has also been central to the attempt to minimize
subsidy and financing costs.

The article concludes that the possibility of further enhancements in social

housing finance is limited at best. The problem remains the gap between the
cost of developing new social housing and the revenues generated from rents.
Various partnership approaches have been tried, but none has been successful
in providing housing at low rent levels. Some potential does exist, however, to
refinance older social housing developments and draw equity out of them. This
may be the only source of new funding available because federal assistance to
new social housing developments has been frozen.

Keywords: Canada; Financing; Low-income housing; Nonprofit sector


The purpose of this article is to review the financing mechanisms

and approaches used to construct, rehabilitate, and acquire
social housing in Canada and to discuss current issues in the
financing of social housing. As is the case in the United States
and the U.K., social housing production in Canada has been
increasingly curtailed throughout the past decade. In the context
of an increasing government deficit, attention has focused on
alternative financing to replace government funding.

This article reviews the approaches that were used to procure

the existing stock of public and social housing in Canada. Even
though these programs no longer receive new funding, it may be
instructive to readers from other countries to learn about their
successes and limitations. The article then describes the current
situation in Canada, including the basis for the freeze on new
social housing production, efforts to achieve efficiencies within
816 Nick Van Dyk

the existing publicly assisted stock, and the ongoing modest

efforts to provide affordable housing through public-private
partnerships. The most recent attempts at innovation in financ-
ing mechanisms are examined, and the article concludes with a
number of policy implications and suggestions intended to stimu-
late further discussion of alternatives.

This article focuses primarily on the financing mechanisms used

to support the production of social housing, although rehabilita-
tion and private rental incentive programs are briefly mentioned
to complete the context. Person-based subsidies (shelter allow-
ances similar to the Housing Benefit in the U.K. or housing
vouchers in the United States) are not discussed. With the excep-
tion of small shelter allowance programs in four provinces
(assisting in total less than 70,000 households, mostly seniors),
there are no person-based housing assistance programs in
Canada. However, income-assistance programs, delivered by
each province and cost-shared by the federal government, im-
plicitly include an allowance for shelter in calculating the total
support benefit, although this allowance is not explicitly
budgeted or recorded. The amount of shelter assistance flowing
to income-assistance recipients through these programs has been
estimated as $5.3 billion. This exceeds the total explicit housing
expenditures of both levels of government ($4.1 billion)
(Canadian Housing and Renewal Association [CHRA] 1994).


The existing stock of federally assisted public and social housing

amounts to some 650,000 units, representing approximately
6 percent of the total stock of housing. See table 1 for the num-
ber of units assisted under federal or jointly funded programs
and the level of federal funding effective December 1992.1 Most
provinces are involved in some form of cost sharing for much of
this social housing stock. In addition, a few provinces have, or
had, unilateral provincial programs. While data are not readily
available for projects with only provincial funding, these projects
include approximately 60,000 to 70,000 units, mostly in Ontario
and Alberta. This increases the total size of the assisted stock to
about 700,000 units, or about 7 percent of the total national
housing stock.

1 There is some double counting in these figures, primarily relating to rent

supplement units, almost 8,000 of which are stacked on nonprofit projects
while almost 6,000 are stacked on the federal cooperative housing program
(deemed to be a market program as units are not targeted to low income).
Financing Social Housing in Canada 817

Table 1. CMHC Assisted-Housing Portfolio, December 1992

1992 Subsidy
Category No. of Units (Thousand Can$)

Social housing
Cooperative housing 50,937 163.7
Low-rent housing 117,254 21.0
Nonprofit housing 155,699 558.5
On-reserve housing 13,197 68.4
Public housing 205,752 495.6
Rent supplement 46,032 96.7
Rural and native housing 23,535 126.2
Urban-native housing 9,355 81.2
Subtotal 621,761 1,611.3
Rental residential rehabilitation assistance 17,402 1.4
Market housing
Federal cooperative 13,578 31.3
Total 652,741 1,644.0

Source: Canada Mortgage and Housing Corporation (1992a).

In Canada, the term “social housing” is often used to refer to

assisted housing owned and operated by the nonprofit and coop-
erative housing organizations generally known as the “third
sector.” Nonprofit and cooperative housing accounts for almost
two-thirds of this stock; it is distinguished from earlier forms of
assisted housing (public housing) that make up the remaining
one-third. The term “social housing” is used in this article to
refer to the entire assisted stock. As is evident from table 1, a
small portion of the social housing stock includes rural housing
and rent supplements. In addition, some 51,000 units are in
private rental properties but governed by operating agreements
to restrict rents to an affordable level.2

In table 1 social housing includes all housing owned and oper-

ated by the government (public housing), the third sector (non-
profit, cooperative, and rural), and native organizations
(on-reserve, urban-native, and native), plus some private sector
rental housing (rent supplement and low-rent). All of the as-
sisted housing developed by government and the third sector
before 1985 is included as social housing, but assisted housing
developed by cooperatives after 1985 (14,710 units) is considered
to be market housing since it was not specifically targeted to

2 These low-rent units are in limited dividend private rental properties similar
to Section 236 rental projects in the United States. They are discussed in
detail later in this article.
818 Nick Van Dyk

households in need. However, a percentage (between 30 and

50 percent, depending on the province) of the latter units qualify
for rent supplements, and those are considered to be social

Housing assisted under the Rental Rehabilitation Assistance

Program (RRAP) is sometimes considered social housing and
includes privately owned rental housing whose residents are
households that qualify as being in core housing need. Other
publications on housing in Canada (e.g., Canada Mortgage and
Housing Corporation [CMHC] 1992b) include the rental rehabili-
tation units (and also the federal cooperative units) as social

“Social housing” refers to housing in the public or nonprofit

sectors; however, the scope of this article is somewhat broader. It
looks at the financing of affordable housing in general, including
some forms of housing that would be described as market hous-
ing by the Canadian government. It encompasses housing that is
affordable to households whose incomes, while still low or moder-
ate, are above the defined core need thresholds.

Before the early 1970s, most assisted housing was provided and
managed by public housing authorities funded jointly by federal
and provincial governments. Through the 1960s much of this
public housing was developed in areas of urban renewal and was
seen as a panacea for urban blight.

As is the case in the U.K. and United States, large-scale projects

of concentrated lower income households led to physical and
social decline and the labeling of these projects as ghettos. The
subject of a number of important reviews (Dennis 1972; Federal
Task Force on Housing and Urban Development 1969; Lithwick
1970), this method of providing housing for lower income house-
holds was significantly reformed in the 1973 amendments to the
National Housing Act (NHA). The era of social housing com-
menced with a focus on small-scale, community-based nonprofit
and cooperative associations.

As discussed in some detail by Dreier and Hulchanski (1993),

this focus represented a significant divergence in housing poli-
cies in the United States and Canada as each reacted to the
perceived failures of public housing and urban renewal. Reflect-
ing a political ideology that more strongly favors the private
market and a more powerful private real estate lobby, the
United States turned toward a greater reliance on private
provision, premised largely on person-based subsidies deemed to
Financing Social Housing in Canada 819

enhance personal choice. In contrast, Canada reacted by con-

sciously emphasizing the development of a third sector (i.e.,
other than the public or private sector) as the principal vehicle
through which to continue developing a permanent stock of
affordable housing, owned and operated outside the vagaries of
the private market. Promoted by reform-minded advisors, this
approach was implemented in 1973 by a minority government in
which the social democrats held the balance of power.

A central part of the social housing policies that prevailed from

1973 to 1985 was the concept of social mix—income-integrated
projects intended to avoid the earlier problems of concentrated
poverty inherent in public housing. During this period, there was
no income ceiling on eligible tenants. Social housing projects
attempted to mirror the general society—they were to be projects
in which poor people could live, rather than projects for poor
people (Pomeroy 1993).

A commitment to this supply-oriented, third sector approach was

sustained through conservative governments from 1984 to 1993.
Indeed, a consultation paper issued by the Conservative housing
minister in 1985 observed that social housing programs directed
to those who cannot afford decent housing reflect a recognition
that private markets, even well-functioning ones, cannot deal
with these problems. This acknowledgment notwithstanding, the
emphasis of housing policy in Canada has traditionally revolved
around the notion of facilitating the effective functioning of the
private market—through the development of an effective mort-
gage finance system—with social housing taking a residual role
in filling the gaps in the market system. The reorientation of
social housing policy at this juncture was primarily in the form
of inducing greater provincial involvement and cost sharing and
moving away from the social mix concept to one of targeting
limited resources to households in need.

Within this policy context, another important difference between

Canada and the other countries is the role of the tax system.
Although tax provisions have historically been an important
influence on the production of private rental housing, they have
not, to date, been a vehicle for the procurement of social housing.
While some policy analysts in Canada have examined the United
States’ use of tax-exempt bonds and low-income housing tax
credits, the general conclusion is that these are not efficient
vehicles and serve to obfuscate actual expenditures paid through
the tax system (CHRA 1991; Fallis 1990). An analysis of joint
ventures in the United States has revealed considerable ineffi-
ciency in these approaches, largely the result of the complexity of
820 Nick Van Dyk

the arrangements and high intermediary costs (Stegman 1991).

The policy direction in Canada does not appear poised to em-
brace such approaches. Indeed, the direction of tax reform
through the 1980s was toward the disentanglement of the tax
system. Also, unlike those of the U.K. and the United States, the
Canadian tax system does not permit mortgage interest deduct-
ibility, nor does it impose any capital gains tax on the sale of a
principal residence.

Core housing need in Canada

Public intervention in the provision of social housing is premised

on an unmet housing need, implying some inefficiency or lack of
interest on the part of the system of private market provision. In
Canada, housing need is assessed under a core housing need
model. This model defines households in need as those that
cannot obtain unsubsidized market rental housing meeting
suitability and adequacy standards without paying 30 percent or
more of household income. An income criterion is used to exclude
higher income households that may pay more than 30 percent of
their income but are not deemed to be in need. This core need
income threshold (CNIT) is based on the income required to
afford a rental unit of suitable size for the specific household
that rents at the average market rent in its city. The most recent
published information on core housing need in Canada is based
on 1991 data. See table 2 for comparisons of core housing need
information for 1988 and 1991.

Table 2. Core Housing Need in Canada, 1988 and 1991

Number of Households
Household Type 1988 1991

Seniors 363,000 335,000

Couple families 310,000 253,000
Single-parent families 187,000 215,000
Nonfamily singles 401,000 361,000
Total 1,261,000 1,164,000

Source: CMHC (1991, 1993b).

In 1991, 2.9 million households (about 30 percent of the house-

holds in Canada) experienced housing conditions that did not
meet one or more of the basic standards of affordability, physical
adequacy, and suitability. However, 60 percent of these house-
holds had incomes above the CNIT and thus were considered to
have the means to improve their housing conditions on their
Financing Social Housing in Canada 821

own. The remaining 1.16 million households—12 percent of all

households—were defined to be in core housing need. Seventy-
three percent of these were renter households; the rest were
homeowners. About one-quarter of all renter households were in
core housing need.

In 1988, the data showed that 1.26 million households were in

core housing need. In the three-year period between surveys, the
incidence of core need dropped by about 100,000 households.
This drop was partly a reflection of the improved situation for
seniors and singles and partly the result of methodological re-
finements to more accurately identify households in need (CMHC

These numbers indicate a significant housing need—almost one

in eight households—that will not be dealt with in the immedi-
ate future given the current low level of social housing activity,
which reinforces the need to examine alternative approaches to
providing affordable housing.

A brief historical review of social and affordable

housing financing in Canada

Pre-1973 programs

Before 1973, social housing was mainly public housing. Most of

the financing was provided directly through the federal housing
agency, CMHC, with provincial governments contributing 10 to
25 percent of the capital. The loans were secured by 50-year
fixed-rate mortgages. The residents paid rent based on income,
and the difference between this revenue and the full project
operating costs (including mortgage repayment) was covered by
an operating subsidy that was cost-shared between the federal
and provincial (and sometimes municipal) governments. The
direct mortgage was provided at an interest rate based on the
government’s long-term borrowing rate plus administration costs
for CMHC.

Public housing uses a point rating system to allocate available

units to households that are most in need, which means that
public housing is fully targeted to low-income households. The
household pays 25 to 30 percent of its income, depending on the
province, to live in public housing. When a household’s income
increases to the point that it would be paying more than the
market rent, that household moves out, making the unit
available for a new household in need.
822 Nick Van Dyk

An obvious consequence of the point rating system is a concen-

tration of most needy households. This concentration is further
exacerbated by the rent-geared-to-income (RGI) formula, which
effectively causes the economic eviction of households that in-
crease their income. While the point rating system persisted in
public housing, the nonprofit sector in the 1970s avoided these
problems by using market and low-end-of-market (LEM) rent
ceilings to avoid kick-out incentives, since these would have been
contrary to the concept of social mix.

In the face of increasing fiscal contraints, as well as negative

media reports about high-income households benefiting from
social housing subsidies, the practice of income mixing was
abruptly halted in 1985. The RGI mechanism was reintroduced
and rent ceilings precluded. The smaller, community-based
projects were expected to avoid the problems associated with
large public housing projects while still targeting assistance to
only low-income households. Provinces were permitted to con-
tinue income mixing provided that nontargeted market-rent
units were unilaterally subsidized by the province (since market
rents did not fully cover economic rents). Only one province,
Ontario, pursued this approach between 1985 and 1994.

Before 1973, additional affordable housing was provided through

a “limited dividend” program that encouraged private investors
to develop and operate low- to moderate-rent housing.3 Rents on
these projects were based on break-even costs and a rate of
return approved by the government. The developers benefited
from high-ratio, direct government loans at interest rates ap-
proximately 2 percent below prevailing conventional mortgage
rates. Projects were governed by an operating agreement that
dictated the targeting of units to households below specified
income levels and placed restrictions on rent increases. The
agreement was in force through the duration of the mortgage
(50 years), but prepayment privileges were permitted after
15 years.4

This program was very similar in concept to the Section 236

subsidized rental housing program in the United States. Not
surprisingly, the “expiring use” problem evident under Section

3 A parallel nonprofit housing program was also developed under this legisla-
tion involving similar terms, although the limited return on equity was
nonapplicable. These nonprofit low-rental units account for two-thirds of the
units identified under this line in table 1.
4The prepayment option did not exist for projects built before 1969 (about
20 percent) but was subsequently extended to these owners.
Financing Social Housing in Canada 823

236 has also confronted these limited-dividend projects. In the

16th year, owners could fully repay the loan and release them-
selves from the restrictions of the operating agreement. Many
landlords then sought to raise rents to increase the capitalized
value of the properties, causing difficulties for low-income ten-
ants. Various efforts to negotiate supplemental agreements with
landlords met with limited success.

In the early 1970s, in response to a worsening housing market,

the federal government implemented the $200 Million Innova-
tive Housing Program. This program was available to both the
private and third sectors. It provided direct government mort-
gages for 95 percent of a project’s capital cost at an interest rate
slightly below market. The intent of the program was to encour-
age the development of innovative housing forms (e.g., higher
density, nonapartment forms) or housing tenure (e.g., coopera-
tives). Most projects developed were for private or condominium
ownership, but a few nonprofit cooperatives were also developed.

In the cooperatives, residents made a 5 percent equity contribu-

tion. For a project to be viable, the rents (“housing charges” in
co-ops), which had to cover the full mortgage payment and all
operating costs, were to be market or below-market rents for
similar accommodation. Initially only moderate-income house-
holds (which could afford the equity contribution and the hous-
ing charge) were eligible, but over time the cooperatives were
given access to the rent supplement program so that lower in-
come households could qualify. Rent supplements provide unlim-
ited levels of assistance that cover the full difference between
project housing charges and what the household pays depending
on its income. The households assisted through this rent supple-
ment stacking were similar in profile to public housing tenants.
In 1990, an evaluation found that one-third of residents in these
older cooperatives had incomes below the national low-income
cutoff (CMHC 1992c).

The use of direct government mortgages ensured that the

projects could be financed at the best interest rates possible. The
interest rate on the mortgage was set at the rate at which CMHC
borrowed from the federal government, plus an administration
fee of 1/8th percent. Thus, there was no subsidy involved in
developing or operating these projects. In the absence of an
ongoing subsidy, the housing provided was affordable only to
moderate-income households (e.g., households with average or
near-average incomes). Lower income households could afford
the housing only if some additional (e.g., rent supplement)
assistance was provided.
824 Nick Van Dyk

1973 to 1978 programs

In 1973, the federal government introduced a program specifi-

cally for nonprofit and cooperative housing groups, modeled
largely on the innovations piloted through the $200 Million
Innovative Housing Program. As noted earlier, this major legis-
lative amendment followed from an extensive set of reviews and
the election of a new minority government. The new program
provided direct government long-term mortgages, although now
for the full capital cost of a project, at an 8 percent interest rate
(which was slightly below the market interest rate at the time).
Depending on the government borrowing rate, the fixed 8 per-
cent interest rate could mean that the project was receiving some
indirect federal assistance. In addition, only 90 percent of the
mortgage amount had to be repaid. The remaining 10 percent
was a capital grant, earned over the life of the mortgage.

To ensure that the housing remained modest and assistance

costs remained reasonable, capital cost benchmarks were estab-
lished and operating budgets were monitored and controlled. The
nonprofit and co-op groups set their rents to cover all operating
costs, including the actual mortgage repayment. Project viability
(and approval) was based on the rents being at or just below
market rents. This concept of LEM rents was devised as an
incentive for middle-income families to live in social housing, to
ensure a social mix.

An additional innovative financing feature was included in the

program. The value of the capital grant benefited those house-
holds that would not necessarily be in the low-income category.
Accordingly, households with incomes that were more than four-
and-one-half times greater than the rent were supposed to pay a
surcharge that would be used to create a subsidy pool within the
project to supplement some households with lower incomes. The
surcharge was set at an amount that would eliminate the benefit
of the below-market interest rate once the household income was
more than five times the rent (i.e., the household was paying
less than 20 percent for its housing). With some variations
among projects, this subsidy-surcharge concept was usually

The subsidy-surcharge concept allowed for only limited income

mixing in projects as these internally generated subsidy funds
were insufficient to provide extensive assistance to lower income
households. The potential for housing more lower income house-
holds was increased when nonprofits and co-ops were allowed to
use the rent supplement program to provide a subsidy to
Financing Social Housing in Canada 825

households paying more than 25 percent of their income. By

1977, between one-quarter and one-half of the units developed
were available to lower income households—facilitated through
either the surcharge pool or the stacking of rent supplements.

Through the mid-1970s, rising interest rates rendered the below-

market interest rate and capital grant insufficient to allow for
the development of affordable housing in many of the major
urban areas—the required cost-recovery rents were too high.
Some provinces began to provide additional assistance to allow
continued activity. This assistance was generally in the form of
ongoing operating grants that were reduced over time, a major
change from the way the federal government was providing

In contrast to the 1973 amendments—which, though diluted by

compromise, had evolved from an extensive analysis of issues
and policy options—much housing policy in the later 1970s was
premised more on political expediency. In 1974, the practice of
announcing new programs through the federal budget com-
menced, and it continued through the change in government in
1984 (Fallick and Oberlander 1992). This era also witnessed a
short intrusion into the arena of tax instruments as a vehicle for
housing policy, counter to the 1972 tax reform, which had sig-
naled a shift in favor of disentanglement of the tax system. The
1974 federal budget introduced a tax-sheltered savings plan to
encourage savings for home purchase—the Registered Home
Ownership Savings Plan—and a tax provision to permit inves-
tors to shelter income by permitting the deduction of capital cost
allowances and front-end development soft costs for rental in-
vestment against income from any source—Multiple Unit Resi-
dential Building (MURB). Both of these provisions were
motivated by a desire to address problems of a rental housing
shortage coupled with recession-induced high unemployment.
Both were intended as temporary measures. Unlike new pro-
grams that require a protracted period of development as well as
explicit budget approval, tax expenditures can be introduced
quickly and their real costs hidden. While politically expedient,
such approaches also shifted the policy responsibility from
CMHC increasingly into the Department of Finance.

The impact of the tax expenditure programs was not fully appre-
ciated until the 1980s, when a number of housing economists
analyzed these instruments (Gau and Wicks 1982; Jones 1983).
The general assessment of MURBs suggested that these stimuli
were less effective than claimed. The benefits were quickly
capitalized into land prices, neutralizing any change in rates of
826 Nick Van Dyk

return to investors (Gau and Wicks 1982). Moreover, the federal

government published its first accounting of tax expenditures
only in 1979. While not perceived by the corporate sector as an
intervention in the economy, tax expenditures were identified as
a regressive policy instrument lacking in accountability.
Housing-related tax expenditures in 1979 cost about $5 billion,
three times more than CMHC’s direct subsidy programs (Fallick
and Oberlander 1992). Similarly, the impact of the Assisted
Rental Program (ARP)—described below—was deemed to be
temporary and merely caused an acceleration in housing starts.
Smith (1981), however, suggests that most ARP starts were net
additions to supply because the program was introduced in an
environment of rent controls and acted to offset the negative
impacts of rent controls.5

To further address the largely demographically produced rental

shortage, ARP was announced in 1975. Directed at private land-
lords, the program provided a monthly grant to generate a re-
turn on equity. Later versions of the program in 1976 and 1978
involved repayable but interest-free loans to bridge the gap
between market rents and economic rents. Like the limited
dividend program, ARP required the rental owner to fulfill
certain obligations, including limitations on return on equity and
limits on rent increases.

Paralleling these rental initiatives, the 1973 Assisted Home

Ownership Program (AHOP) responded to the general belief that
all households aspired to own their own homes and that with
some assistance, lower income households could also achieve this
goal. Initially, AHOP offered a 95 percent loan with a 35-year
amortization period at rates as low as 8 percent (while conven-
tional loans were at 11 percent), depending on borrower income.
Moreover, grants reduced the maximum payable for mortgage
principal, interest, and taxes to 24 percent of income. In a modi-
fied version in 1974, AHOP used CMHC-insured mortgages (not
direct mortgages) and initially provided assistance that was
reduced each year. The subsidy to reduce initial payments was
replaced in 1975 by a graduated-payment mortgage (GPM) as the
financing mechanism.

The GPM, by reducing the mortgage payment in the first few

years, made housing more affordable and allowed access by more
moderate-income households. The GPM instrument was also
5 Rent controls were introduced in all provinces in 1975 at the behest of the
federal government as part of an inflation-fighting policy. Before 1975, only
two provinces had rent control. Three provinces removed rent control in the
Financing Social Housing in Canada 827

used in a 1978 modification to ARP as a means of lowering

initial payments to facilitate a withdrawal from direct subsidy.
Under the GPM, the monthly payment was reduced by $2.50 per
$1,000 of principal. This meant that the resulting payment was
insufficient to fully amortize the loan, and unpaid interest was
added to the outstanding principal balance. As the subsidy
mechanism under both ARP and AHOP involved gradual reduc-
tion over time (in anticipation of rising income and rents), the
GPM instrument was expected to replicate this pattern while
eliminating subsidy requirements.

A major flaw in the design of the GPM was its combination with
the Canadian term mortgage, specifically the use of a five-year
term after which the mortgage is renewed at a new prevailing
market rate. The GPM assumed that the mortgage payments
would increase at a fixed rate (e.g., usually 5 percent per year)
for 10 years, without considering the impact of an increased
interest rate resulting from this five-year renewal. The GPM’s
lower initial payments resulted in negative amortization—the
outstanding principal amount was increased since payments did
not fully cover the principal and interest. At renewal in the early
1980s, interest rates were at their historical peak, exceeding
20 percent. The combination of increased interest rate and in-
creased loan balance substantially raised monthly payments.
Many households and rental project owners could not afford the
increased payment after the renewal, and the default rate was
extremely high.

1978 to 1985 programs

In 1978, following a request by the prime minister for a review of

social policy on shelter, the federal government made major
revisions to its housing programs. These amendments were
intended to respond to long-standing concerns, including the
heavy demands placed on the federal government by the direct
financing approach used in both public housing and nonprofit/
cooperative housing; the need for provincial cost sharing, which
was not always possible for poorer provinces and generated a
skewing in delivery to provinces that could afford to participate;
the exposure of the federal government to the open-ended sub-
sidy mechanism under public housing (i.e., sharing of all operat-
ing losses); and the concern about ghettoization of public
housing. The joint federal-provincial nature of public housing
also generated ongoing disputes between the federal and provin-
cial governments. The prevailing mood of the government, and
828 Nick Van Dyk

especially the prime minister, favored a strong, centralized


The major shift in financing was from one of direct lending using
government funds to one of private lending facilitated by mort-
gage insurance. In effect for rental investors since 1954 and for
homeowners since 1964, public mortgage insurance had devel-
oped a strong system of housing finance in Canada. Extending
this system to include social housing was a natural progression.
CMHC began insuring mortgages for 100 percent of project
capital costs. The mortgages were provided by lenders and inves-
tors (e.g., pension funds) at market interest rates. They followed
the usual Canadian term mortgage practice of terms of one to
five years and amortization periods of between 25 and 35 years.
Under the Canadian term mortgage, the interest rate changes
with each renewal.

Capital grants were eliminated and assistance was provided in

the form of ongoing operating grants. This shift in the financing
mechanism was made to reduce the federal government’s borrow-
ing requirements at the time and to spread the subsidy out over
the life of the project. The maximum amount of assistance for a
project was calculated by determining the difference in annual
payments between the payment based on mortgage market rates
and the payment that would be required if the rate were only
2 percent. This maximum annual amount was advanced in
monthly installments. This assistance was split between a first
component that bridged the shortfall between economic rents
and the revenues generated based on LEM rents (the LEM rent
is approximately the appraised fair market rent less 5 percent).
A second component bridged the shortfall for lower income
households between LEM rents and RGI. To control expenditures
(which were largely determined up front by capital costs and the
initially established LEM rents), maximum unit prices (i.e.,
maximum per-unit capital costs including land, construction,
and all soft costs) were used, and operating budgets were
monitored and approved.

This ongoing assistance made projects viable and minimized

default risk. The 1983 evaluation of the nonprofit and coopera-
tive program in fact found that the combination of the NHA
mortgage insurance and the ongoing subsidy was an important
consideration in lender participation. Unlike earlier programs in
which operating subsidies were unlimited, the formula under
this version of the nonprofit and cooperative program established
a maximum level of assistance for each project. Both market
conditions (e.g., soft markets) and the program design created
Financing Social Housing in Canada 829

some viability problems, with the result that the design is not
risk free to the Mortgage Insurance Fund (MIF). Provisions have
been put in place to protect project viability through various
workout provisions, some of which involve a deferred payment
loan from the MIF, with accumulated interest forgiven in the
event of compliance with loan conditions. Because of these work-
out provisions there have been no defaults. The cost of these
remedies and their impact on the mortgage insurance fund is not
publicly available.

Notwithstanding these rather limited viability issues, the in-

sured private lending mechanism has been perceived as benefi-
cial, particularly in achieving the objective of reducing public
borrowing requirements. Between 1979 and 1981, annual capital
requirements were reduced by $851 million on average (CMHC
1983). This capital borrowing reduction was, to some degree,
offset by both the cost of borrowing from retail markets and
ongoing subsidy costs. The annual project subsidies rise as
additional projects are added to the portfolio. By 1985, the an-
nual subsidy related to the 153,000 units developed between
1978 and 1985 amounted to $578 million. Another aspect of
subsidy cost is that related to the cost of borrowing on retail
markets. The 1983 evaluation found that rates obtained through
approved lenders ranged between 150 and 250 basis points above
the rates possible through direct lending (government bond
plus 0.5 percent). During the first four years of the program,
1978 to 1981, this cost of borrowing was estimated to have im-
posed a cost of $38 million, 13 percent of the total subsidy expen-
ditures associated with these projects (CMHC 1983). As
discussed below, in retrospect, this use of private capital was not
cost-effective and was subsequently reversed in a return to direct
lending in 1992.

Rents in these nonprofit projects were set at the LEM rent to

ensure that the housing was affordable. Part of the assistance
went to cover the difference between the project’s total operating
cost (including the full mortgage payment) and the income from
the project rents. The remaining assistance was available to
lower the rents for low-income households, which paid rent
based on their income (usually 25 percent). One of the program
requirements was that a minimum of 15 percent of the units had
to be occupied by households on such an income-tested basis.
While no restrictions were placed on the income of households, it
was expected that all of the available subsidy would be used so
that as many lower income households as possible would be
served. Almost half the units were occupied by households on an
RGI basis (CMHC 1983). The 1983 evaluation found that, on
830 Nick Van Dyk

average, the income profile of program clients was lower than

that of the general population as well as that of all renters:
Thirty percent of residents had 1980 incomes below $10,000,
compared with 17 percent in the total population and 26 percent
among all renters.

The subsidy mechanism reduced the component flowing to bridge

the gap between LEM and economic rent over time and reallo-
cated this amount to the RGI subsidy pool. This partly offset any
increase in the difference between 25 percent of income and the
new LEM and partly allowed additional low-income households
to be served. Funds not used for this purpose must be returned
to CMHC. While data are not readily available, many projects
are returning funds, indicating some potential to house more
lower income households.

As interest rates increased after 1978, reaching peaks of close to

20 percent in the early to mid-1980s, the assistance costs for
social housing projects developed under the 1978–85 program
(under which mortgages were renewed on a five-year term)
increased drastically. This was because the maximum annual
assistance was recalculated based on new interest rates. To keep
assistance costs down, CMHC began to implement measures to
control financing costs. One of the most effective ways of doing
that was to reduce the mortgage interest rate.

The first step in achieving reduced interest rates was to require

social housing projects to tender their mortgages at renewal
time—the Competitive Financing Renewal Process (CFRP)—
rather than simply accepting a mortgage from a local lender at
current market rates. This process was implemented for renew-
als starting in 1987. CMHC had recently introduced mortgage-
backed securities (MBS) to the Canadian mortgage market, and
social housing mortgages were eligible for MBS pools. Lenders
then bid to provide the financing and servicing of the loan and
could package these loans within MBS. Because of the combina-
tion of subsidy and NHA mortgage insurance, social housing
loans were perceived by the market to be more secure than
private rental or homeowner loans. Although originally financed
at a 100 percent loan-to-value ratio, projects that were 5 to 10
years old had appreciated, effectively reducing the ratio and
further lessening risk. Finally, unlike nonsocial housing loans,
these loans incurred no prepayment risk, a feature especially
attractive to MBS pools.

By the late 1980s, social housing projects were obtaining mort-

gage interest rates that were only 40 to 80 basis points above the
Financing Social Housing in Canada 831

interest rates of government bonds for similar terms. This meant

that renewal rates were well below the conventional mortgage
rate, resulting in major savings. For example, on the social
housing portfolio of about 200,000 units financed by private
mortgages, a 50-basis-point reduction in interest rates meant
annual savings exceeding $50 million once all the projects had
been renewed. The CMHC 1993 annual report indicates that
CFRP had reduced the cost of social housing subsidies by $231
million over the previous five years (CMHC 1993a).

Post-1985 programs

In 1985, the programs were once again changed. Like the 1973
amendments, this change followed a government-wide program
review instigated by a new Conservative government elected in
1984 as well as a national consultation process. A key outcome of
these reviews was a return to increased targeting, as fiscal
constraints dictated allocating limited funds only to those in
need. (The 1978–85 programs had been castigated for housing
“nonneedy” middle-income households.) The other important
change was a new spirit of cooperative federalism in which the
government wished to induce greater provincial involvement in
what had become almost a unilaterally funded area. Thus,
federal-provincial cost sharing reminiscent of the public housing
era returned.

The ratio depended on the province’s financial ability; wealthier

provinces paid a higher percentage of the costs than poorer ones
(25 percent was the minimum provincial share). The intent of
this requirement was to leverage more development with the
same amount of federal assistance by encouraging provincial
participation. Provinces had the option to take over delivery and
thereby gain the political visibility that accompanies a delivery
role, despite paying as little as 25 percent of the costs.

The financing was still provided through a private mortgage for

100 percent of the capital costs, but only households in core
housing need would qualify. Provinces could continue income
mixing, but the federal government would cost-share only on the
targeted units. Only Ontario exercised this option, developing
nonprofit projects with a 60/40 ratio of core need and market
rent units. The previous interest rate differential formula was
abandoned. The full difference between the project’s total operat-
ing costs and the income from the rent (based on the residents’
incomes) was covered by government assistance. This wide-open
assistance formula allowed projects to house all low-income
832 Nick Van Dyk

households. With an open-ended subsidy (an implicit cash flow

guarantee), default is virtually eliminated. Reflecting this fea-
ture, a loan insurance agreement was implemented to protect
the MIF from any claim, and, in conjunction, the mortgage
insurance premium (3 percent of capital cost) was waived. In the
unlikely event of a loss, the cost would be charged against the
current year’s operating subsidy, cost-shared by the federal and
provincial governments. To date, no defaults have occurred.

Maximum unit prices and controls over the operating budgets

remained in place to minimize assistance levels. Tendered mort-
gages, mainly using MBS, kept the interest rates reasonable.

The 1985 changes also included an innovative financing mecha-

nism. To allow cooperatives to develop affordable housing for
households not in core need, a program using index-linked
financing was approved on an experimental basis.6 Cooperatives
could develop projects that were 100 percent financed with an
index-linked mortgage (ILM) and receive an ongoing operating
grant that would cover the difference between the total project
operating costs and the market rent. Because of the structure of
the ILM (lower initial mortgage payments), the necessary assis-
tance was much lower than the assistance required when a
conventional mortgage was used. This program was in place
until the end of 1991, when it was terminated as part of
government budget cutting, mainly because it was not fully
targeted to households in core housing need.

Current situation

Elimination of new supply programs

Although the 1985 social housing programs have not been offi-
cially terminated, federal government budgets over the past few
years have regularly reduced the level of new subsidy funding
available. This culminated in the February 1993 federal govern-
ment budget, which froze CMHC’s total annual assistance
budget at about $2 billion, starting in 1994. Development, in
terms of new social housing supply under the main social hous-
ing programs, last occurred in 1993, with limited program activ-
ity from 1994 on. The February 1994 federal government budget
did not reverse that decision, although it did reinstate the RRAP
for homeowners, a program that assists in the remediation of

6Further information on the index-linked mortgage is presented in a later

section of the article.
Financing Social Housing in Canada 833

conditions falling below minimum property standards. Later in

1994, a rehabilitation program for rooming houses and private
rental apartments was also announced.

CMHC again providing direct mortgages to achieve savings

Following an internal review to identify possible savings and

efficiencies, and building on the successes of CFRP, CMHC has
recently been authorized to again provide direct mortgages for
assisted-housing projects. CMHC raises the financing by issuing
bonds in capital markets. When project mortgages come up for
renewal, they are converted to direct CMHC mortgages, unless
they can find a private lender who will match the CMHC direct
lending rate. Since CMHC bonds are basically government bonds
(CMHC is a crown corporation that obtains financing at rates
almost equal to the government bond rate), their rates are ex-
tremely good and will rarely be matched.

In the past, any savings achieved by reduced interest rates were

used to reduce the federal assistance budget. Recently, the
federal government has stated that any savings achieved from
the existing social housing stock, including savings from lower
rates as a result of direct lending, may be used for new activity.
The government has also stated that long-term assistance com-
mitments (such as 35-year assistance commitments) are no
longer allowed. It appears that only one-time grants or ongoing
assistance for short periods can be provided to new projects. At
this writing, efforts are under way both in CMHC and the third
sector to devise new ways to procure social housing within this

Residential Rehabilitation Assistance Program


The new government has reinstated RRAP, which provides

forgivable loans to homeowners in core need to make required
repairs to their homes. To qualify, homeowners must live in
housing that does not meet national adequacy standards (i.e.,
dwelling units must have all basic plumbing facilities and be in a
reasonable state of repair) and must have incomes below the
CNIT for the area in which they live.

RRAP is targeted to low-income homeowners. By using forgiv-

able loans, it allows them to improve their housing without
significantly increasing their monthly costs. Much of the activity
834 Nick Van Dyk

under this program occurs in rural areas and small towns, since
that is where a large portion of homeowners in core housing need
live. Approaches that maintain the existing dwelling can be
effective in reducing the demand for new social housing.

Public-private partnerships and nonpublic investment

In 1990, the federal housing minister sponsored a housing fi-

nance conference to address the pressing need for affordable
housing in Canada and to explore possible new sources of fund-
ing for low-income housing. Canada was praised by international
speakers as “standing alone as one of the few countries with a
relatively efficient and effective housing finance system” (Boléat
1990). The most significant outcome of the conference was the
establishment within CMHC in 1991 of the Canadian Centre for
Public-Private Partnerships in Housing (CCPPPH).

In all recent issues of its regular publication, Partnership

Courier, CCPPPH makes the following mission statement:

The Canadian Centre for Public-Private Partnerships in

Housing acts as a catalyst, initiator and source of best
advice to advance and encourage housing partnership
projects. It bridges the public and private sectors and
ventures into untried areas to advance the cause of cost-
effective, accessible housing, without tax subsidies, through
such means as innovative financing and tenure

The main financing mechanisms available for joint public-

private projects are CMHC mortgage insurance and upfront
project development risk (or start-up) loans. The main tenure
options used to date have been life leases, nonprofit rental, and
equity cooperatives (often termed member- or resident-funded

Because they usually have no access to ongoing assistance, the

target client groups are generally moderate- to higher income
households. Life leases are often targeted at seniors who are
asset rich but cash poor and who thus have the potential to sell
their current home and purchase a life lease on a more appropri-
ate dwelling unit (e.g., one that offers “aging in place” and other
support features).

Nonprofit rental projects are targeted to households that can

afford the rents required to cover all the operating costs (includ-
ing mortgage payments). Some nonprofit projects are sponsored
Financing Social Housing in Canada 835

by community or ethnic groups that may be in a position to

provide some assistance to lower income households. Until re-
cently, nonprofit groups often incorporated some social housing
units (e.g., rent supplements or nonprofit program units) in the
projects so that lower income households could be served.

Equity cooperatives are also targeted mainly to seniors who are

asset rich and cash poor or to households that can afford an
equity contribution but prefer cooperative ownership, with its
increased involvement in the operations of the community, to
condominium ownership.

The availability of CMHC mortgage insurance makes it possible

for these types of ventures to raise required funding without a
great deal of difficulty, as long as some sponsor equity is avail-
able (100 percent financing is not available except for
nonprofits—current legislation permits 100 percent loans to
incorporated nonprofit housing associations). However, there
would have to be some assurance that residents had the means
to service the debt since no subsidies are involved. The main
condition for mortgage approval is the overall viability of the
project, and mortgage insurance is available only to projects that
are viable. Viability means that the project would be able to
charge rents that are at or below market rent levels or would
have a total cost (e.g., for life leases or equity purchases) that is
at or below market value. It does not mean that the project could
serve lower income households or those defined as being in core
housing need, the targets of previous social housing programs.

If project viability depends on assistance, approval will only

come when the assistance has been formally committed, either
by a government (federal, provincial, or municipal), by the spon-
soring organization, or by some other group that can
provide it.

To date, there are a few examples of public-private partnerships

developed using the services of CCPPPH. In 1993, CCPPPH
arranged 26 partnership deals that resulted in the addition of
1,380 units in major urban centers (CMHC 1993a). For the most
part, these involve some form of relaxation of underwriting
standards to permit mortgage insurance.

First Home Loan Insurance program and Home Buyers Plan

One of the federal government’s major current thrusts in the

provision of affordable housing is focused on first-time home
836 Nick Van Dyk

buyers. Under the First Home Loan Insurance (FHLI) program,

CMHC will insure mortgages for up to 95 percent of the cost of
affordable housing units for first-time home purchasers. This
means that the down payment requirement is only 5 percent. By
the end of 1993, 141,531 households had purchased a home using
FHLI, over half of them (77,986) during 1993 (CMHC 1993a). In
light of the high demand and no cost beyond any risk incurred by
the MIF, the government recently extended the program to 1999.

Under the Home Buyers Plan, individuals who have not owned a
home for the past five years can withdraw up to $20,000 from
their Registered Retirement Savings Plan (RRSP) to purchase a
home. While separate from the FHLI program, the Home Buyers
Plan can be used to provide the 5 percent down payment for the

RRSPs are tax-sheltered savings plans that individuals can use

to defer taxes until the funds are used. Funds deposited in
RRSPs can be deducted from an individual’s taxable income, and
withdrawals are added to taxable income. When used for a down
payment under the Home Buyers Plan, the withdrawn funds are
exempted from taxable income, as long as they are “repaid” in
equal installments over a 15-year period. If the RRSP is not
repaid, the amount due must be added to taxable income.

The RRSP down payment program was started in 1992 as a

short-term program that all home purchasers could use. In early
1994, the government made the program permanent but re-
stricted its use to households that had not owned a home in the
previous five years.

Although many moderate-income renter households do not have

RRSPs, those that do can use this program to buy a home with-
out having to wait until they save enough for a down payment.
Savings toward a down payment can even be put into an RRSP
to obtain a tax benefit.

Data on the actual target group are not available, but CMHC’s
housing affordability indicator shows that in most urban centers
a large percentage of renter households (over one-third in all
areas except Toronto, Vancouver, and Victoria) could afford to
purchase a starter home.7 Households in core housing need
would typically not have enough income to qualify.

7 For CMHC’s affordability indicator, an average starter home is a house at

the average price for an existing house insured under CMHC’s mortgage
insurance program.
Financing Social Housing in Canada 837

Provincial and municipal initiatives

Some provinces and municipalities continue to have housing

programs. Ontario has a major nonprofit delivery program
(which in fact produced more nonprofit housing in 1993 than all
production under the federal-provincial nonprofit program), and
British Columbia and Quebec have smaller programs. Most of
the activity in Quebec is targeted to renovation of existing af-
fordable rental housing stock to ensure that it is maintained in
good condition and is available to lower income households.

Some municipalities, usually the larger ones, also have housing

programs. These are generally fairly small and are targeted at
specific needs (e.g., renovation grants to maintain older afford-
able rental housing stock or municipal land banking for use in
provincial or federal nonprofit housing).

Creative financing mechanisms

Two major financial innovations for social housing have been

implemented or supported by the federal government since 1985.
They are ILMs and direct government mortgages for social
housing (which are handled differently from the direct
mortgages in the 1970s and earlier).

Index-linked mortgages

When interest rates rose in the early 1980s, assistance costs for
projects also rose. Even small increases in the interest rate
resulted in major increases in assistance costs. The impact of
inflation on nominal interest rates became a serious problem,
and the discussion of alternative mortgage instruments prolifer-
ated in the housing literature (e.g., Follain and Struyk 1977;
Gau and Jones 1982; Goldberg 1983).

For example, if the inflation rate is in the 3 to 4 percent range,

the mortgage interest rate would usually be in the 8 percent
range. On a $75,000 unit, the monthly mortgage payment would
be about $526. If inflation rises by 2 percent and the mortgage
interest rate rises to about 10 percent, the monthly payment
would increase by over 20 percent to $633. Yet rents and incomes
would increase only by 5 to 6 percent. So in the case of subsi-
dized projects, most of the higher mortgage payments would
have to be covered by increased federal assistance to keep the
housing affordable.
838 Nick Van Dyk

In 1985, the cooperative housing sector proposed the use of ILMs

as a means of dealing with the impact of inflation on mortgage
payments and specifically as a way to substantially reduce the
rapidly rising subsidy caused by very high interest rates (over
20 percent). ILMs use real interest rates rather than nominal
rates, and the payments are adjusted annually based on infla-
tion. This effectively neutralizes interest risk for both borrower
and lender. Instead of high initial payments that drop in real
terms over the years (as occurs in conventional, equal-payment
mortgages), ILM payments stay fairly stable in real terms. The
ILM proposed and used by the cooperative housing sector adjusts
payments annually by the inflation rate less 2 percent (e.g., if
inflation is 3 percent, the payment would increase by 1 percent;
if inflation is 1 percent, the payment would decrease by 1 per-
cent). This means that the payments drop slightly (by 2 percent)
in real terms each year. The lender is compensated by adjusting
the outstanding balance for actual inflation, while also receiving
a contracted real rate of interest.

The proposal by the cooperative housing sector (prepared in

1985, when the expectation was that inflation would average
about 5 percent over the medium and long term) was based on
the concept that, as rents increased, the net income (rents less
operating costs) would also increase, allowing the project to
carry higher mortgage payments. An allowance was made in the
instrument for income and rent growth to lag behind inflation by
2 percent. This lag in the adjustment to annual payments added
protection against the risk of incomes not keeping pace with

Conventional mortgages had payments that stayed the same

during the mortgage term and changed only if the interest rate
changed. This meant that high levels of assistance were required
up front, although the assistance should decline as the project
could afford to carry more of the mortgage payments. ILMs had
lower initial payments, which increased as the project could
afford to carry higher payments. This meant that assistance
levels would be lower initially and would stay fairly level over
time instead of decreasing. In short, the instrument was de-
signed to replace and reduce subsidy requirements.

Projections indicating major savings in assistance were borne

out during the first year of the ILM program. For example, the
monthly conventional mortgage payment on a $75,000 unit at
11.25 percent (the nominal rate on a five-year mortgage in late
1986) was $702. The initial monthly payment for an ILM was
$498, or $204 less. If the rent for the unit was $500 and the
Financing Social Housing in Canada 839

operating costs totaled $250, the net income (available to cover

the mortgage payment) would be $250. Assistance of $452 would
be required for the conventional mortgage, while only $248
would be required for the ILM. The savings came to about
45 percent.

By establishing a fixed real rate and adjusting the outstanding

balance, the amortization period, or the annual payment for
actual inflation, both lender and borrower are protected against
interest rate risk. However, the negative amortization under this
instrument increases the default risk for the lender. Unlike the
concurrent nonprofit program, in which the subsidy was open-
ended, the ILM program had a fixed annual subsidy based on the
bridging amount required to make the project viable in year 1.
Thus, the program was more vulnerable to viability problems.
This issue was addressed by establishing a special stabilization
fund (based on a premium of 3 percent of capital cost) in addition
to the mortgage insurance premium. The stabilization fund
provides assistance in cases in which projects experience viabil-
ity problems. In simulations undertaken in the program evalua-
tion in 1992, the combination of the stabilization fund and
mortgage insurance was found to provide adequate risk protec-
tion in all but the worst scenarios for future growth in income,
operating costs, and inflation. A number of difficulties have,
however, arisen related to soft rental markets where the infla-
tion-induced rent increases have pushed project rents above
market levels and caused vacancy problems. This has been
compounded by the general decline in the real income of renters
over the past decade, which has created affordability problems
for existing residents.

The ILM as a financing mechanism was available only to hous-

ing cooperatives developed under the Federal Co-operative
Housing Program. Because it was tied to a specific program, it is
difficult to separate shortcomings in the instrument from those
of the program. Through the 1986–91 period when the instru-
ment was being used, there was considerable difficulty in gener-
ating sufficient funds because of limited lender participation.
The nature of the instrument made it attractive principally to
investors with future-indexed liabilities such as pension funds.

Even though ILMs overcame the flaws in the previous GPM,

they were often perceived as the same kind of instrument. Also,
through this period the implicit real rate (i.e., the nominal mort-
gage rate less inflation) persisted at its highest historical level,
introducing some concern as to whether a 4 to 5 percent real rate
was competitive. Because the program had been approved and
840 Nick Van Dyk

budgeted on the assumption of a 4 percent real rate, actual rates

higher than this reduced the volume of activity under the pro-
gram. In fact, while ILMs were expected to produce 5,000 units
per year for five years, a total of only 11,417 were developed.
Activity was constrained by a fixed budget and higher than
anticipated real rates of interest (CMHC 1992c). Also, the low
level of activity and temporary, experimental nature of ILMs
acted as a deterrent to investors who were reluctant to establish
the new systems necessary to administer the instrument (CMHC

This experiment ended when the Federal Co-operative Housing

Program was terminated in 1991, primarily because of funding
constraints and the fact that the co-op program was the only one
not targeted to core need households. This termination was not
based on any perceived failing of the mortgage instrument.
Beyond the program evaluation there has been little analysis of
this ILM experience.

Discussions are ongoing in CMHC and among some provincial

housing agencies concerning the potential for using ILMs for
other social and market housing projects; however, they are not
currently available as mortgage instruments. In the context of
relatively lower mortgage rates through the 1990s, especially
those available under direct lending, and the persistent high
implicit real rate of return, the potential benefits of ILMs are
marginal and perhaps insufficient to offset the risk. However,
given the positive experience in reducing program costs between
1986 and 1991, ILMs still appear to have excellent potential as a
financing mechanism for social housing since they require low
levels of assistance to produce affordable housing.

Direct CMHC mortgages

As already noted, since the mid-1980s, the requirement for

competitive mortgage tendering and the use of MBS produced
lower interest rates on social housing mortgages. However,
interest rates were still higher than rates on government bonds
for similar terms, even though the social housing mortgages
were fully government insured and involved no greater risk.
While conventional mortgages carry an inherent risk of both
default and prepayment, these risks are neutralized in the case
of social housing loans where the income stream is guaranteed,
the loan is fully insured, and no prepayment is possible as the
projects operate under a 35-year agreement. The results of CFRP
had already proven that the market perceives this lower risk.
Financing Social Housing in Canada 841

To capture the full benefit from inherently low-risk social hous-

ing mortgages, CMHC began to provide direct mortgages in
1993. CMHC issues bonds to raise the required funds and pro-
vides mortgages at the bond rate plus an administration fee of
1/8 percent.

Direct CMHC mortgages, issued at only a minor premium above

government bond rates for similar terms, have resulted in addi-
tional savings of more than 25 basis points over the rates
achieved through the mortgage-tendering and MBS approach.
CMHC projects the savings to exceed $120 million over the next
four-year period (CMHC 1993a).

CMHC is now providing only the conventional mortgage with a

five-year term under its direct lending program. The potential
exists for expanding its function to provide index-linked financ-
ing as well. Specifically, CMHC could issue real-return (or index-
linked) bonds to raise funds for ILMs for social housing projects
or refinancings.

Using savings from the existing social housing stock

While the government has indicated a willingness to use savings

from the operation of the existing social housing stock to support
some new activity, no guidelines or mechanisms are in place to
do this. It is expected that some method will be developed to
encourage the third sector to submit ideas on a project-by-project

The major savings are the result of the decrease in required

assistance because of lower interest rates. However, much of
these savings will be required to cover costs in public housing
and the rent supplement program, which are increasing mainly
because they are being targeted more and more to lower income
households, thus generating lower RGI revenues. To reduce
subsidy costs, the government is expected to raise the RGI level
to 30 percent (two provinces, British Columbia and New
Brunswick, already use this level). This is an effective increase
of 20 percent in the rent levels for low-income households and is
expected to be highly controversial, tantamount to reducing the
deficit on the backs of the poor.

There has been some discussion in the third sector about poten-
tial savings through more efficient and effective operations;
however, there are few incentives to encourage or support such
endeavors, aside from the general desire to keep costs down to
842 Nick Van Dyk

control the government deficit. Individual residents are unlikely

to volunteer a rent increase or accept new terms to operating
agreements that affect them directly. In addition, operating
efficiencies that might result in some long-term savings usually
have some higher upfront costs (and current budgets do not
allow for that) or require more volunteer involvement in project

In addition to savings as a result of lower interest rates and

possible operating efficiencies, there is also the potential for
using the existing assisted-housing stock to leverage more
activity. Again, mechanisms to do this are not in place.

Regardless of the source of savings, there are serious limitations

on how these funds can be used. Specifically, the 1993 budget
provision precluded new long-term commitments, and in any
event, funds are unlikely to be sufficient to facilitate ongoing
cash flows to match such a subsidy mechanism. The most fea-
sible approach will inevitably involve small grants or loans to
facilitate project development, provided that some efficiencies in
per-unit cost can be developed to minimize the gap between
ongoing costs and revenues.

Efficiency of the financing mechanisms used

The use of 100 percent financing, either through direct govern-

ment or private mortgages, has effectively ensured that financ-
ing is available to develop social housing. This system has
proven quite efficient, as illustrated in the savings achieved.
Obtaining financing was never a problem for groups, so it was
not necessary to spend much time and effort on that aspect of
development. Over time, and particularly in the recent efforts of
CFRP and direct lending, intermediary costs have been mini-
mized, and mortgage rates are now the best available. This is a
substantial improvement over the circumstances between 1978
and 1985, when lenders were purchasing relatively low-risk
mortgages at conventional rates. Notably, when the government
authorized CMHC to raise funds in capital markets and provide
direct loans, there was no outcry from the financial services
sector that this was not an appropriate role. It was difficult to
argue against a mechanism that generated such substantial
savings despite displacing private lenders.

Ongoing assistance that covered the full difference between what

a low-income household could afford to pay and the full operat-
ing cost of a project has provided open access to social housing
Financing Social Housing in Canada 843

regardless of income. The only limitation was the number of

units that would be funded in any year. Given the current assis-
tance budget freeze, this is no longer the case.

Despite the apparent efficiency, there remains some serious

concern about the overall benefit of an approach that puts most
decisions and a great deal of control in the hands of government
while negating any incentives for sponsors to be efficient. In
theory, groups were responsible for the development of the
project, but there was little incentive to be effective and efficient.
The maximum unit prices were generally viewed (by both the
sponsoring group and the building industry) as the actual prices
to aim for. Government monitoring and approval of operating
budgets often reduced any incentive to find more efficient means
to operate a project. Similarly, programs that cover the full
difference between rents and operating costs leave little need or
incentive for self-management and volunteer activity.

Direct government mortgages somewhat reduce the interest

rate, and thus the assistance required. They also remove any
connection between a project and local lenders or investors and
eliminate another component of management that can build
skills and effectiveness. Groups that are required to negotiate
mortgage terms develop management skills that will be bene-
ficial in other areas. One of the major benefits of community-
owned social housing is that the residents can develop
management and administrative skills that will have a positive
impact on the community and potentially reduce future operat-
ing costs. Taking away most of the decision-making authority
reduces the opportunity to develop those skills and could result
in higher long-term costs.

Direct government mortgages also reduce the ability of local

financial institutions to become involved in community develop-
ment and local economic development initiatives. With the ex-
ception of some community-based credit unions, there has been
little evidence in Canada of financial institutions, becoming
involved in such activities. Canada has no equivalent of the U.S.
Community Reinvestment Act, and the country is characterized
by national rather than local financial institutions.

There is a major effort under way to encourage and promote

public-private partnerships, led in part by the CMHC establish-
ment of CCPPPH. The efficiency of this approach is still open
for discussion. Since the functions of CCPPPH do not encompass
the provision of subsidies, it is difficult to determine the cost-
effectiveness of this approach. There has been no evaluation of
844 Nick Van Dyk

CCPPPH’s activities to determine if projects facilitated through

CCPPPH would have proceeded without this assistance. Like
many of the low-income housing tax credit initiatives in the
United States, the products of CCPPPH have not been able to
penetrate the lower income levels. At best they provide a vehicle
for moderate-income housing and, in the absence of any signifi-
cant rental market activity, a substitute for market-rate private

Conclusions and policy implications

Innovations in financing mechanisms can reduce costs, but they

have great difficulty in substituting for the direct subsidies that
have historically been provided. A critical contributing factor to
the affordable housing problem is the high cost of producing new

This review of financing mechanisms used to develop social

housing in Canada reveals that almost all public and social
housing, with the exception of nonprofits developed between
1964 and 1978, has involved long-term, ongoing operating subsi-
dies. For those projects without ongoing subsidies, assisted
through preferential rate mortgages, rent levels were not low
enough to penetrate low-income levels, and stacking of rent
supplements was required. While efforts were made to control
costs and total subsidies on a project-by-project basis, the aggre-
gate effect of continually expanding the stock is to layer on
additional subsidy obligations annually. The inevitable conse-
quence of such an approach is an exponential growth in expendi-
tures. As this increase has been juxtaposed against the concern
for high government debt, the eventual curtailment of funding
was inevitable. The traditional approaches used to develop a
permanent stock of affordable housing in Canada are simply

Financing has been a central focus of efforts to minimize the cost

of social housing. The current direct lending practice provides
access to capital funding at the lowest rate possible, optimizing
the combination of the borrowing power of the federal govern-
ment, mortgage insurance, and an implicit cash flow guarantee
through various ongoing subsidy mechanisms. In this light,
opportunities to further reduce the cost of new social housing
from a financing perspective appear severely limited. Rather,
efforts must concentrate on the other aspects of procurement—
land and construction costs and higher rent revenues. Indeed,
with the imposed constraint on long-term subsidy mechanisms,
Financing Social Housing in Canada 845

any future development of social housing must be undertaken on

a pay-as-you-go or grant basis in which there may be some po-
tential to use financing instruments to generate new funds,
primarily in the form of equity takeout within the accumulated
portfolio of social housing. This equity might be the basis for
internally provided development grants to assist new projects or
expansion of existing portfolios.

For example, a nonprofit or cooperative housing project that has

20 years remaining on its original mortgage could extend the
amortization by 5 or 10 years. With no change in rents, the
project could carry a slightly higher mortgage amount with
extracted equity used as a form of equity for a new project. If the
project’s rents were below market, a slight increase in the rent
would allow it to carry an even larger mortgage, with the addi-
tional amount again available as equity for new development.
This system is currently not possible because each project is
independent and has a contract with the government concerning
the availability and use of assistance. Each project would have to
approve the extension or increase, and it is not necessarily in the
project’s self-interest to do so.

Another option would be to convert the financing from a conven-

tional mortgage to an ILM. Again, this would provide equity for
new development. Applying the ILM instrument to refinance an
older project would permit a low loan-to-value ratio, since accu-
mulated equity would exceed historic cost and could be designed
to be transparent to residents. The program mechanism in the
1978–85 projects already involves a phasing out of annual assis-
tance up to the point where the project is paying the full princi-
pal and interest payment (this involves an annual increase in
the operating budget of 2 to 4 percent, all other operating ex-
penses being held constant). Maintaining this annual increase
would not be onerous, especially where rents are at below-
market levels, and would facilitate the ILM financing. Also, with
rents already at below-market levels, the problem of maintaining
viability with above-market rents as experienced in the 1986–91
co-op program would be minimized.

If the social housing were owned by larger community-based

organizations, it might be possible to implement these sugges-
tions. This, however, is not the case, as most projects are owned
by small nonprofit or cooperative associations. This reality
reinforces the need for partnerships and, in particular, arrange-
ments in which existing projects are given some incentive to
participate and are encouraged to use their assets to expand
the stock of affordable housing. A potential incentive is the
846 Nick Van Dyk

possibility of splitting the savings and allowing the project to

make improvements or even expand its own project.

A legitimate concern among project sponsors is that any efforts

to reduce existing subsidy costs will be used simply to reduce the
government deficit, rather than help expand the portfolio of
nonmarket housing. The fact that assets are not owned by the
government provides a powerful mechanism to negotiate a part-
nership in which any savings can be used only within the hous-
ing sector. Without such a guarantee, the potential to induce
existing sponsors to participate is extremely remote.

The use of any funds procured through such equity takeout

requires serious consideration. Using these funds to develop new
social housing will limit the volume possible, and care must be
taken not to replicate the former problem of long-term subsidy
dependence, as an equity takeout cannot sustain such funding.
Pomeroy (1995) has demonstrated that it is possible to acquire
existing private rental properties at a fraction of the cost of new
nonprofits. The objective is not necessarily to produce new units,
but to increase the proportion of the stock within the control of
the third sector, thus ensuring its retention and availability to
lower income households. Another possibility is to use this ex-
tracted equity in combination with land or equity through other
partners, such as those that have been involved in projects
assisted through CCPPPH.

Except for a brief period in the 1970s, Canada has not experi-
mented with using the tax system as a vehicle for stimulating
the production of affordable housing. The results of these en-
deavors suggest that this is not an efficient mechanism, a find-
ing also confirmed through analysis of the real cost and benefits
of the low-income housing tax credit in the United States. Ac-
cordingly, this is not a desirable area of attention for the Cana-
dian housing sector.

In summary, creative or innovative financing is not a panacea.

Indeed, the opportunities to use financing approaches to address
the persistent housing problems of lower income Canadians
appear limited. However, the financing approach does have some
utility and potential in the area of refinancing and release of
accumulated equity in the social housing sector. A number of
crucial issues related to how to create the incentives for existing
project sponsors to participate and how best to use any funds
generated through such refinancings still need to be assessed. A
more focused effort is clearly required.
Financing Social Housing in Canada 847

Nick Van Dyk is an independent housing policy consultant with a special
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