COMPARISON OF THE LONG-TERM COST OF
SHELTER ALLOWANCES AND NON-PROFIT HOUSING
Prepared for
The Fair Rental Policy Organization of
Ontario
By
Clayton Research Associates Limited
October, 1993
EXECUTIVE SUMMARY
A study prepared by Clayton Research in June, 1993, The Cost of a Shelter Allowance
Program in Ontario, has raised questions about the relative cost of this alternative means of
providing housing assistance compared to the current non-profit housing program. Supporters of
non-profit housing have argued that comparison of one-year costs is not appropriate since the
costs of non-profit housing will, over time, decline and the projects are an investment in lowcost housing in the future.
The Fair Rental Policy Organization therefore commissioned this study to examine the longterm costs of the two approaches - taking into account the investment aspect of non-profit
housing - in order to determine the relative costs of shelter allowances versus non-profit
housing.
The study compares the cost of assisting 1,000 needy renters with non-profit housing in Toronto
versus shelter allowances over the next 50 years. The average capital cost of non-profit housing
is assumed to be $112,000 per unit and incomes average $14,000. For the shelter allowance
estimates, the same mix of assisted tenants and average rents of $670 per month in the first
year are assumed. For the future, inflation is assumed to be 3 percent annually and all
incomes, rents and costs are assumed to increase at that rate. Since non-profit housing
provides for a mix of both market and rgi (rent-geared-to-income) tenants, a total of 1,335
non-profit units are required in order to provide housing for the 1,000 needy tenants in the
analysis - the market units are assumed to have market rents.
The main findings of the study include the following:
•
Shelter allowances are significantly less expensive than non-profit housing
throughout the first 35 years of the analysis. This is the period over which the mortgage
on the non-profit projects must be repaid. After 35 years, the non-profit projects yield
a slight surplus on operations.
•
The difference in costs for the two programs totals $8.8 million in the first year and
declines gradually each year but still totals $1.8 million by the 35th year. In the
36th year, with the repayment of the mortgage, the non-profit units generate a small
surplus and the overall difference in costs between the two programs is $8.7
million in favor of the non-profit projects.
•
The interest charges on the higher non-profit costs are very substantial. By the 36th
year, when the non-profit mortgage is finally repaid, the interest charges on the
accumulated difference in total costs between the two programs totals $63.5 million
per year.
This is well above the relatively small ($8.7 million) advantage in
current year costs enjoyed by the non-profit projects in that year.
•
By the time the mortgage on the non-profits is repaid, the cumulated difference
between the costs of the two programs (with interest) totals over $910 million.
Even without any interest charges, the cumulated value of the differences in costs
over time totals over $175 million.
-2•
After 50 years, when the non-profits will have not only repaid their mortgage but
will have had 15 years of mortgage-free operation, the cumulated difference
between the two programs (with interest) totals $2.2 billion.
•
Estimating the value of the non-profit projects in the future is very difficult;
however, no matter what assumption is made, their ultimate value is well below
that of the accumulated difference in costs. Even if it is assumed they rise with
inflation (highly unlikely since properties depreciate rather than appreciate over
time), they would be worth a total of $655 million after 50 years - much below the
value of the cumulated difference in program costs. The analysis assumes that no
additional investment is required to renovate or upgrade the projects during the 50
years (another doubtful assumption). To the extent that such investments are
required, the differences in program costs would be greater still.
•
One of the reasons why shelter allowances are much less costly than the nonprofit
program is that the assistance is less generous than for non-profit housing. The
formula for shelter allowances used in this analysis is that they equal 75 percent of
the difference between rent and 30 percent of a tenant's income. In contrast, tenants
in non-profit housing currently pay 26 percent of their income in rent though this
will rise to 30 percent over the next four years.
•
This difference accounts for only a relatively minor share of the total difference in
costs between the two programs. An alternative analysis considered the difference
in costs if both the shelter allowance and the non-profit assistance utilized the same
rgi ratios of 30 percent. The total cumulated difference in program costs for this
analysis was $1.6 billion after 50 years - compared to $2.2 billion for the base
analysis.
•
Another alternative analysis was conducted which incorporated a substantial
increase of 10 percent in market rents in the first year. This was to test the
sensitivity of the conclusions to such a rise in rents which some observers (though
not the authors of this report) believe could occur if a significant shelter allowance
program was introduced.
•
This would, of course, reduce the difference in costs between the two programs
since it would raise the shelter allowance costs. However, it is nowhere near
sufficient to alter the overall conclusion - after 50 years the cumulative difference
in program costs is almost $1.4 billion using this assumption.
•
Shelter allowances are clearly a much more cost-effective means of providing
housing for needy tenants than non-profit housing. The main reason why shelter
allowances would be less expensive is that they provide assistance to needy tenants
within the existing housing stock - most needy tenants are already adequately
housed, their problem is that they cannot afford the rent. Rents in the existing stock
are much lower than the costs of building new nonprofit housing. Also, there is no
need with shelter allowances to provide subsidies to house non-needy tenants in
order to provide for income mixing - as is the case with non-profit housing.
-3-
COMPARISON OF THE LONG-TERM COST OF
SHELTER ALLOWANCES AND NON-PROFIT HOUSING
A study prepared by Clayton Research in June, 1993, The Cost of a Shelter Allowance
Program in Ontario, has raised questions about the relative cost of this alternative means of
providing housing assistance compared to the current non-profit housing program. The study
indicated that a shelter allowance program targeted at providing assistance to those in core
housing need (i.e. tenants unable to afford adequate, suitable rental accommodation at a cost they
could afford) would cost an estimated $275 million annually.1 Shelter allowances allow needy
tenants to receive assistance while occupying units in the private rental market rather than have
to seek accommodation in the limited stock of social housing as is the case with the nonprofit housing
program.
The study drew the comparison between the estimated $275 million annual cost of shelter
allowances (which would assist 200,000 needy renters) and the $200 million annual operating
subsidy required for the 20,000 non-profit housing units announced in 1992. The annual cost of the
non-profit projects is three-quarters of the full cost of a shelter allowance program but would yield
only one-tenth the number of units.
In responding to the study, supporters of non-profit housing have indicated that a one-year
comparison of costs is not appropriate since the costs of the non-profit projects will, over time,
decline and the projects are an investment in low-cost housing in the future. Shelter
allowances, on the other hand, make no such investment for the future since they provide
assistance only to meeting tenants' current housing costs.
A recent article in the journal Housing Policy Debate focuses attention on this issue by
referring to a previous report by Clayton Research which demonstrated the long-term financial
advantages of home ownership to families and individuals:
"Instead of any conclusive evidence about the comparative long-term cost-effectiveness of
alternative subsidy options (analysis that is very difficult to perform in a convincing and
conclusive fashion), common sense arguments, in the end, have greatly influenced the
public debate. In Canada, the argument that has generally prevailed is: If it is financially
advantageous over the long term for individual households to become homeowners, why
should not the same logic apply to public-sector investment in housing?"2
This is a fair comment. The Fair Rental Policy Organization therefore commissioned this study
to examine the long-term costs of the two approaches - taking into account the investment
aspect of non-profit housing - in order to determine the relative costs of shelter allowances
versus non-profit housing.
-4-
The Approach - Comparison of the Costs for Providing Assistance
for 1,000 Needy Tenants with Non-Profit Housing
Versus Shelter Allowances
There are three types of tenants in non-profit housing: deep subsidy, shallow subsidy and
market rent tenants. From discussions with Ministry of Housing officials, the broad
breakdown of tenants in a typical new non-profit project is as follows:
•
•
•
Deep subsidy tenants - roughly 55 percent;
Shallow subsidy tenants - roughly 20 percent; and
Market rent tenants - roughly 25 percent.
Therefore, to provide 1,000 units for needy tenants with non-profit housing would require a
project with about 1,335 units (735 deep subsidy tenants, 265 shallow subsidy tenants and
335 market rent tenants. All three types of tenants receive subsidies since even the market
rents do not generally cover the costs of building new non-profit housing. Based on estimates
from Ministry of Housing staff, the monthly mortgage and operating costs for a typical new
non-profit unit total over $1,150 per month - well above the typical market rent ($875) for
these units.
In contrast to the non-profit approach which requires the government or third sector to build or
acquire housing, shelter allowances provide assistance to tenants who seek their own housing on
the private market - often in the dwelling they already occupy. The calculation of the assistance
is based on the tenants' income, family size and rent (subject to maximums which are based on
market rents for typical types of housing). The formula for shelter allowances used in the
previous Clayton Research report is the most commonly discussed approach - the shelter
allowance payment would be 75 percent of the difference between the rent and 30 percent of
the tenants' income.
One of the advantages of shelter allowances compared to non-profit housing is that they do not
need to provide subsidies to market rent tenants. With non-profit projects, it is desirable to
have a mix of tenants since the experience of the past is that concentration of needy tenants in
non-mixed projects increases social problems. With shelter allowances, such a mix of tenants
is intrinsic to the program and subsidies to non-needy (market rent) tenants are not required
to achieve it.
The remainder of this study presents a comparison of the estimated costs over time associated
with the provision of 1,335 units of non-profit housing -1,000 shallow and deep subsidy units
for needy tenants and 335 market rent units (25 percent of the total) and the assistance which
would be provided for the same 1,000 needy tenants using shelter allowances. The
comparisons relate to costs and rents of typical nonprofit and private rental projects in
Toronto.
-5-
Initial Year Costs Very High for Non-Profit Housing
According to information from Ministry of Housing staff, the average capital cost of non-profit
housing in the Toronto area for the most recent program is roughly $112,000 per unit.
According to Ministry sources, operating costs are roughly $5,500 and mortgage rates for nonprofit housing have declined to the 7 percent range. This interest rate seems low, however, in
order not to overstate the costs, this 7 percent rate has been used for this analysis of the costs
of non-profit housing. With loans amortized over 35 years, this yields an annual financing cost
per unit of $8,494. The total annual cost per unit in the first year is therefore roughly
$13,994.3
Rents in non-profit housing depend on
the income of the tenant. According to
Ministry sources, incomes in the rgi
(rent-geared-to-income) units average in
the $12,000-$16,000 range - firm data are
not available so an income of $14,000 is
used to illustrate the likely situation. For
this level of income, rents would be
$3,640 -assisted rent is set at 26 percent
of income under current policy.
Therefore, the initial year per unit
subsidy required for the assisted tenants
in non-profit housing would be $10,354.
Shelter Allowances Cost Much Less in First Year
In the previous Clayton Research report (The Cost of a Shelter Allowance Program in
Ontario), the average annual per unit cost of a shelter allowance was estimated at $1,373 for all
Ontario in 1991. This includes the full range of core needy tenants, including a large number of
non-elderly singles - not a priority group for housing assistance. This estimate of the average
cost of shelter allowances also relates to all of Ontario in 1991, while the non-profit cost
estimates presented above relate to Toronto in 1993. Therefore, for the comparative analysis of the
costs of nonprofit housing versus shelter allowances presented in this report, adjustments were
necessary to the estimated cost of shelter allowances from the previous report. These adjustments
were required in order to reflect a mix of shelter allowance tenants, which would be
comparable to those in non-profit housing, as well as rents appropriate to Toronto in 1993.
The average rents required to obtain suitable rental accommodation in Toronto in 1993 were
assumed for the purposes of this analysis to be $8,040 per year ($670 per month).4 Combined with
the same $14,000 estimated average income used for the analysis of the cost of RGI non-profit
units, this estimate of rents results in annual shelter allowance costs of $2,880.
-6-
The chart at left summarizes the
estimated first year subsidy costs for RGI
tenants in non-profit housing and for
tenants with a shelter allowance
assuming the $14,000 average income.
Clearly, the first year costs for the nonprofit housing are much higher than for
shelter allowances.
Of course, part of the reason for this reduced
subsidy cost for a shelter allowance
program is the formula of the shelter
allowance (75 percent of the difference
between rent and 30 percent of income)
which is less generous for tenants than the
26 percent of income which is currently used
in non-profit housing.
Average effective rents for a tenant with an income of $14,000, for example, would be $303 per
month in non-profit housing and $430 per month with a shelter allowance. Some of this
difference will disappear as the share of income required for rent in non-profit housing rises to 30
percent ($350 per month for those with incomes of $14,000) - as currently planned over the next four
years.
Therefore, it is clear that subsidies for the non-profit rgi units are much higher in the initial year than
for a shelter allowance program - partly due to less generous assistance but mainly due to the high
costs of accommodating tenants in high-cost new buildings rather than in the (lower-rent) existing
stock. This comparison relates, of course, only to the first year of operation (other years will be dealt
with later).
Non-Profit Costs Higher Still When Market Rent Units are considered
The above comparison considers only the rgi units. However, non-profit projects also include market
rent units for which rents are not sufficient to cover mortgage and operating costs - at least in the
early years. In Toronto, average monthly rents for the market units are estimated at an average of
$875 per month, whereas costs are estimated at $1,166. Assuming an average 5 percent vacancy
rate, the average subsidy for these units in the first year would be over $4,000 per unit.
The subsidy required for these market rent units needs to be taken into account in the assessment of
the comparison of the costs of shelter allowances and the non-profit program.
-7-
An estimate of the total costs of the two
approaches is provided at left. This compares the
cost of providing 1,335 units of non-profit housing
(1,000 rgi and 335 market rent) with the costs
of using shelter allowances for 1,000 tenants with
the same income as those in the non-profit rgi
units. This is essentially a comparison of the
initial year costs required to house 1,000 needy
tenants under the two programs.
The initial year costs for non-profit housing are, of
course, much higher - $11.7 million compared to
$2.9 million to house the same 1,000 needy
tenants with a shelter allowance program.
Shelter allowances are clearly less costly in the
initial year.
Future Costs of Non-Profit Housing and Shelter Allowances
The relative subsidy costs of non-profit housing and shelter allowances will, of course, not remain
constant over time. The remainder of this study outlines the expected changes in these costs (and
the resulting required subsidies) over the next 50 years. This is long enough to pay off the
mortgage on the non-profit project (after 35 years) and for the project to enjoy a significant
mortgage-free period of operation - with all the financial benefits that entails.
The analysis requires assumptions about future trends in costs, incomes and rents. In general,
the assumptions used in this analysis are similar to the assumptions used by Clayton Research in
Homeownership as an Investment (cited earlier) which examined the financial merits for a
family of purchasing a home versus renting over the long-term in a low-inflation environment.
The key assumptions used in this analysis include the following:
•
3 percent inflation - all of the variables subject to inflation (e.g. operating
costs, rents and incomes) are assumed to increase at the rate of 3 percent.5
•
Mortgage interest rates for the non-profit project are assumed to be the
current rate of 7 percent for the initial five-year period. If inflation stays
low at 3 percent, which is assumed, there is little room for further
substantial reductions in this already extremely low rate (conventional fiveyear mortgages are 8.75 percent). However, a further decline to 6 percent
is assumed for the period after the first five years.
•
The long-term Provincial government bond rate is currently about 8 percent. This is
assumed to continue for the first five years of the period and then be reduced to an
assumed 7 percent for the remainder of the period.
-8•
The rent-to-income ratio on the non-profit rgi units is assumed to rise by one percentage
point per year from 26 percent in the first year to 30 percent and remain constant after that
- in line with current Provincial policy. This will erase much of the difference between the
effective rents paid by shelter allowance recipients and the rents paid by rgi tenants in
non-profit housing.
Annual Subsidy Costs of Non-Profit Housing
Decline Gradually Over Time
Using the assumptions outlined above, the subsidies required for non-profit housing decline
gradually over time. However, there continue to be substantial subsidies throughout the period
until the mortgage is repaid in Year 35.
The analysis assumes that no major renovation
costs are necessary during the period - i.e. that
the reserve funds will be adequate to meet all
such costs. This is a questionable assumption but,
in the absence of firm estimates, it was adopted
in order not to overstate the costs of non-profit
housing.
Clearly, while the difference between total
costs and revenues declines gradually over time,
the required subsidy is still very high throughout
the mortgage repayment period. In the final (35th)
year of the mortgage, an estimated $9.7 million
subsidy is required for the 1,335 units (1,000 rgi units).
After the mortgage is repaid, a slight surplus is generated by the non-profit housing.
Shelter Allowance Subsidy Costs Rise Over Time But are Lower Than Non-Profit Costs
Until the Mortgage is Repaid
For shelter allowances, the annual costs rise
over time as inflation affects rents.
However, not until Year 36 (a year after the
mortgage on the non-profit project is repaid)
does the annual cost of 1,000 shelter
allowances exceed the cost of the comparable
non-profit units.
In Year 36, the non-profit generates a surplus
of $600,000 while the shelter allowance costs
$8.1 million - a net difference of $8.7 million.
-9-
Thus, the "investment" in non-profit housing begins to pay off after Year 35. However, this has come with
an enormous cost to the size of the Provincial debt and interest costs.
Interest Payments on Increased Debt a Critical Factor in Comparing Non-Profit Versus
Shelter Allowance Program Costs
To compare the long-term costs of the two programs, it is necessary to include the interest
costs on" the higher public borrowings required to finance the difference in the annual costs
of the non-profit program versus the shelter allowance program.
In today's era of high deficits, any
increase in program spending must be
financed - currently the long-term
Province of Ontario borrowing rate is in
the 8 percent range.
Factoring in the value of these interest
payments (which also must be
borrowed), it is clear that the very
high initial costs of the nonprofit
program
(relative
to
shelter
allowances) more than offsets the
potential for future savings once the
mortgage is repaid.
The interest payable on the extra
borrowings rises gradually over the
period to the point where, in Year 36,
it totals $63.5 million - far greater
than the $8.7 million in projected
savings achievable with non-profit
housing that year - the year after the
mortgage is paid off.
The cumulation of the differences in
program costs (plus these interest
costs) is truly staggering over time. It
reaches over $900 million by the time
the mortgage is paid off in Year 35 but continues to rise after that since the
interest payments far outweigh the cost
advantage of nonprofit housing once the
mortgage is repaid.
By Year 50, the value of the accumulated difference in the costs of the two programs (plus
interest) is $2.2 billion.
-10-
Clearly, the long-term costs of the non-profit program are much greater than those for
shelter allowances. Next, it is illustrated that the ultimate mortgage-free ownership of the
properties does little to alter this conclusion.
Ultimate Ownership of the Property Insufficient to Offset the
High Costs of the Non-Profit Program
One of the advantages cited for the non-profit program is that the property is ultimately owned by
the third sector and therefore can continue to provide inexpensive housing services in the future once the mortgage is repaid. This is a serious issue - it is a critical factor on which the conclusion
that homeownership is a good long-term investment in the Clayton Research paper Homeownership
as an Investment (cited earlier) is based.
Forecasting the future value of real estate, particularly rental properties, is extremely difficult. For the
purposes of the comparison of the long-term costs of non-profit housing versus shelter allowances,
two scenarios are used regarding future increases in the value of the non-profit projects:
• A rise in property values at the rate of inflation (i.e. 3 percent); and
• No rise in property values.
The first scenario is considered to be unreasonably optimistic (properties generally depreciate over
time rather than appreciate) but it is included here to provide the limiting upside case of the
possible future values of the properties. It should be emphasized again here that no allowance has
been made for renovation costs or any additional investment in the non-profit properties beyond
those which could be financed through normal operating costs - or from the build-up of reserve
funds.6 If additional investment will be necessary (as seems likely), the costs of the non-profit program
will be greater than those estimated here - or ultimate values will be lower.
VALUE OF EQUITY IN NON-PROFIT PROJECTS
2 SCENARIOS OF PROPERTY
VALUE APPRECIATION
The initial value of the housing is
$112,000 per unit - almost $150 million
for the 1,335 units. In the early years,
there is little equity in the properties due
to the initial 100 percent mortgage particularly in the scenario where
property values do not increase with
inflation.
Over time, the mortgage is repaid and
equity in the properties rises.
Ultimately, with repayment of the
mortgage after 35 years, equity in the
properties reaches just over $400
million
under
the
(unlikely)
-11-
VALUE OF ACCUMULATED DIFFERENCE IN
SUBSIDY COSTS PLUS INTEREST AND
VALUE OF EQUITY
scenario of property values rising at a rate
equal to inflation - after 50 years, the
properties would be worth roughly $650
million.
As large as these amounts are, however,
they pale in comparison with the
accumulated differences in the higher
costs of non-profit housing compared to
the shelter allowance alternative.
Even at the optimistic scenario, the value of
the non-profit properties is still only $650
million after 50 years. But the
accumulated value of the differences in
costs between the two programs (with
interest) is over $2.2 billion.
Clearly, the eventual equity build-up in
the non-profit properties is nowhere near
sufficient to offset the higher costs of
operating the projects in their early years
and the interest cost on the borrowings
required to finance these higher costs.
Less Generous Assistance Under Shelter Allowances
Responsible for Only a Small Part of the Difference
in Costs Between the Two Programs
As noted earlier in this paper, the proposed shelter allowance program is less generous to the
needy tenants than the assistance available from the non-profit program. The proposed shelter
allowance formula is to provide assistance equal to 75 percent of the gap between 30 percent of
income and the rent on an adequate unit. Assuming a $670 per month unit ($8,040) and an income
of $14,000, the shelter allowance payment would be $2,880: 0.75 [$8,040 - 0.30 x $14,000] =
$2,880.
Thus, this tenant pays $5,160 per year in rent. The current rgi assistance available from nonprofit housing limits a tenant's rent payment to 26 percent of income - in this case it would be
$3,640. Under a new policy announced this year, however, the rgi rent is scheduled to rise to 30
percent of income ($4,200 in this example) by 1997.
The reasoning behind the design of the shelter allowance formula whereby assistance is limited to
only 75 percent of the gap between 30 percent of income and the rent is to encourage tenants to
seek inexpensive housing - since they would share in the benefit of lower rents. Tenants to be
similar to those available to non-profit rgi tenants if the formula were adjusted, for example, to 75
percent of the difference between rent and 25 percent of income could achieve this same incentive
while allowing actual rent payments. The other formula is used for the purposes of this
-12-
analysis because it is the one commonly used in Provincial programs in Canada - and was also used
in the previous analysis of the costs of shelter allowances.
The actual shelter allowance formula used does not significantly alter the conclusions of this
analysis of the relative long-term costs of a shelter allowance program versus non-profit housing.
To illustrate this, the analysis was
reworked to reflect the situation where
tenants in both the non-profit rgi units and
the shelter allowance recipients pay the
same proportion of their income in rent - in
this case 30 percent of income ($14,000).
This assumption does reduce the difference
between the costs of the two programs - but
only by a fraction of the total. The
cumulative higher costs of the nonprofit
program, plus interest, total $1.6 billion
after 50 years under this assumption
compared to the base case of $2.2 billion
using the other formula.
Large Cost Differential Even if Rents Rise
Significantly
It has been argued that rents would rise if shelter allowances were freely available to tenants.
While this has not been the experience in areas where shelter allowances are in use, this has been
raised as a concern if a large scale program were introduced and rent controls were relaxed.7
To examine the potential for such rent increases to affect the relative costs of nonprofit housing
versus shelter allowances, the analysis was adjusted to take account of a 10 percent increase in
market rents in the initial year - and assuming thereafter that rents rose 3 percent annually with
inflation. This in no way should be interpreted as a belief on the part of the authors that
market rents would rise to this extent (it is considered highly unlikely), however, the analysis
was undertaken as a theoretical exercise to assess how a very large increase in rents would affect
the analysis.
-13-
The chart at left illustrates the cost
difference between the 1,335 units of
non-profit housing and 1,000 shelter
allowance recipients over time assuming
that the initial rents of the market rent
units in the nonprofit housing and the
initial rents of the shelter allowance
recipients were 10 percent higher. Rents
are then assumed to rise by 3 percent
annually with inflation.
While the difference in costs between
the two programs is less if one assumes
this large increase in rents, the long-term
cost of the shelter allowance alternative is
still substantially lower than the cost of non-profit housing.
At Year 35, the cumulative difference in costs (plus interest) totals $635 million -compared to
just over $900 million in the base case scenario (without the large initial increase in rents).
After 50 years, the cumulative difference in costs is $1.4 billion as the interest charges on the
higher costs of the non-profit program in the early years continue to mount. While less than the
$2.2 billion outstanding after 50 years in the base case scenario, this is still a very substantial
difference in long-term costs in favor of the shelter allowance approach.
Conclusion - Clearly Both the Initial and Long-Term Costs of Shelter
Allowances are Significantly Less Than the Costs of Non-Profit Housing
Shelter allowances clearly are a much more cost-effective means of providing housing for needy
tenants than providing non-profit housing. The non-profit program builds up a stock of housing
which, once paid-off, offers the potential for cost savings relative to shelter allowances assuming no significant renovation costs are required.
However, over the 35-year period while the mortgage is being repaid, the costs of nonprofit
housing are significantly higher than the costs of a comparable shelter allowance program.
The accumulation of these higher subsidy costs, plus the substantial interest costs required
to finance them, more than offset the value of the non-profit projects in the long-term.
The fact that the shelter allowance approach offers cost savings is due in part to the less
generous assistance provided - though much of this difference will be eliminated as the non-profit
program moves to rgi rents equivalent to 30 percent of income over the next few years. However,
as is demonstrated in this report, this accounts for only a relatively small portion of the cost
difference between the two approaches. The shelter allowance program could be designed to
ensure the rents paid by needy tenants are the same as those offered by non-profit housing and
still be much less expensive than the non-profit alternative.
The main reason why shelter allowances would be less expensive is that they provide assistance to
needy tenants within the existing housing stock - most needy tenants are already adequately
-14-
housed, their problem is that they cannot afford the rent. Rents in the existing stock are much
lower than the costs of building new non-profit housing. Also, there is no need with shelter
allowances to provide subsidies to house non-needy tenants in order to provide for income
mixing - as is the case with nonprofit housing.
-15-
APPENDIX
COMPARISON OF THE LONG-TERM COST OF SHELTER
ALLOWANCES AND NON-PROFIT HOUSING
-16-
COMPARISON OF THE LONG-TERM COST OF SHELTER ALLOWANCES
AND NON-PROFIT HOUSING ($000)
Assumptions: See description in main body of report
-17-
ADDENDUM
In reviewing the report when it was first released, some commentators questioned why the
cumulative value of the differences in the subsidy costs of shelter allowances versus non-profit
housing was used rather than discounting the differences to present value. This approach was
used for two reasons:
•
To present the results in the same manner as was used in the report cited
earlier, Homeownership as an Investment - as noted, that report has
been used by some to conclude that non-profit housing must also be a good
investment so, to facilitate comparison, the same approach was adopted.
•
Many observers are not familiar with the concept of discount rates and
present values.
For those who are interested in examining the results in present value terms, these have been
calculated and are presented here. For the purposes of these present value estimates, this analysis
uses the long-term government bond rate used in the report (8 percent for the first five years
and 7 percent thereafter).
The present value of the differences in the
annual costs for the two programs to provide
1,000 units for needy tenants over fifty years
are presented in the chart at left.
In the initial years, shelter allowances are
considerably less expensive than non-profit
housing. Discounting, of course, reduces the
present value of these differences significantly
over time.
CUMULATIVE PRESENT VALUE OF ANNUAL
DIFFERENCE IN SUBSIDY COSTS
After the mortgage is repaid in Year 35, the
non-profit projects generate a surplus. Thus, the
balance shifts so that the annual costs of shelter
Allowances exceed those of nonprofit projects. In
present value terms, this surplus is small.
The cumulative value of these differences is
substantial. By Year 35, the cumulative present
value of the difference in annual costs of the two
programs totals $84 million - an average of
$84,000 for each of the 1,000 units of assisted
housing.
-18-
This is reduced slightly in subsequent years due to the operating surpluses of the non-profit
housing (assuming no requirement for additional investment to renovate the non-profit projects)
and totals $75 million after 50 years - $75,000 per unit of assisted housing. To bring this into
perspective, a difference of $75,000 or $84,000 per unit in the present values of the subsidies for
the two programs represents over two-thirds of the initial $112,000 per unit capital costs of the
non-profit projects.
PRESENT VALUE OF CUMULATIVEDIFFERENCE
IN SUBSIDY COSTSAND EQUITY AT YEAR 35
Bringing in the present value of the
equity in the non-profit projects does
not alter the conclusion that non-profit
housing is much more expensive than
shelter allowances.
Even using the unrealistically high
assumption that the projects rise in value
at the rate of inflation, the present value
of the projects after 35 years totals only
$40 million. This is $44 million less
than the cumulative present value of the
difference in subsidies between the two
programs.
Therefore, even allowing for a very
optimistic estimate of the value of the projects themselves, the present value of the differences in
the costs of the two programs after the mortgage on the non-profit housing is repaid totals over
$40 million for the 1,000 units of assisted housing (1,335 units including the market rent
units). In per unit terms, the present value of the excess of subsidy costs for non-profit
housing compared to shelter allowances totals over $40,000 per assisted unit
This excess cost of non-profit housing compared to shelter allowances actually widens (in present
value terms) to over $50,000 per assisted unit after 50 years as the present value of the
future equity in the non-profit units diminishes using the discount factor.
Therefore, the use of present value analysis does not alter the conclusion reached in the analysis
using the cumulative value of the differences in subsidy costs plus interest: non-profit
housing is a much more expensive approach to providing assistance to needy tenants than
shelter allowances. Put another way, per dollar of expenditure, many more needy tenants could
be assisted through shelter allowances than through provision of non-profit housing - in both
the short-term and the long-term.
October 26,1993
-19-
COMPARISON OF THE LONG-TERM COST OF SHELTER ALLOWANCES
AND NON-PROFIT HOUSING ($000)
-20-
ENDNOTES
1
Clayton Research Associates Limited, The Cost of a Shelter Allowance Program in Ontario, prepared for the
Fair Rental Policy Organization of Ontario, June, 1993 - the study used CMHC"s core housing need model to
provide information on tenant characteristics, incomes and rents and a shelter allowance equal to 75 percent of the
difference between rent paid and 30 percent of tenants' income (subject to a maximum rent based on market rents
for suitable accommodation).
2
Peter Dreier and J. David Hulchanski, "Role of Non-Profit Housing in Canada and the United States", Housing
Policy Debate, Volume 4, Issue 1, page 58. The article refers to a report (Homeownership as an Investment),
prepared by Clayton Research for the Canadian Home Builders' Association in 1992, which concluded that
homeownership was a good long-term investment
3
These non-profit cost estimates are much lower than earlier estimates of the typical cost of non-profit units (e.g.
those contained in the 1992 report of the Provincial Auditor) because they relate to the costs of new projects at
present rather than the costs which prevailed over the past few years. The estimates used here are based on
discussions with Ministry staff regarding the costs of the current round of non-profit projects and they also
incorporate consideration of the reduced interest rates which currently apply. However, they are still estimates
since hard data are not available from the Ministry for much of this analysis.
4
In the previous report, the average shelter cost on which the Provincial shelter allowance estimates were based
was $6,300 per year (the average for all tenants in core housing need in Ontario in 1991 as estimated in CMHC*s
core housing need model). The $8,040 estimate for Toronto used in this report is much higher. It was derived by
taking the average shelter costs in the earlier analysis with several adjustments to reflect the higher housing costs in
Toronto, inflation since 1991 and a different mix of tenants. The mix of tenants was assumed to be 30 percent
seniors and 70 percent families. Therefore, no non-elderly singles (which are not a priority group for housing
assistance) were assumed to receive shelter allowances in this analysis. Non-elderly singles were included in the
previous analysis since they are included in CMHC's definition of core housing need - since they have relatively
low rents, their exclusion from this analysis led to an increase in the estimated rent for tenants with shelter
allowances.
The analysis here, therefore, yields a much higher average shelter allowance because it assumes both a higher rent
and a lower income than were used in the estimates prepared in the previous report on the cost of shelter allowance
for the Province.
5
This is higher than the 2 percent inflation rate assumed in Homeownership as an Investment
since the earlier document deliberately understated expected inflation in order to demonstrate that homeownership
was a good investment even at low rates of inflation. Based on the experience of the past three decades, there is
little doubt that homeowners gain from higher inflation.
6
Most rental buildings (both private and public) face substantial renovation costs as they age. This includes regular
replacements and upgrading as well as major renovations which are generally required over a long period - such as
the 50 years used in this analysis. Assuming that reserves will be sufficient to cover this work is particularly
doubtful given the current moratorium on these reserves in non-profit housing.
7
Several research studies have concluded that shelter allowances do not result in an increase in rents. See, for
example, Marion Steele, Housing Allowances, An Assessment of the Proposal for a National Program for Canada,
January, 1985, pages 18-20; and the U.S. Department of Housing and Urban Development, Experimental Housing
Allowance Program, Conclusions, The 1980 Report, page 50.