© 1991 Karen Selick
  There's Gold in That Thar' Non-Profit Housing
An edited version of this article first appeared in the October, 1991 issue of Canadian Lawyer.  If you wish to reproduce this article, click here for copyright info.


 There's Gold in That Thar' Non-Profit Housing

What's so magical about the expression non-profit?  Why are so many Canadian politicians clamouring for non-profit housing when the rest of the world is turning to the profit motive as an antidote to the ravages of socialism? 

Politicians seem to operate on the theory that the government can produce things more cheaply because it doesn't have to make a profit.  It's as though profit were a layer of cream floating atop a bottle of overhead, waiting to be skimmed off by fat, lazy businessmen.  Eliminate the cream, and the cost of the finished product would be less.

That's seductive imagery, but inaccurate.  The truth is, the non-profit housing bottle actually contains something more like homogenized milk.  There's plenty of cream in there, but separating it would be virtually impossible. 

Almost every step of a non-profit housing project is carried out by someone who is in it for the profit, from the architect who draws up the plans, to the painter who finishes the walls.  You don't find tradesmen or suppliers turning down contracts for these projects because they're unprofitable.  In fact, the construction industry promises to be a more effective, if subtler, lobby group for non-profit housing than the people who will eventually occupy the houses.

There may be no entrepreneur orchestrating the whole thing for a slice of the pie, but the career bureaucrats in various housing ministries and the emerging class of non-profit development consultants don't work for peanuts either. 

If you really wanted to test the layer-of-cream theory, you'd have to set up non-profit corporations for every component of the project: non-profit concrete, steel, lumber, drywall, paint, landscaping, and so on.  Of course, each new non-profit enterprise would face the same problem; its suppliers would be trying to make a profit.  You'd have to nationalize the whole economy to make a serious effort at squeezing out the cream. 

Fortunately, those considerate citizens of the Soviet Union have already tried this experiment for us.  Their economy (not to mention their housing stock) is crumbling around their ears.  Maybe we can learn from their mistake without having to repeat it ourselves. 

In Belleville, Ontario, where I practice law, the local newspaper reported that a recently constructed non-profit complex of 48 townhouses will receive annual subsidies of $537,000, or $932 per home per month.  That ignores capital costs, which were also subsidized.  In nearby Trenton, a similar project is subsidized to the tune of $959 per home per month.  The classified ads in the same newspaper show that in both cities, you can rent a detached 3-bedroom house for $600 to $875, from a variety of private landlords greedily trying to make a profit.

There is mounting evidence that government-produced goods and services always cost more, not less, than the same things produced in the marketplace.  In its Fifth Annual Report on Privatization, the Reason Foundation found that governments around the world had privatized functions such as garbage collection, transit systems, fire departments, recreational facilities, prisons, airports, and many others, with savings ranging from 10% to 40%.  Forty-five percent of those governments reported significantly improved quality. 

There is indeed a shortage of housing for lower income tenants and buyers, but the failure is not one of the marketplace.  Left free to exercise their ingenuity, entrepreneurs routinely service both the upper and the lower ends of any market, and make money at both ends.  The clothing industry is a good example.  There are high-priced stores like Holt Renfrew and cut-rate places like Bi-Way.  Both make a profit, and nobody's clamouring for the government to establish non-profit clothing stores.

Housing is different because the profusion of controls and regulation has made the lower end of the market a "non-profit" proposition even for those who would like to be in the industry earning a profit.

Rent control is probably the biggest culprit, reducing both the supply and quality of rental housing.  Swedish economist Assar Lindbeck has called rent control "the most efficient technique presently known to destroy a city--except for bombing."

Some would-be tenants who can't find places to rent decide to buy instead, thereby driving up prices at the lower end of that market too.

The artificial push into home ownership is aggravated by the capital gains tax exemption for principal residences.  This increases demand for houses relative to other investments, but doesn't affect supply.  The result: higher prices.

Zoning is another culprit.  Minimum lot size requirements, for example, allow existing homeowners to drive up the values of their own property, while denying others the opportunity to join their ranks.

The Ontario Home Builders Association has catalogued 280 provincial acts, 460 codes and 400 regulations governing housing construction.  Compliance with all this law means that it takes on average 10 years to convert raw land into housing lots.

Some U.S. studies have estimated that the cost of regulatory compliance constitutes 20 to 30 percent of the price of a new house.

This is all so obvious that one can't help wondering about the motivation of those who impose these laws, then agitate for non-profit housing.  Is it stupidity, or is it malevolence?  I'm still deliberating.


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