The cost of affordable housing: Does it pencil out?

Canada is currently grappling with a shortage of affordable rental housing. The most recent Canadian Census in 2021 revealed that 2.6 million Canadians live in core housing need, meaning their current housing is either unsuitable, inadequate, or unaffordable, and they would need to spend 30% or more of their household income to meet basic standards.

Suitability refers to having enough bedrooms for the household's size, adequacy refers to housing in good condition and meets the needs of the household (without major repairs needed); and affordability means spending no more than 30% of before-tax household income on housing.

This stark reality underscores communities' critical role in developing all housing types, ranging from purpose-built rentals to co-operatives and mixed housing models, particularly, when the private market is out of reach.

To bridge this gap, we must work together to address barriers that hinder the construction of these desperately needed units.

Despite community housing's critical role in communities across the country, the question remains: why is it so challenging to build these units, and what can we do about it?

Below, we explore why affordable housing is so expensive to build, how it is typically financed, and what it will take to ensure low-income Canadians can access safe, secure housing that meets their needs.

This shortage of affordable housing leaves many households struggling. A single parent working two-part part-time minimum wage jobs might wait months or years for a community housing unit. But despite this high demand, developers aren't racing to build new affordable housing.

The challenge? Building affordable housing is not particularly affordable. There is a persistent gap between the high cost of constructing and operating these developments, and the rents people with low incomes can realistically pay. Without government subsidies or other supports—which are often scarce—many affordable housing projects simply do not "pencil out."

This interactive framework explores why that gap exists, how affordable housing is typically funded, and what it takes to close the gap for households with the lowest incomes in Canada.

Where is there a gap?

High Development Costs

Building an affordable housing development is expensive. Developers often borrow heavily to pay for the land, permits and materials, all before a single tenant moves in and starts paying rent. But if a building's projected rent income isn't high enough to cover debt service and provide an essential return, banks and other lenders won't approve a loan, or will only lend a fraction of the total cost.

Without external subsidies from federal programs under the National Housing Strategy (NHS) or provincial, territorial or municipal funding streams, affordable housing developments stall, leaving few viable options for many Canadians who need below-market rents.

This problem is even more acute for households at the very lowest end of the income spectrum in many regions. The rents these households can afford are too low to cover building operations, even if the property was constructed at no cost or has no capital debt.

Typical Example: To illustrate this, consider a mid-sized Canadian city such as Calgary. Development costs in Calgary, including land, labour, and materials, are significant (although they may not be as high as in other communities, including most urban centres). The math behind building affordable units usually follows the same formula across provinces.

Development costs a lot of money. Developers rely on loans and other sources to fund construction before people move in and start paying rent. However, developers can only secure those loans and equity sources if the operating income from the building is enough to make the loan and pay returns to investors. This stops affordable housing development before it even begins, leaving few options for the millions of low-income families looking for safe, affordable homes.

The problem is even more difficult when you consider the lowest-income households. In many places, lowest-income households cannot pay rental rates that cover the costs of operating an apartment building, even if developers could build that building for free.

Uses (Development Costs)

Housing developments involve multiple "uses" of funds

Other uses include soft costs (architectural, engineering, legal fees), interim financing costs (interest on construction loans), permanent financing fees, reserves, contingency allowances, project management fees, and preparing applications for different funding streams.

Simulate donated public land >

The following significant development cost is construction. While a developer could make some decisions to minimize construction costs, market forces largely determine these costs.

A third use to consider is the developer fee. This fee is built into calculating the development costs because a developer uses it to pay all the costs of doing business: hiring staff, running an office, finding new opportunities, and more. While some community housing providers absorb these costs, they are still quite extensive. Affordable housing developers can defer some fees, leaving more money to cover development costs. The developers then recoup the deferred portion of the fee as rents are paid over time. This assumes that the gap is eventually closed, the building is built, and it operates successfully for years.

While these are three crucial uses a developer must account for, other costs include design fees, construction loan interest, permanent financing fees, reserves, and project management fees.

Sources (How Developers Pay for it All)

To cover these substantial costs, developers must rely on funding sources, most commonly:

Provincial and Territorial Differences

Each province and territory has its own funding mechanism and housing strategies. The diversity of policies can dramatically affect affordability and project viability from one region to another.

Developers rely on various sources of money to cover the costs of building and operating a housing development. One important source is debt, which they borrow from lenders based on the amount they can pay off over time.

Though the current market affects the loan terms, developers are unlikely to get a loan big enough to close the gap.

To demonstrate this, we look at vacancy rates, which are generally an indicator of market strength. In a very tight rental market (low vacancy), a building generates a more consistent income, so you'd expect a higher mortgage rate. Repricing is hard in affordable housing and other factors can also lengthen vacancy.

Since the size of the loan is based on the future rents the building is expected to bring in, lower vacancy rates—and the resulting increase in income—should increase the size of the loan. Below, you can adjust the vacancy rate to see its effect on the gap.

Vacancy Rate & Financing

A building's expected rent revenue partly hinges on its vacancy rate, the percentage of units sitting empty at any given time. In a very tight rental market (low vacancy), a building generates a more consistent income, which can justify a larger loan. However, including minimum rent and other provisions for rents within lower funding guidelines can limit the loan. However, even with a low vacancy rate, the maximum loan combined with grants might not cover all costs, leaving a gap.

Another consideration is the availability of tax credits, which are a way to encourage affordable housing development. Besides loans, there are grants, but these sources come with very clear conditions.

Closing the gap

Can we close the gap…with larger loans?

If public funding isn't enough, why not just borrow more? Lenders calculate the maximum loan using debt service coverage (DSC) requirements and interest rates. The project's NOI must comfortably exceed the annual loan payments, so the organization is not constantly at risk of default. Lower rents = lower NOI = smaller possible loan. Bigger loans alone rarely solve the affordability gap for affordable housing developments.

At this point, it's fair to ask: If there aren't enough grants or tax credits, why don't developers take out bigger loans to get the building off the ground?

In short, lenders won't (and shouldn't) let them. A bank's loan size depends on the project's net operating income (NOI) or the amount of money it expects to bring in from rent after accounting for operating expenses.

Lenders use NOI to calculate how much debt a developer will reasonably be able to pay off, accounting for interest and recognizing the developer still needs to have some cash flow to cover unexpected expenses.

But if the rent is set at rates that a working family can afford, the NOI will be pretty low. It might even be less than zero if operating costs exceed revenue. The lower the NOI, the smaller the loan.

Can we close the gap…with more units?

Increasing the number of units can make some aspects of development more cost-efficient (spreading land or soft costs across more units). This is often referred to as economies of scale. However, that assumes enough demand to fill them and that local zoning allows for higher density. Even with larger projects, subsidies are typically needed, primarily to support the very low-income units.

Raising the rent?

A quick path to boosting NOI is charging more in rent. Yet, when rent surpasses 30% of a household's income, it is no longer considered affordable. For developments that serve extremely low-income households, even a modest increase can make rent unaffordable, which, for many community/affordable housing providers, fundamentally conflicts with their mission. The core goal of non-profit housing organizations is to ensure low-income households have access to stable, affordable homes, not to maximize rent revenue. Instead of relying on rent increases, most non-profit housing providers focus on long-term affordability through alternative strategies, such as:

• Use mixed market rent structures that balance market, near market, and affordable units to reduce reliance on grants.
• Layering funding sources (e.g. municipal land contributions, rent subsidies funding through federal and provincial governments, grants and other funding streams)
• Leveraging economies of scale to reduce per-unit costs
• Building mixed-income developments where moderate-income renters help cross-subsidize lower rents

Long-term affordability requires substantial public investment, cost-efficient development models, and sustained operational support to keep rents low while covering costs.

The Role of Non-profits, Housing Management Bodies, Co-ops and Indigenous Housing Providers

So, if you need a higher NOI to get a bigger loan, why not add more units to your development to increase the NOI? Though this will increase construction costs, some costs, like the acquisition cost and project management fee, may remain the same or increase more slowly, helping close the gap.

So... How Do We Truly Close the Gap?

If a funding gap remains after layering available supports, it indicates that projected rents and financing are not sufficient to fully cover development costs under current conditions.

Closing the viability gap typically requires a combination of tools working together, including:

• Rent assistance such as the Rent Assistance Benefit (RAB), the Canada Housing Benefit, or other portable housing allowances that reduce the tenant’s share of rent while allowing projects to operate sustainably.
• Capital grants from federal, provincial, and municipal programs to reduce upfront development costs.
• Donated or discounted public land that removes or significantly reduces land acquisition costs.
• Favourable financing, including CMHC programs such as the National Housing Co-Investment Fund or access to lower-interest, long-term borrowing for Housing Management Bodies through provincial financing mechanisms.
• Land-use reforms and construction innovation, such as modular or prefabricated building methods, which can reduce costs and timelines but are rarely sufficient on their own.

For the lowest-income households, particularly those in housing with on-site services or supports, both capital subsidies and ongoing rent assistance are often required to keep housing affordable over the long term.

Subsidies are essential to closing the gap.

Changes to land use, regulations, and construction methods can help narrow the affordability gap, but they are not enough on their own. Most affordable housing projects require subsidies to be financially viable.

Subsidies serve different purposes. Rent assistance programs, such as the Rent Assistance Benefit (RAB), support households directly by reducing rent burdens while allowing projects to operate sustainably. Other supports reduce upfront development costs, including CMHC financing and capital programs, provincial funding such as the Alberta Affordable Housing Partnership Program, and municipal tools like land contributions, fee waivers, and property tax exemptions. Incentives for modular and modern construction methods can further reduce costs and timelines.

No single tool can solve the affordability challenge. Closing the viability gap requires layering development financing, municipal supports, construction innovation, and ongoing rent assistance, particularly to serve the lowest-income households.