A Community Solution to the Housing Crisis

We all know there’s a big problem with the lack of affordable housing. But what’s a good solution?

BY TIM NASH

July 14, 2023

Housing is a fundamental human need, and there is no good substitute for a roof over your head. You either rent or you buy, so when both options are extremely expensive something’s gotta give. People are frustrated, angry, and scared, and I don’t blame them. Housing insecurity sucks!

There is no simple solution to the housing crisis, there are no silver bullets here. It’s a systemic problem, and it’s going to take a range of solutions to make a dent. We used to build a lot of housing owned by nonprofits and co-operatives in Canada, but no more. We’re left with the age-old question “Who’s going to pay for it?”. Fortunately, we have a great answer – Community Bonds!

WTF are Community Bonds?

First, you need to understand what a bond is and then we’ll get to the community bit. Bonds are debt. When I buy a bond, I’m loaning money to a corporation or government. For example, I might buy a 5-year government of Canada bond that pays 3.5% per year. I buy the bond for $1,000, earn $35 every year for 5 years, and then get my original $1,000 back at the end of the term. You’re with me?

A community bond works the exact same way, except we are loaning that money to a nonprofit or co-op in our local community. We still earn a financial return, but the money stays in our backyard and helps to build assets that make the world a better place.

A Better Place? Really? Tim, Are You Greenwashing?

The positive impact of community bonds is undeniable. I get that there’s concern about greenwashing in sustainable finance when it comes to “doing less evil” strategies like divestment and ESG analysis. But community bonds are very much on the “doing more good” side of the spectrum. Instead of going through brokers and secondary markets, we invest in Community Bonds directly with the nonprofit or co-op. It often means there’s a little more paperwork, but you can rest assured knowing that you’re funding an impactful project.

What Kinds of Projects?

I personally own three community bonds. The first one I bought is a solar bond from SolarShare – they are a nonprofit co-op that builds community owned solar projects all over Ontario. Pretty cool, eh? The second one I bought is from the Centre for Social Innovation – a nonprofit co-working office with two locations in Toronto where I’ve had space for over 12 years. How the heck does a nonprofit buy two gorgeous 5-storey buildings in downtown Toronto? Community bonds! The most recent community bond I bought is from Sketch – a nonprofit that offers arts programming to youth who are experiencing homelessness. I’ve so often felt hopeless about the homelessness situation in Toronto, so I feel really good knowing that I’m helping kids find a home at Sketch.

The next wave of community bonds coming on the market are mostly focused on affordable housing across Canada. Propolis is building a sustainable housing co-op in Kamloops, BC. Places for People are consolidating their existing properties in preparation for a bigger multi-unit building in Haliburton, Ontario, and Kensington Market Community Land Trust is buying property in the iconic Toronto neighbourhood to makes sure it stays affordable. It feels like nonprofits and co-ops are catching on to the community bond model, and we are just scratching the surface of what is possible!

Am I Giving Up Financial Returns?

It depends. Each community bond is different, so you need to evaluate the risks and returns of each option. I find that most community bonds offer anywhere between 2-5% annually, which is in-line with low-risk investments like GICs or government bonds. However, community bonds do come with more risk. Aside from the regular liquidity risk (you can’t sell them if you need the cash back) and duration risk (interest rates are fixed, so if rates keep going up the current rate won’t be as attractive), community bonds are subject to a higher degree of default risk (the possibility that the organization goes bankrupt and is unable to pay back their debt).

This default risk is the big one that investors need to think about. There’s always a chance that the organization will fall on hard times and be unable to pay back their debts. That’s why I prefer to invest in community bonds that are “asset-backed”. This means that the bond is being used to purchase a physical asset like a building or solar project, so that if the organization does go bankrupt, then they will sell the asset to pay back their debts. I might not get all of my money back if the asset gets sold for a low price, but I’ll probably get at least some of it back. I’m also reassured that these purpose-driven organizations are going to fight tooth-and-nail to keep their doors open. Private investments will often fold at the drop of a hat if things turn unprofitable, but I’m confident that community bonds are more resilient because of their mission. Still, you only want to invest a small percent of your overall investment portfolio into community bonds and it’s a good idea to spread it around.

How Do Community Bonds Fit in My Portfolio?

I consider community bonds to be my “doing more good” fixed income allocation. I never suggest investing more than 10% of your total portfolio into community bonds, and it’s perfectly fine to start at 1% or less. It’s a pain to hold them inside of an RRSP or TFSA (more paperwork and annual fees), so I suggest holding them as ‘unregistered’ which means that you’ll pay taxes on the income you earn.

Figuring out how community bonds fit into your overall investment strategy is a big part of what we do here at Good Investing. We’re always happy to chat about it with a free consultation.

How Do I Learn More?

We keep an up-to-date list of impact investments for Canadian retail investors on our website. Keep an eye on this list to see when new community bonds become available.

Good Investing is here to help you invest sustainably.