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Tax reform could spell trouble for low income housing construction

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Lower corporate tax rates weakened the incentive for developers to use the Low-Income Housing Tax Credit program, which could prompt affordable housing construction to fall by as much as 40% by 2022, according to data aggregator Reis.

Affordable housing supply under the LIHTC program rose 0.9% from a year ago and inched up 0.7% for the third consecutive quarter, Reis said. The national vacancy rate of the sector also held firm at 2% for the third consecutive quarter, but jumped 20 basis points from the second quarter of 2017.

Despite affordable housing holding steady, subsequent effects of the Tax Cuts and Jobs Act of 2017, which devalued tax credits for low-income housing, should take shape over the next few years. A drop in the corporate tax rate to 21% from 35% gives sources of financing less incentive to invest in LIHTC properties. Construction in the sector is expected to drop 40% between 2019 and 2022.

While affordable housing completions were up slightly, the measure of 7,300 units in the second quarter was lower than the quarterly average of 8,000 units over the past year. Completions in 2Q18 hit their lowest level since the third quarter of 2017. Still, rent growth was 3.2% over the past year and 1.3% in the quarter, marking the greatest growth rate since the end of 2015.

Completions are expected to average 26,100 units over the next five years, according to Reis estimates.

The government-sponsored enterprises made substantial equity investments in LIHTC properties prior to the crisis, and returned to the market last November in an effort to stabilize affordable rental housing.

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