Gender Income Gaps, Shelter costs, and equity

 

Source: https://blog.vantagecircle.com/gender-pay-gap/

               Time to be a little bit of a nerd and get excited about census data release day. Unfortunately, other than the data being released, there is little to get excited about.  In the below image we can see the income profile for men and women in Langford. What we see is, unfortunately, reminiscent of what is seen in many communities around Canada, Women tend to be over-represented in the lower incomes, while men tend to be over-represented in the higher incomes. Without getting into the causes, or some of the (terrible) justifications for a gender wage gap, I want to take a look at the impact this has on the security of housing.

               With highly inflated house prices and interest rates on the rise, I wanted to take a step away from the ownership discussion because i) the current carrying costs of qualifying for a new mortgage are so ridiculous that very few people possibly could unless they already have a sizeable amount of equity and ii) because the recent census release also included the housing tenure information which showed that, at just over 35%, an increasing number of Langford residents are renters.

               With ownership, the majority of owners are shielded by wild swings in the valuation of their property, and with most Canadians utilizing fixed-rate mortgages, many will continue to be shielded from interest rate fluctuations for up to the next 5 years.

               The same is not true for renters. Renters typically face annual rent increases up to the maximum as set by the provincial government. But as renters move due to changing housing needs, or to be closer to work, or due to eviction, their rent is re-negotiated at market prices. This means that renters are far more susceptible to paying the current market rent than homeowners are to the current market payment for housing. That is, Renters are more likely to be paying the current, high, market price of rent, well homeowners are more likely to be locked into a constant, lower, payment for their home.

               Thus, if we look at current market rents, versus current incomes, what we find is that only the top 19.85% of income earners are able to afford an average 1-bedroom rental at an affordable rate in Langford.

               Note: Affordability is determined as 30% or less of your before-tax income going towards shelter.

               What is exceptionally troubling is if you break this down by gender. Amongst those identified in the census as male, the top 26% of income earners are able to obtain the average 1-bedroom at an affordable rate.  While only the top 13.7% of female earners are able to obtain a 1 bedroom at an affordable rate.

               It is often presented that renting is a stage of life that you get through until you can obtain high enough income and wealth levels to afford to buy. What we are finding is that this is untrue, with all but the highest income earners being unable to rent a 1-bedroom in an affordable fashion.

               Many argue that this is an unfair verdict. The average household in Langford is 2.4 people, after all, thus most of the time these shelter costs are split between two income earners. We can similarly look to see what percentage of households are able to afford a 1-bedroom. The issue that then arises is that a 1-bedroom may not be suitable for a 2.4-person household – but we will overlook this to maintain a constant comparison.

               The further issue is social in nature and is that as housing becomes increasingly unaffordable for a single individual it encourages individuals to remain in relationships they may not otherwise remain in out of economic necessity. This creates understandable problems that I will not go into here.

               Just the same, we can see in the image below the distribution of household incomes, and from this determine that only the top earning 31.25% of households would be able to afford a 1-bedroom rental at an affordable rate. While this is better, it still signifies a huge problem in that only the top-income earners can afford to rent at an affordable rate.

          With homeownership becoming increasingly out of reach resulting in an increasing percentage of our residents being renters – we cannot afford to overlook this segment of the population. As a city, we need to ensure that rentals are being built and provided to residents at an affordable rate. It is through the initial years of renting that a household can build up the wealth needed to enter the housing market. If the rental market itself is closed off to all but the highest income earners then how can this happen?

This is clearly an issue that affects all members of society, even those in the top income brackets. What do you see as a potential solution? 

Feel free to comment below. 

Does Density Do Anything?

 

This is in response to an article written by Patrick Condon, the original can be found here.

First off, this is an excellent article at getting at many of the problems we face with urban economics – for any who are not aware of the works of Henry George, I would highly recommend giving it a read. George was alarmed by the inequity created by simply gaining wealth by owning land (without any improvement being made), this kind of situation is known as economic rent and is typically seen as not ideal. George promoted a land value tax, but unfortunately at the time (as it is now) many of the neo-wealthy had made their fortunes and continued to make their fortunes from appreciating land values “while they slept” – thus he was met with fierce opposition.

I can’t find it for the life of me now, but a post along a similar argument as the one being made here by Condon was made about a month ago by a UBC prof. Both essentially argued the same thing, that as soon as the property is subdivided, the value of the land increases, erasing any potential savings from densification.

However, my fear is that many will take this conclusion that density (on its own) may not help affordability, and take this to mean that density does not help. 

Before I get into discussing the why of this, I want to highlight that Condon (the writer of this article) at the start lays out many of the benefits of densification, even if prices do not drop – in addition to the benefits Condon lays out, as we are on the precipice of a climate crisis, and governments are facing an increasing budget crisis (not to mention the housing crisis, etc.), the greener nature of dense building (with adequate green space and parks that we don’t see here in Langford) coupled with the cheaper cost to provide services, is a step In the right direction for many of the problems we face.

Ok, so then why – Why is it that when a parcel is subdivided, the values shoot up? The big explanation (as far as I have been able to tell) is due to restrictive zoning. Restrictive zoning is only a by-product of the last 100 years or so (less in some cities) and is by far and large a racist, and colonial response to planning with many restrictive covenants and zoning bylaws being put into place to limit the ability for certain undesirables (non-western-European immigrants) to be able to access a given area – this, sadly enough, is why cities like Toronto abandoned low rise apartments (the so-called missing middle) in favour of Single-Family Housing (SFH) almost 100 years ago.

So other than the overtly racist undertones in the history of zoning – why does it create this problem?

It creates the problem because it takes the standard market for housing and then through regulation and laws, separates it into multiple smaller markets for housing. Because of this, you get oddities in some areas where the cost of commercial buildings can run significantly cheaper than the cost of residential buildings, even if they are side by side (this is not the case here as we also have a lack of commercial space).

The reason we see this is because you have very different people competing for real estate for living versus for commercial purposes, the result, the land that is “ear-marked” for commercial can go for significantly less than if it was “ear-marked” for residential, simply because there can be less demand for this space.

The same occurs within residential zoning – Imagine an entire city zoned for single-family housing (SFH). There are lots of people looking for a house and want to buy, but as the whole city land is used up for SFH, there is nothing available for them, so values start to rise as they try to out-bid each other for the few houses available. Clearly more needs to be built, but (A) there is no more land within city limits, and (B) zoning only allows for SFH to be built.

Let’s suppose, that as a trial, the city decides to allow a certain parcel to be subdivided, or allows the zoning to be changed to allow denser housing to be built – what happens? All this pent-up demand from people looking for housing (and unfortunately speculators looking to make a $) all rush in to purchase this newly made available land, thus further driving up the price. The trial appears to have been a failure.

The problem with it is that you just created a momentary market for a single good that a lot of people wanted – of course, they piled on and bid up the price. As long as the city continues to sub-divide or allow densification on an ad-hoc, one-off basis, this will continue to happen as each time this becomes available the pent-up demand will rush in, bidding up the price, until equilibrium is met.

It has thus been argued that if the city were to significantly relax their zoning requirements – IE, instead of setting areas as only SFH, they can set them as a “residential” blanket allowing a degree of density, this would eliminate the gold-rush mentality and help to stabilize land prices – If memory serves, Vancouver attempted this a few years ago to a limited degree on one street and still saw prices balloon – why? Because it was still done on a limited scale with people believing (rightfully so) that this was a one-time, one-off event, and while on a slightly larger scale, was still a land gold rush.

In my opinion – to help alleviate this, one needs to adopt a two-pronged approach – (A) conduct a complete overhaul of zoning laws to make them less restrictive and allow densification across the board. (B) adopt taxes as first promoted by George and re-iterated again in this article by Condon.

Such a tax allows – as proposed by George – much of the gains from this land appreciation to be recaptured by society, not the few landowners and developers, and thus can be utilized by the government to provide increased public infrastructure and services.

Unfortunately. like in Georges's day, the idea of increased taxation on land will be highly unpopular as in his day we have a massive class of neo-wealthy who would be negatively impacted by such a tax, and thus would be more than incentivized to speak out and disprove the effectiveness of it. 

While opinion pieces are interesting - keep in mind, they are just opinions.

 

     I came across an article in the Globe and Mail yesterday titled, "Politicians are selling us a myth on housing: that more supply will be our salvation" by Gary Mason. While these kinds of articles always make for an interesting read - and always sucker me in - thus fulfilling their purpose.

     In response to the author's statement, ultimately - no, the writer did not magically find some exception to the rules of supply and demand.

     While Mason makes a convincing argument that is easy to follow and easy to believe - the crux of the argument is that building more supply won't fix the problem because we are building luxury units for investors and the rich - if we want to solve the problem we need to restrict demand, not fix supply, this is clearly true because they are building highrises in Vancouver, and affordability has not gotten any better.

     Ok - let's address the problem in the arguments.

     First, as repeatedly mentioned, yes speculators and massive real-estate investment are a concern - but it is important to recognize that these actions are a symptom of the problem, not the problem itself. You could not make money in real estate if we were not supply-constrained pushing up the price. Thus it is because of the supply constraints that investors are attracted to real estate because they know as long as supply continues to be constrained, they can continue to make money. Thus to say it again - real estate speculation and investment is a symptom, it in itself is not the problem. Like with medicine, if we chose to just treat the symptoms, we may feel better, but we will just be ignoring the root underlying issue.

     The next issue is that the author, Mason, believes that somehow he has found a situation where the rules of supply and demand do not apply. Mason brings up the fact that despite a high-rise with several hundred units being built, they were all sold off and did nothing to improve affordability. Let me make a similar argument and we can judge how it holds up - it is an analogy I have used before.

     Imagine a case where the water in your kitchen is stuck on, there is no way to turn it off. similarly, while your kitchen drain is working, it is a little clogged such that water is entering the sink faster than it can be drained out. The result - the sink is filling with water. For whatever reason, you ignore this until the sink is near the top and at risk of spilling over onto the floor. You decide that maybe, to prevent the water from spilling over, you can scoop it out with a cup. You do so, but the water keeps rising - clearly, this is not a solution. (Mason's argument).

     Again, in our case - this is analogous to our current housing situation, the flow of water is our population growth - there is no ethical way to turn off the water. As the sink fills, prices rise - If you can fill up cups just as quickly as the flow of water, there is no change. If you can fill up cups faster than the flow of water, then the overall level in the sink decreases, and prices will fall. When the sink gets full and starts flowing over, well that's when we begin to get all of our negative social spill-over effects due to the unaffordability of housing.

     To add to the problem - you have a friend in the kitchen with you who is, chaotic evil, and just wants to watch the world burn. As the sink gets fuller and fuller they are getting more and more joy as the spill-over is getting nearer. Thus, as a result, this friend starts to take a few empty cups and puts them "away" so that they cannot be used to bail out water.

     Mason is arguing that the sink is on the verge of overflowing because the friend is hiding cups, ignoring the fact that the reason the sink is overflowing is that we are not bailing out enough water. While it is easy to blame the friend in this situation - the friend is just being opportunistic given the situation and their nature - the problem at hand is not the friend, but the rapidly filling sink. The solution is not a blame game but rather to get more cups to get more water out of that sink as fast as we can.

    Note: To be clear - it works in this analogy to have the 'friend' be chaotic-evil because there is no other real reason why they would want the sink to fill with water. This is not saying that landlords / real-estate investors are chaotic-evil. In the real world, the rising water (prices) gives them a real payoff and an incentive to continue to hold onto cups (property) - they benefit as long as the sink continues to fill, in this case, they are doing the same as anyone would do if they had the opportunity - trying to make a better life for themselves.

     One of the final points Mason makes that needs to be addressed is that these highrises are building lots of "luxury" units versus entry-level units - thus not really helping. Keep in mind, there are people out there that either (A) make lots of money, or (B) are chronologically blessed and entered the housing market decades ago and are now exceptionally wealthy. Both of these groups want luxury units and are willing to buy them. If these luxury units were not being built, then these two groups would continue to compete with everyone else for the same few units that exist. By building these luxury units, these individuals either are not competing with you for your normal unit or alternatively are the ones selling these regular units as they upgrade to a newer luxury one.

     Finally, I feel it is important to keep in mind, that builders are running a business, they will build what demand is dictating. to make another comparison - a baker will only bake the bread that they feel will sell during the day, If the baker only makes cheap white bread, all the customers are left buying this. If the baker makes loaves of varying quality, then consumers of different means can purchase the bread they desire. The baker will not produce only the most expensive sour-doughs if they do not believe these will all be bought - after all, the baker does not do their job out of concern for your well-being, but rather they do their job out of concern for their own well-being. In this way, the baker will provide the varieties of bread that will sell the best, to maximize their own well-being. We do not fault the baker or any other business owner for this, similarly, we should fault the builder either.

     Always interested to hear your thoughts and opinions on this - feel free to comment below.

 

 

Affordable Housing

 

    I often hear the term "affordable housing" being thrown around. "We need more affordable housing" or "Why aren't these units affordable?" This begs the question - What is meant when we say affordable housing? A follow-up question might be, how did housing become unaffordable? 

What is affordable housing?   

    To start off - What is affordable housing. Unfortunately, there is no universally agreed-upon definition for this. Some define affordable housing simply as "non-market" housing, that is a unit that is purposely sold for less than the current market price. It is prudent to remember though, that just because something is being sold for cheaper, this does not necessarily make it affordable. 

    One of the most commonly used definitions of affordable housing is the one used by the Canadian Mortgage and Housing Corporation (CMHC) which states that housing is considered affordable when less than 30% of a household's gross income goes towards shelter costs. 

    Why 30%? where does this number come from? This number is simply the value often offered by financial experts as a maximum shelter expenditure that still allows adequate money left over for food, utilities, etc.  But keep in mind, this 30% value is simply a rule of thumb with no good reason as to why it is an optimal value. That is, it is quite easy for two different households to be spending 30% of their gross income on shelter, but have very different financial situations depending on their number of kids/dependents or health concerns/costs, etc. As such it is important to recognize that this 30% rule is a standard definition for affordable housing, but that does not make it a perfect definition. 

    So how does this 30% rule work in the Capital Regional District (CRD)? Unfortunately, the income tables from the 2021 census are not released till later this year - so we can make our best guesses given the 2016 census. 

 The Data

    In 2016, the median household income in the CRD was $70,283 (StatsCan), compared to the 2006 census, this shows that median household incomes grew, on average, 1.09% a year over this ten-year period. If we assume that median household incomes maintained a constant growth rate, this would put us at an estimate of $78,337 for median household income for the CRD in the year 2020 (the 2016 census estimates 2015 data).

Note: Median is the middle value, this means that 50% of households in the CRD would earn more, while 50% would earn less. 

    Thus, if we assume that the median household income for the CRD is now, roughly, $78,337 - this puts an affordable, rental rate at $1958/mo. for the median family. This means that at a rental rate of $1958/mo. only the top 50% of households would find this rate affordable - as defined as being less than 30% of their incomes. 

    What about purchase prices? Well, things get a little more complicated - given current prices we need to assume that we are only considering condo/townhomes, meaning that there are strata payments. If we assume a strata of $175/mo, this would leave $1783 available for a mortgage payment. If we presume a mortgage rate of 5% (given higher stress test requirements), this median household's affordable mortgage would be about $305,000. Throw in a 5% downpayment, subtract out closing fees and insurances, and you get a purchase price of a little more.

    As you may now be aware - these rental and shelter prices are becoming exceedingly unrealistic - meaning that based on the rule of 30% gross income towards shelter = affordable, we are finding that by far and large the median household cannot find affordable housing. To put this another way, over 50% of households would have trouble finding affordable housing in this market. 

    Now - why do we not see such massive homelessness? clearly, if over 50% of households could not find housing we should see people in camps everywhere right?! The vast majority of these households - were able to secure housing before the prices jumped - for them, as long as they can maintain their shelter, or access the equity of their house, they are stably sheltered and they face no problems - it is the future generations and those who were not able to obtain secure shelter earlier that are left out in the cold. 

    How did we get here?

    In the case of shelter, or any good, if we have more demand for the good than there is supply, we would say we have excess demand. In this case, we have lots of people who want it, however only a few who are able to sell - as a result, we have 2,4, or more people trying to buy each unit that comes available. How do you ensure you are the one who gets to buy the thing you want? You offer a higher price! who amongst us as a seller would say no to being offered more money? In this way, prices rise. 

    Locally, and across most of Canada, over the last several decades we have had our typical growth of population through birth rates and immigration, however, the development of housing has not kept pace. That is, we have had only slight increases in supply over the last several decades - this slow supply growth is often attributed to restrictive zoning and community groups rejecting development over fear it would change the nature of the neighborhood. In reality, we've seen this all around the world, as soon as you become a home-owner your aim is to protect your investment (your home) if you can restrict development around you, your asset price increases, and you are better off. Unfortunately, we rarely consider the consequences this has for our children and future generations. 

    Now on its own, this would have pushed prices higher, and made housing more expensive - but likely would not have led to the extent to what we see today on its own. 

    Over this same period, we have witnessed a relaxing of many mortgage lending rules (specifically in the early 2000s) coupled with record low-interest rates and a new view of real estate as an investment commodity - and one that banks were more than willing to easily lend money to allow people to buy. As a result, those who could access credit could purchase a second home, or maybe even a 3rd or 4th. All of this creates even more demand for housing given a relatively constant supply.  

    So to recap - supply was been restricted, and demand has continued to grow through natural population growth as well as a rise in speculative demand. the result, is a massive amount of excess demand, putting upward pressure on prices. 

The Solution.

    The problem is a lack of supply. If we want to ensure that our children can choose to live in the same community that they grew up in, we need to ensure we are building enough to house them. That is, we need to increase supply, we need to build more in a thoughtful, responsible, sustainable way that creates a livable community for current and future generations.

Note: Many say the solution is to restrict all this excess demand due to speculators. While this would help, it turns out they are a small part of the problem - this is discussed in a previous post here.

    As we can bring more units online we can increase the supply, and begin to match all the pent-up demand. Of course, the kick-back is always "We have been building, yet prices still keep rising". My response to this is twofold. 

A) Yes, of course, prices are still rising, there has been so much excess demand that building a few hundred units hardly absorbs the difference! 

B) We still have speculators out there who believe that the market will keep rising, and money is still to be had by buying and flipping properties, although this appears to be a smaller effect than many believe.

    As long as demand exceeds supply, prices will rise. to stabilize, or reverse the price trajectory, we need more homes built for people to live in. Emphasizing people to highlight the fact that we need policies in place to prioritize homes for living over investment. 

   A further kick-back or criticism is always "Why here. Municipality XYZ isn't building anything!". Unfortunately, this is always a problem. Truth is, building, development has growing pains and costs, being part of the solution is not easy, but it is necessary. this problem is actually akin to climate change. Climate change is a global crisis with real costs to combat it. It is always easy to say "Why should we change our lifestyle to combat climate change when country XYZ isn't doing anything". The answer is really the same to both questions, it's because if not you then who is going to? 

     Local regions and municipalities only have so many tools at their disposal. While the municipalities that harness these tools to face this housing crisis head-on have the ability to transform themselves into amazing vibrant communities where families want to grow up and stay, communities that continue to attract the best a brightest from around the world. It is these communities that have the potential to be leaders and forge ahead post-crisis rather than being left picking up the pieces and playing catch-up. 

    This means changing zoning to allow for greater densification to allow more units to be built. this means recognizing that people need to recreate, we need community hubs, parks, and urban green spaces. this means communities that are designed to promote active transportation with investment in the required infrastructure for easy public transport and decarbonization. 

    This means municipalities taking a stand to combat rising prices, the Canadian Centre for Policy Alternatives recently released a report pushing for more support for non-profit community rentals. This is within the scope of municipalities to build public, non-profit, rental units on a cost-recovery basis. Doing so provides many more units to the community at significantly cheaper market rates, helping to address affordability, all the while keeping these projects self-supporting - that is, the burden of these projects won't fall on the taxpayer. 

    This is not an easy task, but we are currently confronted with the joint housing and climate crisis giving us the opportunity to engage in a massive infrastructure project arguably not seen since the end of the second world war. We can either continue on with a business as usual case, or we can address these crises' head-on, face these costs, and build a better tomorrow. 

    As always housing is an extremely delicate issue where emotions run hot amongst those with and without access to shelter. What are your thoughts on this? feel free to comment below. 

New inflation values out today - be careful how you interpret this!

     

    TL;DR: When StatsCan measures changes in prices, they do so for a fixed basket of goods - this includes maintaining quality at a fixed level. When the quality of goods increases over time this creates problems - especially when consumers cannot choose to still purchase the lower quality good for a cheaper price - the result is that the actual inflation of this good, likely, is significantly more than the posted rate of inflation.     

    A common argument is that the average household today is better off than John D Rockefeller because we now have access to microwaves and the internet. Thus, this drastic increase in the quality and availability of new goods must mean that we live significantly better lives. The real question is, can we honestly compare the standard of living across such an expanse of time given drastically different goods, and the quality of goods available. 

    Just the same, an attempt at this adjustment is used in calculating the Consumer Price Index (CPI). recognizing that we have access to superior quality goods today Vs what we had 10, 20, or 30 years ago. This improvement in quality must be accounted for in computing the change in the price of a fixed basket of goods. 

    I talk about this a lot with my students - CPI inflation is intended to be a measure of the change in aggregate consumer price levels for a fixed basket of goods to provide information to policymakers regarding how consumer prices have changed year over year. This provides insight as to what has been happening with prices, but it is not the full story and it is not a good measure of the cost of living.

    But first, why is this problematic? This is problematic as the CPI measure of inflation is often used by employers, pensions, unions, and others to determine the change in the cost of living. This leads to the thinking "Oh, CPI inflation was 2% last year, so as long as I get a 2% pay raise I am no worse off". Unfortunately, as we will see - this may not be true. Specifically, your observed rate of inflation may be significantly higher than the reported CPI inflation - basically, the problem comes down to assumed substitutability.

    (This helps to explain why even though wage growth has been slightly higher than CPI inflation, the average wage earner today feels as if their purchasing power is less than it used to be)

    To evaluate this, let's focus on the aspect of CPI inflation, rented accommodation - while shelter costs on whole are weighted as 26.8% of the CPI basket of goods, rented accommodation accounts for only 6.4% of the total CPI weighting (because we assume that most households are owners - however, a similar problem exists for owned accommodation as the problem we discuss here).

    To begin, we can look at the Canadian Mortgage and Housing Corporation (CMHC) historical records showing the median rental price in the Capital Regional District (CRD) from October 2011 through to October 2021 (the latest available published data), this shows that average rental prices have increased by 4.97% on average over the last ten years (source).

    To compare this to the latest CPI inflation information, we see that over the last ten years the rental accommodation aspect of CPI inflation for the CRD has only increased by an average of 1.92% (source).

    So on one hand, we have the CMHC saying that rents have increased by 4.97% annually (on average), while we have Statistics Canada through the CPI saying that rents have only increased by 1.92% annually. Where does this large discrepancy come from? 

    While these two values are computed through different surveys, and over slightly different time periods, it is easy to presume that as both surveys sample from the same population, we should have approximately the same values given the large sample size - that is to say, sampling error does not explain this difference. 

    What does then? Partly it is in how Statistics Canada and all OECD countries compute the CPI. By definition, the CPI is measuring the change in the price of a fixed basket of goods. For some goods, this is not problematic. IE. The price of a litre of milk in 2011 was $X, then in 2021 the price of litre of milk is now $Y - in this case, milk is milk and has not significantly changed over the last ten years.

    But what about when measuring expenditure on other items? Cars, Computers, Cell Phones, Housing? All of these goods have had quality increases over the last decade (a 2021 computer is not the same as a 2011 computer!) As a result, Stats Canada needs to recognize that quality has increased, and thus needs to determine what would be the change in price for a constant quality (fixed basket) rather than the change in price due to the fact that it is a fundamentally new good being sold (again, it would be tough to argue that a 2021 computer is the same good as a 2011 computer). 

    Statistics Canada does this by using a matched-model method to measure pure price changes. That is, attempting to determine what the price of a good would be if we could somehow keep the quality constant.

    While the idea behind this fundamentally makes sense and is necessary - there are some major problems. Often as quality increases, the consumer no longer has the option to obtain the cheaper, original-quality option. For example, as cell phone speed, and features drastically increase each year, you are stuck paying for these features even if you do not want/need them because there are few if any phones on the market that do not include these new improved features. The same can be said for housing or vehicles. In fact, if features (quality) increase substantially while price only increases marginally, this matched-model method may actually report that the price for this good has decreased from year to year! 

    This becomes exceptionally problematic if the consumer does not actually differentiate based on quality. With respect to housing, what if the consumer is primarily concerned with access to shelter rather than access to different qualities of shelter. 

    If this is the case, then shelter becomes homogenous irrespective of quality - That is to say that the potential consumer does not significantly see a difference between low-quality shelter and high-quality shelter. Given the current tightness of the rental (and housing) market, this makes sense - and we would expect to witness similar market prices irrespective of quality. 

    If we take the year built to be a proxy of quality (IE, newer built homes have newer better quality features) we could test this hypothesis by comparing the two possible outcomes:

1. If we witness little if any price difference based on year built, then the consumer primarily cares about the availability of shelter, irrespective of quality. 
2. If we witness newer places renting for higher amounts, then consumers value quality and thus are willing to pay a premium to access higher quality shelter. (If this is the case, then we should be accounting for this change in quality when computing inflation!)

    Likely, we will witness a bit of both happening, so the real question is where are we sitting today Vs. where were we sitting in the past? Well, we find the following (Source)

    How do we interpret the above table? Initially, we find a large spread between old builds and new builds, this would signify that in 2011, there is a desire for quality - renters were willing to pay more for a quality (newer) unit over a lower quality (older) unit. 

    As we move forward to today (2021) we witness that this spread has flattened out. in 2011 the maximum rental price was 43% higher than the minimum, while in 2021 the maximum was only 9.7% higher.  

    This is signifying that renters are caring less about quality than they care about access to units, thus resulting in a reduction in the quality premium. That is to say, while StatsCan, through the CPI, still discounts higher rents to account for increased quality - the renters are not caring about the quality so much as they are caring about access to shelter.

    To summarize, CPI Inflation says that the cost of rental accommodation has only increased by 1.97%  Vs CMHC's reported 4.97%. The reason for the significantly lower CPI inflation increase is due to the fact that there has (on average) been an increase in the quality of rented accommodation. To account for this increase in quality, the price increase must take the quality increase into account in order to compare "apples to apples". This "apples to apples" comparison yields only a 1.97% increase in rental prices over the last ten years. 

    While this method of comparison is preferred to compute changes in prices from an economic and policymaker standpoint, this is problematic when these same metrics are used to compute changes in the cost of living as they will often under-estimate the true change in cost - this is especially true when the consumer does not have the option (or ability) to continue to choose the lower (original) quality option. 

    The crux of the argument is to use caution when interpreting CPI inflation as there are many assumptions that go into these calculations, and the recently reported annual inflation rate of 6.7% (source) may not be telling you what you think it is. 

    Any comments or questions please feel free to message me or comment below.

    

    

     

Vacant homes

 

   CBC's "The Fifth Estate" recently released a documentary (here) under the title "Canada's rental crisis: Why we're losing affordable housing" - While I found the film informative, it really lacked any real analysis, nor did it really answer the question posed in the title. 

    

    Just the same - I did find it interesting the claim made throughout, about the number of vacant homes being used for speculation rather than shelter - hinting that this was a key part of the problem.

    Mind you - most of the film appears to be pointing fingers at corporate landlords and REITs for commoditizing shelter which I have mixed opinions on - but the point about vacant homes was something I had the data to look at. 

    So this got me thinking, given the high rents in BC, specifically in Vancouver and Victoria - what is the degree of vacant homes - or speculative homes that exist here?

    Primarily, I would be inclined to think that if BC, Vancouver, or Victoria had a high proportion of vacant homes, this would point fingers at those holding onto Real-Estate for capital gains as a key reason for the surge in housing and shelter prices. 

    After all, I hear the argument that the reason we shouldn't build more units or density here on the south island is that all these units will be snatched up by investors and sit vacant - thus doing nothing to help solve the problem. I hear this argument so frequently on social and print media that it almost becomes true because of how often it is repeated. 

    Unfortunately (or fortunately), this does not seem to be the case - looking at the percentage of vacant homes, we find the BC is actually in the bottom end of the distribution, with the percentage of vacant homes falling from 2016 to 2021 (seen below). 

   

    Thus, while about 8% of homes were vacant in 2021, we see that BC really is on the bottom end of this distribution, Newfoundland actually having the highest proportion of vacant homes (but not necessarily the highest shelter and rental costs!)

    If we magnify the view from the national/provincial level to evaluate the percentage of vacant homes by Census Metropolitan Area (Essentially cities, and greater cities, IE Greater Victoria). we see much of the same. The regions with some of the highest rents and real-estate prices, Vancouver and Victoria are both significantly below the BC average at just under 6% of homes being vacant in 2021. 

   

    Again; what if we focus the view a bit more, just looking at the municipalities that make up the Capital Regional District (CRD). Here again, we see that, on average, about 1 in 20 dwellings are sitting vacant (just over 5% in 2021). 

    Now, I want to bring attention to Langford, as this is an area that has witnessed an explosion in the construction of new units over the last several years. What we see is that (despite fears and stories) the vast majority of these dwellings are occupied by a usual resident, such that the percent vacant is lower than the regional average. 

    Thus evaluating this, it appears that the boogeyman of vacant homes drastically driving up prices is just like the real boogeyman - a figment of our imagination. Keep in mind, I am not saying that vacant homes do not impact prices, having 1 in 20 or 1 in 10 dwellings vacant is not ideal socially, and having 5-10% of homes being purchased strictly for capital gains investment is a problem that needs an effective policy to address. 

    

    Instead, what I am saying is that these vacant dwellings do not seem to be a primary contributor to the cost of housing/rent -- if they were we would expect to see high percentages of vacant units in areas with high purchase prices and rent while seeing more reasonable prices in areas with low percentages of vacant units. 

    Thus - If we can't point our finger and vacant homes - what is to blame for the sky-rocketing prices and rents? Again, this appears to be a simple supply and demand problem - for years we have underbuilt, and engaged in restrictive zoning. these practices allowed for the rate of population growth and household formation to exceed the rate of new dwelling construction, the fact of the matter is we have years of excess demand to construct before we even begin to solve the problem. 

    To put this problem in the terms of a simple metaphor - suppose that we have a kitchen sink. The water flowing into the sink is the population growth, the people who need to be housed. A cup is a dwelling. In this case, the tap is left on - there is no (ethical) way to turn off the flow of water. 

    For years, we ignored the problem, occasionally filling up cups with water, but generally allowing the tap to fill up the sink (excess demand). Today, we are at a point where the water is about to crest the sink and begin to spill out onto the floor. The solution? we need to start filling up more cups of water to move the water from the tap and sink into cups (dwellings). 

    

    I encourage you to undertake this experiment - at the point when the water is about to crest, it will seem crazy - you will be filling up cups rapidly and it will look like A LOT is being done -- however, there is so much pent up demand in the sink, that despite all your work (and having cups everywhere) you will still be dealing with the excess demand (pool in the sink) for a long time before you can return to addressing the water coming from the tap. 

    In reference to the vacant homes - yes it is annoying that 1 in 20 cups are being held by someone else and they are refusing to allow you to use them to empty the sink - but this was not what caused the problem - it is only an annoyance - the problem was caused by years of letting the tap run without filling up cups.

    What are your thoughts? Feel free to comment below. 

 

Canadian Wealth Lorenz Curve

 

    As promised, above is the Canadian Wealth Lorenz Curve showing the percentage of total national wealth held by each percentile of the population.

    The first thing to notice is that there is not really much movement in this over time. In fact, looking at this I don't find it too interesting and probably would not have posted on it on its own - but I promised in the income Lorenz curve post that I'd run this one too - so here it is. 

    Further, to recognize is that wealth can be negative as individuals can have a negative net wealth - this is specifically seen in the bottom 20 percentile of the population, the net worth of this set is around the -2% range. We see that 50% of the Canadian wealth is held by 90% of the population, with the top 50% of the wealth being held by the top 10th percentile (and the top 25% of the wealth being held by the top 1%). 

    Additionally, most of the movement in this curve takes place in the top 20th percentile. so zooming just on this area we witness the following - still not too exciting.

    So, provided out of a promise to provide, I find it a little interesting that there has not been much change in the wealth distribution over the last 15ish years, That is, a rather anti-climatic change in wealth.

    Further - to be honest - I struggled to find a definition of this data-set, so I am not 100% sure how wealth is determined and what sources of wealth go into this calculation - thus it may very well be that the unremarkability of the above data is due to the way in which wealth is measured and reported.

Canadian Lorenz Curve since 1950

 

    Working on this for a course - but I thought many would find it interesting. Above is the Lorenz Curve for Canada from 1950 to the present (2021). 

    To recall what a Lorenz Curve shows - A Lorenz Curve displays the population percentile to the income percentile. In a perfectly equal society, the bottom 50% of the nation would earn 50% of the nation's income, the bottom 25%, earn 25% of income, etc. etc (this is the 45 degree dotted line). 

    The further the curve shifts down to the right, the more unequal society is - for example, to compare and contrast the 1950 levels to the 2021 levels. 

    In 2021, the bottom 90% of Canadians account for almost 60% of all income, while the next 9% (90 to 99% of all Canadians) account for almost 26% of all income, Finally, the top 1% of Canadians account for almost 15% of all income. 

    In 1950, the bottom 90% of Canadians accounted for just over 65% of all income, while the next 9% (90 to 99% of all Canadians) accounted for just over 25% of all income, while finally to top 1% of Canadians accounted for just under 10% of all income. 

    That is to say, over the last 70 years, the bottom 90% have seen their share of income eroded, the next 9% (90 to 99%) have seen their share stay almost constant, while the top 1% have seen their share of income rise by over 5%. 

    Coming up I hope to create the same for the wealth distribution in Canada - we will see what that looks like! (Spoiler - it's not that interesting)

What does rising interest rates mean for homeowners?

 

    While I found it surprising that the Bank of Canada decided to keep rates steady yesterday (Jan 26th 22), especially in light of sustained inflation above their mandated target. 

    That being said, I also recognize that the Bank of Canada is between a rock and a hard place. On one hand, they have their mandate to maintain inflation between 1 and 3% (targeting 2%). On the other hand, Canadians have been amassing serious levels of debt, with some of the latest estimates pegging Canadian debt to disposable income at just over 177%.

    That is, Canadians tend to owe $1.77 for every dollar of income they earn -- but why does this cause trouble for the Bank of Canada?

    Well, as the Bank of Canada increases the overnight rate to combat inflation, this will also increase debt servicing costs for many Canadians, increasing the proportion of their income that goes towards interest costs. Depending on how rapidly the Bank of Canada acts - this could push certain Canadians into insolvency 

    According to an Ipsos survey from 2019, almost half of Canadians are $200 or less away from insolvency. One can imagine that since the pandemic, and increasing prices all around, this outlook has not improved. 

    Now, with the picture painted that Canadians are heavily indebted, with many on the verge of financial ruin - let's look at the housing market - That is, if the Bank of Canada were to increase interest rates, what impact will this have on the mortgage payments being made by Canadians? 

    First, important to differentiate between variable and fixed-rate mortgages. 

    Variable-rate mortgages are linked - somewhat - to the Bank of Canada's overnight rate. Speaking in generalities, if the Bank of Canada increases the overnight rate by 25 bps, then the variable rate mortgage also increases by 25bps -- meaning the debtor's payment will have to increase.

    Fixed-rate mortgages are a little different - with a fixed rate, the debtor is locked into a given rate for a certain term (say 5 years). With this arrangement, the debtor's payments are constant over the term of the mortgage but will be re-negotiated upon renewal (typically every 5 years).  That is, an increase in interest rates today will have no impact on the holder of a fixed-rate mortgage - until renewal.

    That is to say, a change in the overnight rate will impact variable rate holders immediately, but will impact fixed-rate holders over time - as they renew at new, potentially, higher rates.

    So let's see what the impact on monthly mortgage payments would be if we received a 100bps increase in interest rates (a conservative forecast).

    To do so, let's begin by determining the monthly payment on mortgages of various amounts if the current mortgage rate is 2.5% (a typical fixed-rate amount). 

    While not interesting on its own, let's re-work out what the monthly payment would be at a rate of 3.5%

    Here we see an increase in monthly payments, but what is the magnitude change in monthly payments?

    Thus we see that an increase of interest rates (from emergency lows) by 100bps, which still leaves at historic lows, causes drastic increases in the monthly mortgage payment for many Canadians. 

    Given, as we saw, that many Canadians are within $200 of insolvency we can now see why the Bank of Canada may be so hesitant to begin rapidly increasing interest rates. Even with this - this is just looking at the impact on mortgage payments, many will also be witnessing a potential increase in car loans, student loans, line of credit, etc. All together causing potential trouble for many Canadians.

    Of course - all this assumes that these payments (and prices) are rising, but incomes are staying constant - Of course, this is not true, as we witness inflation, there should also be increased pressure for wages to rise offsetting some of this pain - Although, we just showed a 100 bps increase in the lending rate would cause an 11.5% increase in monthly payments, unlikely that incomes will increase that much.

    Feel free to comment below with your thoughts