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.