House price appreciation over the last decade has placed policymakers in a difficult position of deciding how to make home ownership affordable for a large diaspora of people who lack sufficient capital for a down-payment (talk about a long sentence!). That coupled with a housing shortage in places like Ontario, Canada further exacerbates the problem. The more perplexing revelation for me when I started studying affordable housing more closely, was a lack of a uniform definition of what affordable housing means. For instance, municipal governments may define it differently than provincial or federal governments. For reference, the provincial government of Ontario, Canada defines it as: ”(a) in the case of ownership housing, the least expensive of: (i) housing for which the purchase price results in annual accommodation costs which do not exceed 30% of gross annual household income for low and moderate income households; or (ii) housing for which the purchase price is at least 10% below the average purchase price of a resale unit in the regional market area; (b) in the case of rental housing, the least expensive of: (i) a unit for which the rent does not exceed 30% of gross annual household income for low and moderate income households; or (ii) a unit for which the rent is at or below the average market rent of a unit in the regional market area”; whereas the City of Toronto also splits the definition between affordable rental and affordable ownership, it defines affordable rental as: “housing where the total monthly shelter cost (gross monthly rent, inclusive of utilities for heat, hydro, hot water and water) is at or below the lesser of one times the average City of Toronto rent, by dwelling unit type, as reported annually by the Canada Mortgage and Housing Corporation (CMHC), or 30% of the before-tax monthly income of renter households in the City of Toronto” (City of Toronto). If you start to compare countries, it further blurs the true meaning of Affordable Housing.
When I first moved to London, England to start my career in banking, I moved into a flat on Gloucester Terrace in central London. Directly across from me I noticed a few buildings marked as council housing. My flat was walking distance from the buzzing Paddington Station and the coveted amenity: Hyde Park. Suffice to say it was a prime location, and for the City of London to make it available for residents with lower income was something I hadn’t observed before. This model helped assimilate lower income households with that of middle and higher income households and is something London has successfully championed. Similarly, later in my career when I started living in New York City, I would hear of fierce battles between developers and city councils about allotment of affordable units part of development projects. Though the model in New York is far different from that of London, and perhaps not as effective, it made me conscious about the differing approaches employed by different cities in managing Affordable Housing.
As a member of the real estate development community and an active participant of the real estate industry in Canada, I am greatly concerned about the housing shortage and lack of incentives and requirements for developers and financial institutions alike to make housing more accessible and affordable. My analysis reveals that there needs to be a major shift in policy to create visible change. This blog entry is primarily focused on Ontario, Canada but hopes to shed light on affordable housing and what the future may hold. I have also summarized findings of a recent study by the government of Ontario and highlighted models for affordable housing that may offer some perspective. If given the chance to be a policymaker, I would tackle affordable housing steadfast as its the most unfair distribution of wealth given historically low interest rates (still) and soaring house prices – leaving millions of people without the opportunity to own their own home. And on a personal note, I believe affordable housing ought to be premised on allowing for greater opportunity to “own”. Renting does not help build wealth, ownership does!
Researchers in England found that housing policies like Affordable Housing can help improve health and wellbeing of the populace. A comprehensive study by scientists in the United Kingdom revealed that the health effects of home ownership “operate through labour markets, with home owners more likely to become employed and spend less time travelling to work”. In addition, “home owners also spend more money on leisure and are less likely to smoke and suffer from lifestyle-related diseases”. The key takeaways: (i) Since homeowners are able to make structural adjustments to their dwellings, they are able to directly improve their housing quality and health unlike rented units that lie at the behest of landlords who may not make the necessary adjustments to make housing quality better; (ii) Home ownership provides the physical and emotional security that allows home owners to take control over their life and safety; (iii) Home ownership leads to more socially engaging behaviors such as belonging to local associations impacting the neighborhood and being more politically active; (iv) Studies have also found detrimental effects of home ownership in the United States for instance where higher rates of home ownership led to higher commute times and higher rates of joblessness in certain States (Science Direct). However, while localized effects of home ownership may vary depending on infrastructure and labor markets, the key idea is that the psychological effects of home ownership point to visible health benefits and quality of life.
How about a Right-to-Buy policy: A right-to-buy policy was implemented in England that allowed long-term tenants the legal right to buy publicly owned property at a large discount. “We exploit variations in government house purchase subsidies in England under a policy called ‘Right to Buy’. These discounts, representing more than 76% of an average yearly salary, constituted a substantial incentive for home ownership. This policy increased home ownership as a share of housing by 15 percentage points and generated the largest contribution to privatization revenue in the United Kingdom. It represents an outstanding home-ownership intervention in international terms, though the Israeli government introduced similar reforms in 2000”. Findings from the research showed that the policy led to increased home ownership which led to improved health outcome at the macro and micro levels. Worth noting from the study is that “becoming unemployed is at least as ‘bad’ for health as becoming a home owner is good. We also find evidence to suggest that those who go onto become owners are less likely to have unhealthy behaviours (such as smoking) and less likely to suffer from cardiovascular and respiratory conditions. Those who become owners are also more likely to buy health insurance and make fewer visits to their GP” (Science Direct). It is worth mentioning the limitations of the study which include evaluation of the the sub segment of the population that were eligible for the scheme rather than the full population. Needless to say a direct link to positive heath benefits for the subjects of the study was clear. It is also important to highlight that though the study was conducted in England – a country that maintains a different demographic and economic profile than Canada; one can draw an inference from the positive benefits of home ownership and a suggestion for the Canadian federal and provincial governments to conduct a similar study in Canada to help better shape the housing policy.
House prices in the province of Ontario, Canada have nearly tripled in the past 10 years, yet income levels have only grown by circa 38%. Given rising prices, home ownership and finding quality rentals, is becoming out of reach for many Ontarians. Black and indigenous homeownership rates are startlingly low – less than half of the provincial average. One of the key issues in Ontario is that there simply aren’t enough housing units available. Scotiabank found that Canada has the lowest units per population than any other G7 country. The problem is further compounded by a drop in housing supply over the past 5 years. For perspective, the province of Ontario alone is more than 1.2 million homes (owned or rented) too short of the G7 average. The ripple effect of lack of housing translates into lost job opportunities, long commutes impacting the environment, and shortage of workers (to name a few). The crux of the housing problem in Ontario, and in Canada in general is premised on the planning act with outdated rules, local politics, and lack of available land for development. For perspective, in Toronto, Canada’s largest city, 70% of land zoned for housing is restricted to single-detached or semi-detaches homes. Underdeveloped land within urban boundaries thus needs greater attention to bridge the housing gap. While cities like London and Hong Kong have made good use of maximizing housing supply near transit corridors, Ontario lags in fully maximizing returns on the billions invested in expanding its road and rail networks. Local politics and ”not-in-mybackyard” sentiments known as NIMBYism have deterred progress. Nationally, among the 35 OECD countries, Canada is near bottom of the list (Report of the Ontario Housing Affordability Task Force).
Rising labor and material costs feeds into higher rent, which further exacerbates the lack of affordable housing. In Ontario, these costs amount to nearly half of the cost to build a home. Another pain point are development charges which are exorbitant in the province of Ontario and can cost as much as $135,000 per home in some cases. These charges go toward paying for services like sewers, parks, and roads and the current model requires ‘growth’ to pay for increased services rather than current taxpayers, which in effect creates a disincentive for affordable housing because affordable units bear the same expenses. In short, serious reform is needed on this front. (Report of the Ontario Housing Affordability Task Force).
Making it easier to build rental units could serve as a good solution toward affordable housing. A city like Toronto with all its cranes and soaring towers had 66% of its purpose-built rental built decades ago (1960 – 1979). A number of factors led to the current state of affairs – chief among them: investment returns. There is no shortage of equity or debt capital available for real estate development but most of it gets invested toward condominium development that generates handsome returns for pension funds, and banks. Government taxation and policy toward rental units can help address this challenge. In Ontario for instance, municipal taxes can be as much as 2.5 times greater for rentals than ownership-based housing like condominiums. (Report of the Ontario Housing Affordability Task Force).
In Conclusion:
Coordinated action by federal, provincial, and municipal governments will go a long way in aligning interests with regard to affordable housing. The Ontario Housing Affordability Task force under Premier Doug Ford for instance suggested a ‘Housing Delivery Fund’ that would allow the federal government to reward municipalities that meet or exceed provincial targets, demonstrate reduction in approval times, and remove outdated zoning policies. That coupled with a reduction in funding for those municipalities that fail to meet provincial targets would definitely move the dial on progress for meeting the housing demand. However, such measures need to be balanced with environmental protection, farmland protection, conservation area considerations, and architectural sanctity of towns and cities. If a city like London is able to maintain its heritage while balancing a dichotomy with modern architecture so successfully – it should serve to encourage cities and towns around the world to adopt a workable model. I am not proposing that London maintains a perfect model, but rather a healthy example of progress.
References: City of Toronto, Science Direct, Government of Ontario, Study of the Ontario Affordability Task Force, and CBC. Please note that this briefing contains paraphrased summaries and attributes the original content to the news sources. Readers are encouraged to visit the links to access the full article in its original form for a thorough and complete view. You may need to subscribe to the news agency and source for access. Photo Credit: Smart Cities World. This blog entry does not represent investment advice nor endorse any investment in any asset in any geography. To seek investment advice, please contact your investment advisor.