Step 1: Define Affordability

It’s hard to solve a problem without first identifying what it is.  Solving the “housing affordability crisis” is no exception.

What is meant when someone says there is an affordability problem?  Affordability of what? for whom?

Here are four common things that I think people mean when they talk about housing affordability (feel free to add more in the comments):

1. A lack of rental at prices that workers who earn $10 to $15/hr might be able to pay with 1/3 of their income.

2. A lack of housing options for people without jobs who survive on social assistance.

3. Challenging ownership options for middle income households (for argument’s sake lets define this as those earning $50K-$120K)

4. The inability of middle income earners to afford detached single family homes in their preferred location. (Personally, I want a 4 bedroom detached house across from the beach for less than $400K)

After defining the problem, we can then look at the causes and possible solutions.  Once solutions are tried, we’ll also be in a better position to know if they work.

Take definition number 1 above, the rental affordability issue for the $10-$15/hr worker. First, what can someone afford? Let’s say they make $24,000 before taxes, and $21,000 after taxes; using the 1/3-income-on-housing rule, such a person can afford $7000 per year on rent or just under $600 a month. Doesn’t sound like much in the city–but lots of people seem to get by.

According to CMHC, the average rental rate for a 1 bedroom apartment in Vancouver Metro Area is $964.   However, we should also note that the average rental rate for a 2 bedroom place in the CMA is $1237 –two friends each making $12/hr could rent it.

But maybe people don’t want a room-mate, or the person has a dependent such as a child.  Or maybe they want to live in Vancouver itself (not a suburb) where the average 2 bedroom unit goes for $1493 and 1 Bedroom for $1045?

What causes average 1 bedroom rents to exceed $1000/month and 2 bedrooms to reach nearly $1500/month ?

Answer: Demand for rental housing exceeds supply.  This is especially true in locations where you truly don’t need a car; these locales work great for lower income people who can’t afford one anyway.  But these places are now also in demand from middle and higher income renters who enjoy the amenities at their doorsteps and would rather walk, bike or take transit than drive. Whenever a rental unit becomes available, a landlord can push the rents knowing lots of middle and upper income people desperately want to live in the area.

Solution: More supply.  And not just more supply anywhere in the city or metro area (although this will help a bit).  More supply is needed where people want to live–walkable, urban areas. Note: this could mean adding density in existing neighbourhoods; but it could also mean building new urban spaces at new transit stops in traditionally non-residential or lower density areas.

New supply could also mean smaller units, which then rent for less per month than larger ones.

Also note that new apartments (whether in Condo buildings or purpose-built) also tend to draw the middle and higher income renters out of the older stock–they often want the latest in modern appliances, nicer views, etc. and can afford to pay more if this is available.

How will we know that more supply is helping affordability: rental vacancy rates will stabilize or go up slightly; rental rates in older product will stabilize or go down (give some of the demand a nicer alternative and they’ll remove themselves from the demand pool for lower-priced, older suites).  Note that in a city with strong in-migration, it could take a lot of supply to notice a difference.

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This was one example of what happens when we define Housing Affordability. We can then pick apart the causes and start to see a path toward improving the situation.  These same steps work for the other definitions (other than maybe #4).

The question of housing affordability is multifaceted.  The term means different things to different people and groups.  Any group claiming to be trying to solve affordability needs to define what they mean by it.  This way successes can better be measured, and proposed solutions be better explained to the general public and other interested stakeholders.

What does the term “housing affordability” mean to you?

4 comments

  1. JoVE says:

    Good points. I think pulling apart average prices would also help. How big a spread is there? Are there a smaller number of luxury units pulling up that average? Etc

  2. Wendy Waters says:

    Good question. On rental, the way CMHC tracks it, and the census for that matter, I’m inclined to think that there is actually a downward bias on the average rental rate figure. That is, reported average rents may tend to be lower than what a newcomer to the city would be able to find.

    The exception is when they break out newer product in certain districts. Then my sense is that it’s fairly accurate (albeit at the point of time when they do their survey, usually around September each year).

    It’s different from sale prices of owned homes because people pay rent every month but the rate is set when they lease the place; the sample size for data is therefore very large (CMHC can call a property manager and ask what people are paying in the building). By contrast since people only buy a home a few times in a lifetime (if that), the sample size of data on sale prices is much smaller.

    I’d be curious what others think about using average rental rates though.

  3. One challenge of creating affordable rental units is that the land prices in walkable (i.e. desirable) locations require a premium. On top of the inflated land values inside the city, you also face the increased cost of construction of these types of buildings. Mid-rise and High rise apartments with parking garages, retail and other amenities for residents cost more than simple 2-3 story buildings in the burbs. It becomes difficult for developers to turn profits if they can’t charge a hefty rental fee for each unit. The problem is that if developers aren’t making enough money on the investment, they’ll go somewhere else to get a return. I think the actual solution would be similar, but slightly different: the new buildings continue to go up and the middle-upper classes continue to rent the ‘luxury’ units. This frees up the older, more outdated units as well as pushing their rental prices down as they are forced to compete with the brand new building across the street.

  4. Jesse says:

    Hi Wendy,

    Long time reader of your blog. I wanted to reply to two issues – affordability for young professionals in the urban core & low income individuals.

    For me, housing affordability means that the average middle income earner who works hard is able to live where they want to live – and for low income resident’s, there are enough RGI’s on the market for them as well.

    I recently made the shift from Toronto to Vancouver. Real Estate prices here are through the roof. For the average young professional – you have poor employment prospects in the city, and on top of that, condominium prices and rental rates are through the roof. Most of my friends in Toronto were able to purchase or rent condo’s in Toronto’s core – In metro Van most are forced to live in the suburbs.

    I’ve been helping a friend find a place in Van’s urban core, but there just doesn’t seem to be that many rental units on the market. There is a clear lack of supply. It seems to me that Nimbyism and protection of the “precious” views is stopping council from approving greater heights/density in the core. Most of the condo’s I’ve seen in Van are clearly lacking in amenities and common areas that young people love and i think part of the reason is developer’s can’t justify building these things when height limit’s are so low here.

    I feel it’s ironic that BC claims on it’s license plates “Best place on Earth,” and Van claims greenest city in the world. If it truly is, then let developer’s build tall in the core, so that we can increase the housing stock and as you have aptly suggested. As is, It’s more like best place on Earth if your net worth is greater than $1.5 million. It’s the greenest city if you live in the core, if your living in Surrey, your still glued to the car.

    Also, I feel that the province and municipalities can do much more in increasing the availability of social housing unit’s or RGI’s. Daniels Corp and TCHC are doing amazing things in Regent Park, and more of those large scale projects can be adopted here.

    The City of Surrey owns large tracts of land in Whalley, i would love to see an attempt at urban regeneration with a social housing project on the scale of Regent Park in Surrey. I believe TCHC has the right formula with Regent Park and the model of development can be successfully adapted in Metro Van.