Session 8 June 11, 2008 Housing affordability and housing quality

1. GGR 357 H1F Geography of Housing and Housing Policy  Session 8June 11, 2008Housing affordability and housing quality DR. AMANDA HELDERMAN

2. Announcements Midterm: • Pick-up  Office @ 5th Floor of Sid Smith Building! Registration writing/ assignment tutorial: • Form is circulated in class • Registration is necessary -if you read this online, please send me an email before non on Thursday June 10! • Monday June 16, from 3-5 pm • Room 21.24A in SSH

3. Introduction housing affordability • Housing affordability • Housing quality • Measuring housing affordability/ quality • Canadian situation • Implications of shortage affordable housing • Symptom of deeper rooted problem? • No easy solution • Policy suggestions

4. Housing affordability • Housing is allocated by the free market to an extent • And beyond that, it is also the responsibility of the government • In most countries a balance of allocation • Housing affordability and housing quality are interesting concepts in relation to this

5. Housing affordability If a government agrees that it should meet the housing need of all, housing affordability automatically becomes a problem: • If the market mechanism drives up prices or rents to a level that is too high for some groups • If there is not enough housing for households who are limited to some segments of the market • Underlying problem: poverty

6. Housing affordability Why is housing affordability in the interest of governments? • Important for individual households • Important for governments’ electorate • Important for economic growth: disposable income, access to employment, health, inclusion • Important for children’s health and well being and future level of education, social engagement and responsibility

7. Housing affordability • Price and quality determine housing affordability • A dominant market mechanism implies that prices of cheap rented homes are driven up • Cheap rented homes therefore will not stay cheap for long • Low-income families stayed behind in income in growth economy • Type of housing attractive to developers did not match with this group

8. Resources on growing income gap http://www.growinggap.ca/ Canadian Centre for Policy Alternatives (Income test) www.gtuo.ca Maps and graphs of Toronto's neighbourhoods showing income polarization

9. Housing quality • The ratio of price and quality is influenced by tenure, housing availability, demolition of housing, additions to the housing stock, and government policy, among other things

10. Measuring housing affordability • The Canada Mortgage and Housing Corporation • Measure of housing conditions: Core housing need • Two-step process of assessment in relation to three standards • Adequacy, suitability, affordability

11. Adequacy • The physical condition of the dwelling • Safety dwelling • Inadequate: • If it needs major repairs • If it lacks basic plumbing facilities

12. Suitability • Size of the dwelling • Uses national occupation standards • Effective measure of crowding: number of bedrooms • Number of bedrooms in relation to: • Size household • Composition household

13. Affordability • Refers to the cost of a dwelling as a share of the occupant’s household income • Rule of thumb: households should not have to spend 30% or more of pre-tax income on housing that is both adequate and suitable (meets the other two standards of housing)

14. Assessment of core housing need Two-step process: • Dwelling situation matched with each three standards • If a standard is not met, a means test is carried out to determine if an acceptable alternative may be found for less than 30% of the before tax income, based on median rent. If not, the household is in core housing need • The 50% level indicates that a household is severely burdened; housing costs may compete with other important costs

15. Core housing need • If a dwelling fails to meet one of three standards at least and the household needs to spend 30% or more of pre-tax income to find a suitable alternative (based on median rent!) • Affordability is by far the most serious problem of the three standards: 95% of people in core housing need do not meet the affordability standard: combination of low incomes and relatively high rents • Criticism: median rent (arbitrarily chosen as bench mark) is not a good way of characterizing affordability

16. Core housing need • CMHC prepares the programming to calculate core housing need, and submits them to StatsCan • StatsCan calculates the level of core housing need by matching the calculations with the latest Census data • About 250,000 households in Ontario were in “core housing need” in 2004

17. Other measures of affordability Shelter gap: • The difference between what the poor can afford and the average rent or the average cost of building new units Of course the same criticism applies to this measure: • Average market rents do not indicate affordability for low income households!

18. Other measures of affordability Funding gap: • What the poorest can afford compared with 2/3 of the average rent • The average income of the bottom 40% compared with ¾ of the average rent • Joint Centre for Housing studies at Harvard University: “more than half of household income spent on housing”

19. Underlying factors of affordability problems • Geography • Demography (age and number of members household) • Migration/immigration/ethnicity (limited knowledge of housing market and discrimination) • Income recipients (number of potential income earners in household) • Income source (self-employment, wages and salaries etc.) and income polarization • Employment and gender • Education (skills and abilities) • Housing tenure (homeownership insulates from price shocks)

20. The Canadian situation • According to CMHC measure (1996 census): • 68% of households live in dwellings that meet all three standards • 14% fails one of the three standards but an alternative that meets all three standards may be found within 30% of household income (before tax) • 17% is in core housing need according to the 30% threshold • 7% is even in core housing need when the threshold would be placed at 50% (severe cases)

21. The Canadian situation Who are the people in core housing need? • 68% are renters • 26% are seniors • 27% are females living alone • 17% are males living alone • 19% are one-parent families are over-represented (17% of which female headed) • People earning less than $20,000 are over-represented, 39% of lower quintile have affordability problems • Singles and aboriginal (non-farm and off-reserve) families are prevalent among those in core housing need

22. The Canadian situation • Large part of the problem is INCOME LEVEL • More than half of core need households are recipients of social assistance • While correcting for inflation, median family income came down between 1980 and 1995! • Not just an urban problem, if you are a renter, but most severe in Vancouver and Toronto • Vacancy rates are rising, but not at the bottom 40% of the rent rates!

23. The Canadian situation Country Percentage public housing Canada 5% The Netherlands 40% United Kingdom 22% France 15% Germany 15% United States 2%

24. The Canadian situation • Rising rents as a consequence of removing rent controls and persisting low level of new supply, and decline in rental vacancy rates • Ongoing erosion of existing, privately owned, affordable housing stock • Even though the 1990s saw a great economic expansion, personal disposable income of the lowest-income groups has only seen a modest increase • Middle income families are lured into homeownership • Developers stepped up pace to build the more lucrative homes: single family homes and condominiums

25. The Canadian situation • Shortage of cheap rented housing for low-income families • Or is it? Income level highly differentiated! Too many low-income families? • The Canada Mortgage and Housing Corporation has successfully focused on the owner-occupied market since the 1940s (amortized mortgages and mortgage insurance) • CMHC helped the average Canadian housing standards, even though the unplanned tract housing and the recent planned subdivisions (low density) have received criticism from an environmental perspective

26. Subdivisions 1911 1960 2006

27. The Canadian situation • CMHC was less successful in providing services for rented accommodations: one in five Canadians cannot afford acceptable shelter (Drummond et al., 2004) • 1940s till 1985: several programs promoted construction in private sector rented housing • Mixed results because few units remain affordable for long. Lowest rents only realized in poor quality buildings and in poor locations • Continuous interventions to make sure market mechanism works

28. The Canadian situation • Erosion of rent controls, dramatic declines in funding for social housing and the reduction of social assistance rates

29. Consequences of affordability problem • “De-housing process” or “homeless making process” • Marginalized groups: aboriginals, immigrants and refugees, race issues

30. Causes for failure • Obstacles by government policy for creating affordable housing • Market prevents creation of adequate and affordable housing supply • Low-incomes stayed behind (widening gap)

31. Government policy history Bulk of affordable housing subsidized by governments: • Direct spending on government owned public housing • Subsidies non-profit organizations and cooperatives • Subsidies to private developers (grants and interest-free loans) Position of CMHC: Insurances against high ratio mortgages (up to 95%)

32. Obstacles by government policy • Lack of money always is the biggest obstacle • 1970s: tax incentives made tax treatment of rental properties less favourable turning high-end rent, owner-occupied housing, and commercial real-estate into more lucrative investments • Budgets at the federal and provincial governments were slashed in the 1980s and 1990s; the municipalities got more responsibilities • In Ontario, and most other provinces, housing slid from to a more municipal level • Municipalities got new responsibilities without many revenue tools, beyond the slow growing property tax

33. Obstacles by government policy • Downloading responsibilities to municipalities leaves an unfair burden on tax payers. The highest burdens would fall on households in cities with the highest rates of unemployment • Municipalities have a varying fiscal capacity • Unfair to potential clients in households facing same circumstances will be treated differently because the different fiscal capacity of the municipality in which they live and the spatial distribution of unemployment

34. Obstacles by government policy • 1990s: characterized by priority at eliminating deficits: belt-tightening by provinces and federal government • CMHC hiked premiums in the 1980s and 1990s and reduced the size of the mortgage possible, which cut back money available for new construction in the rented sector • At the end of the 1990s it became easier to obtain mortgages for existing properties, but the criteria for new rental housing became harder, just when it was most necessary! • Regulations and rent control: fight against inflation • Much higher property taxes on rented units

35. Obstacles by government policy • Significant difference between pre-tax and after-tax incomes for low-income families • Benefit levels frozen to level 1993, cuts in benefits for child care and shelter • Increasing daily out-of-pocket costs that compete with costs for shelter • Obstacles to acquiring skills for lower-wage employed • Until 1995: Canada Assistance Plan: Act that specified five rights. To adequate income, to income assistance when needed, to appeal welfare decisions, to claim welfare, to welfare without forced participation in work or training programs. No longer in place due to budget cuts

36. Obstacles by government policy • Provinces are not cost-sharing federal programs. While the federal government traditionally focuses on building, the provincial government is more focused on (subsidies to) people. This division of tasks has not fully crystallized yet • Zoning restrictions are strangling supply of affordable housing • Supply of land and restrictions on unit sizes also do not help realizing new rented units • Tax breaks are targeted to the whole rented supply, not only the affordable side of the spectrum

37. Obstacles by government policy • Rehabilitation can be very hard because policy said that all current residents had to be eligible for social housing, but to renovate/ redevelop everyone had to move out • Other than that, pension funds (institutional investors) are generally quite interested in revamping old buildings that are still in a reasonable condition • Changing regulation on municipal level, e.g. new fire codes that make it hard to build new housing in the city • Small rental investors are not considered as ‘small businesses’ and are not eligible for lower small business tax

38. Market obstacles • Non-profit sector could not build after government support had evaporated in the mid-1990s • Private lenders were unwilling to lend to non-profit developers • Labour and material costs are established in a private market • Mindset of non-profit developers: spoiled by government funding? “Buildings are owned by government so we don’t see putting in our money as investment?”

39. Market obstacles • Lack of experience in taking full ownership of projects • Non-profit developers are unaware that they could use less government money by lengthening amortization of the mortgage • NIMBY in neighbourhood

40. Market obstacles • No control on demolition and conversion that lead to gentrification, a process that generally means a decline in affordable rented housing • Lifting rent controls boosts rents, which hurts low-income tenants, but rent controls also discourage new construction and encourage demolition and conversion (due to aging of the housing stock) • Demolition and conversion outpace new construction

41. Market obstacles • Competition in the affordable segment, driving up prices • Secondary rental market is a safety valve but it also represents a highly elastic supply • Suites in secondary rental market often home built and not safe (no permit process), limited parking space, often illegal

42. Market obstacles • Trickle down effect is minimal, so adding any rented supply at all is not necessarily beneficial • Developers get immediate return on condominiums. While income gap is growing, why build for a group who cannot afford the rent levels necessary to sustain a new apartment building?

43. Obstacles in labour market • Job creation concentrated in higher segment • Lower wage occupation: shift to developing countries

44. Paradigm change (Drummond) • Housing need no longer treated as inevitable • Low-incomes no longer treated as given  poverty issue can be fixed • The problem is not that there is insufficient housing, there are too many poor people

45. Paradigm change? Solution? • Raise market incomes over the long term (more and better paying jobs, Old Age Security, Guaranteed Income supplement, Canada and Quebec Pension Plans) • Shorter term: improve supports for low-income households, address supply shortage, remove market imperfections that contribute to shortage

46. Attempts to tackle the problem • 1990 National Liberal Task Force on Housing (Paul Martin, Joe Fontana): report with housing recommendations but lack of political will to implement • 1998 Toronto Disaster Relief Committee raised awareness by launching its One Percent Solution campaigns • 1999 Community based groups created the National Housing and Homeless Network • 2000 Partnerships with municipalities

47. Attempts to tackle the problem • 2001 Affordable Housing Framework (AHF) from the federal government: cost sharing program with the provinces (who match contribution of fed. gvt. for units that are and must remain affordable for 10 years, can also be renovation, rehabilitation, conversion etc.) to create 35,000 units until 2007-08 [$680 million, 1 percent of budget] • Federal government hoped that the provinces would contribute an equal amount (One Percent Solution)

48. Attempts to tackle the problem • Why did the one percent solution fail? • Loopholes: • Agreement allowed provinces to pass on the costs to municipalities and third parties • Loose definition of affordable housing Besides that: Tax base eroded, capacity to respond was not there

49. Attempts to tackle the problem • 2003 Income support: raising Canada Child Tax Benefit • Federation of Canadian Municipalities, range of options ranging from waiving or reducing development fees and property taxes in return for approval of affordable housing construction to reviewing zoning by-laws • Challenge of FCM: great diversity, each city has its own problems, resources, funding and legislative arrangements

50. Attempts to tackle the problem • 2003 CMHC once again increased insurance flexibility • 2003 Federal-provincial negotiations Winnipeg: calling on fed gvt to use powers to bypass unwilling provinces and deal with municipalities directly (need for larger scale financer and overview seems necessary though…)