Tag Archive for: Affordability

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We Need Housing that Families Can Afford

When we go to the Committee of Adjustment or TLAB to oppose severance applications, we regularly hear the Planners hired by the builders say that their clients are increasing the supply of housing available to “young families”.

It sounds good, doesn’t it? The builders are helping young families get into the housing market.

You might think this post was going to address affordable housing in the sense of increasing the supply of affordable rental housing or housing for low-income families. Instead, we’re talking about housing that an AVERAGE family can afford.

If you follow the real estate listings in Long Branch, you’ll find that the average price of a home is $834,000. This reflects a mix of house sizes as well as condos and single detached homes.

Source: Zolo.ca

If you narrow this down to single detached houses, you’ll see listings in the range of $1.1 million to $1.7 million. From what we see, the lower end of this scale represents resale homes – a mix of bungalows and modest 2-story homes with 3 or 4 bedrooms.

The upper end of the scale represents homes that have recently been built. Usually, these are larger (approx. 2500 sq ft.), which is what builders say the market wants. And many of these homes are built on smaller lots – often 25-foot frontages – that do not leave much room for gardens or playing area for young children in the back yards.

This begs the question of whether these newly-built homes are within reach of “young families”

The Central Mortgage and Housing Corporation helps first time buyers get into the housing market by offering insurance on mortgages.

According to the CMHC, if you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments.

CMHC mortgage loan insurance lets you get a mortgage for up to 95% of the purchase price of a home. It also ensures you get a reasonable interest rate, even with your smaller down payment.

Mortgage loan insurance helps stabilize the housing market, too. During economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.

However, if the home you want to buy is worth over $1 million – which is more the rule than the exception in Toronto – CMHC does not offer mortgage insurance.

Many mortgage lenders use a CMHC tool called the debt service ratio to determine if potential house buyers represent an acceptable risk. This means looking at the total household monthly income relative to expenses such as heat, hydro, gas, vehicle payments, loan payments as well as the projected mortgage payments to determine just how much house people can afford to buy.

To illustrate, let’s look at an example.

Assume a couple want to buy a home that’s on the market for $1.5 Million – about the middle of the range for newly constructed homes in Long Branch. Let’s also assume they are moving from a rental apartment into their first home and are able to come up with $300,000 as a down payment. This represents 20% of the value of the home.

They want to take out a 25-year mortgage, which would be at 2.5% per year. This would result in monthly payments of $5,383.40.

Now let’s look at their monthly expenses.

Property taxes in Toronto average about 0.45% of the assessed value, which we will assume is the $1.5 million they expect to pay. Their monthly property taxes would work out to $563.75.

Both husband and wife have credit cards and their combined balance each month is $600. Heating their new home could be expected to cost of the order of $200 per month for gas or oil.

When we add up all these expenses, we get monthly expenses of $6,747.15.

The threshold lenders use when determining if a client is credit-worthy is that monthly expenses not represent more than 40% of the combined income.

Using this, for our couple wanting to buy a $1.5 million home, their household income before taxes would have to be at least $202,414. We’ve been very conservative on our estimate of credit card debt and we haven’t allowed for a car loan or lease.

In Toronto, the average household income is $102,721, based on 2015 census data. However, households with incomes over $200,000 represent less than 10% of all households. Household incomes over $200,000 are the exception, rather than the rule.

Such high income levels are not characteristic of “young families”. They represent the elite, not average or typical small families.

So, it doesn’t sound like our young family could afford one of the new homes being built. They might, however, be able to afford something closer to the average in Long Branch. It might be more modest than one of the newer homes, but it most likely will have character and be well-built. And it would be affordable for them. And an entry point into the housing market.

So, a message to planners: please don’t insult our intelligence by trying to pass off developments that will be sold at the high end of the price spectrum as being a way to help “young families” participate in the housing market. The numbers just don’t add up!

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The Economic Issue of Affordable Housing

Housing is affordable, on average, if housing costs can be limited to 30% of a family’s after tax annual income.  Housing includes home ownership and rentals.

Mathematically, a couple whose combined after tax income is $100,000 a year (gross income of about $66k each) would have an upper housing cost limit of $30,000/yr. or $2,500/mo.

Someone paid minimum wage of $15/hr. makes about $30,000 before tax and $25,200 after tax (approx. 16% effective tax rate).  For a couple each making minimum wage their combined after tax income is $50,400 and their housing limit is $15,120 or $1,260 per month for a couple.  For a single person the limit is $630 a month.

The problem with persistent house price escalation is that housing prices can become out of reach for people with lower incomes.

Housing prices rise but, as long as the rate of rise is within capacity of the local economy to absorb, rising house prices are not a significant issue.  A significant issue arises when housing prices rise above what the local economy can really afford. 

There is all sorts of evidence that house pricing has exceeded those limits.  Renovictions, increased Food Bank reliance, increased homelessness are all symptoms of housing costs that are too high.

Solutions proposed that increase housing supply but which are beyond the affordable price range won’t solve high housing prices. Increasing the supply of unaffordable housing doesn’t help and in fact delays other housing solutions.

For the past ten years or so, external demand has increased the price of housing far beyond the capacity of the local population to pay.  Stated another way, how can a local economy with average pay increase of 2% a year cause a housing bubble that saw on average 11.5% increase compounded over the past 10 years.  Until about 2010 the rate of housing increase was about 2% similar to the rate of increase in salaries and inflation.    Something else, beyond the regular local economy has caused significant housing appreciation.

There are likely several sources of external financing that have grown our housing costs.  Pension funds, Investment funds and other large institutions with significant funds to “invest” and others with less of significant fund access have set up investments that capitalize on housing growth.  With rates of return as high as 11%, housing investment is seen a perfect combination of low risk and high return.

Another issue is immigration that tends to move too often to the largest cities. Immigration in the recent past has grown the population, not just replaced our declining birth rates. 

However, unlike, in the past, when immigrants were encouraged to live in rural Canada, immigrants tend to gravitate towards urban centres. That’s where the jobs are. That’s where they are most likely to find elements of their native culture. That’s where they find fellow ex-pats to bond with.

Unfortunately, the Government has seemingly overlooked the needs of immigrants after they arrive in Canada.  Infrastructure such as housing, schools or health care has not kept pace to accommodate the population increase. And finding affordable housing – whether it be ownership or rental – is a prime need for immigrants to be able to settle in their adopted country.

Regardless of the specific source of the financing, the fact that locals are regularly outbid by investors for housing is an economic disaster that continues.  Most countries restrict foreign purchasing of housing, but not Canada.  Canada is one top 10 most desirable countries to live in in the World and the locals have no protection from inflationary housing investment. 

The big money is moving in and the incumbents are being forced out.  This is wrong.  Locals vote, foreign investors don’t.

We need to take steps to significantly reduce housing purchasing by investors – foreign or otherwise- that limits excessive increases and maintains housing at a cost that the locals can afford.   To allow otherwise is irresponsible.  Perhaps a start would be to monitor and report housing inflation and establish benchmarks to maintain similar to how we manage to a 2% inflation target.

To learn more about this, The National Post has an excellent article.

About the author: This post was contributed by Ken O’Brien. Ken is a member of the Board of the LBNA and serves as Treasurer.

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Housing Inflation by the Numbers. A Case Study.

There is a house in our neighbourhood that currently stands vacant, and it is currently for sale.

It’s a prime example of speculation in the housing market.

The house was sold in 2011 when the original owner passed away. The selling price, as we understand, was about $500,000.

The house, a 3-bedroom bungalow built around 1940, sits on a 50-foot lot and is about 1,000 sq. ft.

For the next eight years, it was rented out by the owner to a number of different tenants until it was sold in 2019.

The selling price was $1,300,000 – 2-1/2 times what it sold for in 2011.  That represents a 17.5% annual growth rate in value.

The purchaser applied to the Committee of Adjustment to sever the property and build two oversized homes. The residents objected and the Committee of Adjustment agreed with their objections, unanimously refusing the application to sever.

The owners eventually put the house back on the market for $1.8 million.

In the brief time they have held the property, they are effectively expecting a 16.6% increase in value during which time they have done nothing to add value to the property. As noted in the opening paragraph, the house currently is vacant, so it is not generating any rental income to offset its carrying costs.

In the listing, the owners suggested to potential buyers that the property had potential to be severed and rebuilt.

Let’s look at this.

Assuming the sellers gets their $1.8 million, the cost per severed lot would be $900.000. Usually, in cases of severances, the builders try to build approximately 2,000 sq. ft. of house. At a conservative estimate of $350/sq. ft. to build, the builder would be investing another $700,000 into the property, bringing the total investment to $1,600,000.

Current MLS® stats indicate an average house price of $834,497 Long Branch. This represents houses of all sizes as well as condos. It also represents sales of newly built homes as well as resales of existing dwellings. So, the price for a 3- or 4-bedroom house with 2,000 sq. ft. of space would be significantly higher. According to the MLS®, averages for 4-bedroom homes in Long Branch are about $1,600,000 which, again, represents a mix of new builds and existing homes.

If we assume the average asking price in Long Branch for a 2,000 sq. ft. home is about $1.700,000, which would net the builder only a $100,000 profit assuming everything goes as planned.

But we haven’t factored in costs such as applying to the Committee of Adjustment for the necessary variances, the commission paid to a real estate agent to sell the property, land transfer taxes or interest to carry the property while it is under development. And these probably do not represent all the costs a builder might incur. If the application has to go through TLAB because either the builder or the neighbours appeal a Committee of Adjustment decision, that can easily add another $100,000 to the cost, for hiring a lawyer, a professional planner and an arborist.

Let’s assume this property is purchased by a family who wish to have a custom home built and so they do not plan on severing the property.

Using the property value of $1.79 million and another $700,000 for construction, the owners who wish to build instead of severing would have to ask in excess of $2.5 million for their 4-bedroom, 2000 sq. ft. home, should they decide to put it on the market. That’s well above the average of $1,700,000 for a comparable property in the neighbourhood. But it’s also likely the family would live in the home for several years.

It should be noted that, between 2011 and the present, no improvements have been made to the property we described by any of the owners. So, apart from trying to sever the property, the collective owners have done nothing to add value to this property. And yet they’re expecting something in excess of a 15% return on their investment.

In the meantime, the residents on this street have a house with no neighbours to interact with, that is not being maintained and no real expectation that this will change in the near future.

And it’s not an isolated example in Long Branch. There are several properties that were granted severance approval back as far as 2015 that still have the original homes. In other words, the owners got their severance but have done nothing since.

If everyone is so concerned about housing supply, why haven’t these properties been developed?

If this isn’t speculation in one of its worst forms, it probably is close.

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