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.