Welcome to this month’s installment of Dear Urbaneer, where I take on tough real estate questions from my followers. This month, I am helping a prospective dwell hunter who is grappling with the issue of affordability in the City of Toronto. This is one of the most common issues I’ve been asked to discuss in recent years. Right now, “affordable housing” – which loosely means accommodations that can be rented for 30% of your gross income and shelter that doesn’t cost one dollar more than you have (yes I’m being facetious) – is shrinking relative to the supply of housing in Toronto. Given the housing crisis is real, promises are being made, and opinions are being expressed on this issue, it’s important to be informed and to know the facts.
With rising interest rates – and the rising prices for everyday essentials – I am increasingly worried I have been priced out of Toronto real estate and my dreams of homeownership may be out of reach. I know that the City of Toronto is taking some steps to increase the housing supply to help with affordability, but what exactly is being done? And will it help?
Here’s my reply:
First, I have enormous empathy for those who believe they are permanently shut out of the housing market because their current annual income and existing savings are insufficient to purchase a dwelling in an accessible location and of a satisfactory condition that meets their household’s spatial requirements and needs. Although about two-thirds of the 10.5 million Canadian households (2021 census data) own their principal residence (of which, face it, the majority are indebted to creditors in the form of a mortgage or HELOC), one-third do not. And of those who do not, a percentage of these have at least one of the heads of households with zero interest or desire to own their own home.
Let it be said that when you’re a realtor, you don’t meet many people who do not want to own their own home. I have met some, and they’re lovely people, but I have absolutely no idea how large a pool this subset of the 3.5million households is. But whatever size it is, the Canadian government has indoctrinated several generations to desire homeownership as a biographic right of passage to the Canadian dream (see Why Does Homeownership Remain A Priority For Canadians, Despite The High Costs?), I ballpark there are at least a couple of million households who would like to own their own home. And right now, for many Torontonians / Ontarians / Canadians navigating everyday life, the lens by which they view the world is one where mortgage rates are increasing, inflation is escalating, and there’s a pending threat of food scarcity and fuel shortages. It’s prompting many to question how we are supposed to afford the costs of daily living – let alone get onto the property ladder?
As costs climb, we are looking more and more to government policy to assist. Ontario’s Housing Affordability Task Force Report, published in February 2022, recommends the construction of 1.5 million homes over the next decade in an effort to rectify the mismatch of supply and demand, which is not exactly a villain we can blame or punish, is it? That’s why, over the years, we’ve tried to place blame on the shoulders of foreign buyers/money launderers and investors/speculators – both contribute to the problem but more peripherally. Which prompts me to wonder what is being done to generate this supply? And will it be effective?
From Affordability To Attainability
Although affordability is a hot-button issue – and has been for decades (seriously), especially when it comes to housing – it’s a term that requires some context. This is even more true for our current market, in particular.
The cost of living is rising exponentially; Statistics Canada reported a nearly 40-year high inflation rate of 7.7 percent this month, substantially overshooting the general 2 percent target. There are many reasons why this is occurring, including the disruptions to the global supply chains caused by Covid19, the BOC’s decision during the pandemic to lower the interest rates and flush the economy with cash through quantitative easing, and Russia’s invasion of Ukraine. As inflation spikes, governments respond by increasing interest rates, and the byproduct is that not only does the cost of living go up but the purchasing power of consumers goes down. It also invites volatility and the evaporation of wealth. The frothy 10 percent real estate premiums sellers were getting in February and March have disappeared and real estate values are in decline. Stock values have plummeted around 20 percent this year leaving a trail of uncertainty rendering our economic landscape much bleaker. And unfortunately, this will exacerbate our housing crisis, where affordability is a relative term.
It’s not just housing prices that are driving inflation (although those are certainly contributing). Consumer goods, food, and gas are all taking monster bites out of our collective wallets. And this is on top of households – in particular in the City of Toronto – who have already maxed out their budgets with mortgages in the name of homeownership. Truthfully, having lived in an ultra-low interest rate environment for years and years, giving homeowners the ability to pile on debt and pay huge sums for houses has given us a false sense of what is “affordable”.
The pandemic interest rate of 0.25 percent was implemented to ensure the economy was sufficiently stimulated by encouraging Canadians to borrow more. And it did, but the byproduct was soaring inflation and a real estate market that got scorching hot. So despite the Governor of the Bank of Canada, Tiff Macklem, who said in July 2020: “Our message to Canadians is that interest rates are very low and they’re going to be there for a long time.” the BOC responded by increasing interest rates for the first time in five years in March 2022, with two subsequent rate increases recently and the promise of more. First, no Canadian ever thought ‘a long time’ meant 21 months. And few Canadians ever thought a real estate market could flick off like a switch. So it pains me that those who put their faith in the words of Macklem and made a significant property purchase are the ones at most risk of losing their equity. The change coming is alarming and worrisome.
Although I was present when the Toronto real estate bubble burst in 1989 – that I share in When Dreams Of Domesticity Became Nightmares: A Recollection Of The 1989 Toronto Housing Market Crash – there are two generations of buyers and sellers – along with the majority of realtors – who never realized a real estate market could shift like a stock market, particularly by the speed in which sentiment changed.
The Real Metric Of Affordability
The real metric of what is affordable is set in relation to our incomes. And when you look at past generations when inflation was high, as were interest rates, housing, and household debt took up a far smaller portion of household income. I wrote about this way back in 2015 in my post Dear Urbaneer: Interest Rates In The 1980s And Now. Even then household debt (thanks to huge mortgages) was substantial in relation to housing prices and income. But now, seven years later, that ratio is substantially more out of whack.
As mortgage rates keep climbing, it’s only going to get worse. This Financial Post article “Posthaste: Housing Affordability Suffers Worst Decline Since 1994” based on the Housing Affordability Report from the National Bank has the following stats from the first quarter of 2022:
“In Toronto the average home price rose 7.2 percent over the last quarter to $1,231,944. since Q4 of 2021. This means the average down payment is $246,389 and, based on current household income in Toronto, this would take 336 months to save. And mortgage payments in Toronto represent 75.6 percent of household income, which is up a whopping 8.1 percent over last quarter”.
Wow. I’m speechless.
Here is another article based on that same report, that has a dramatic – but not wholly incorrect – title –> “Here’s What It Takes To Buy A Home In Canada’s ‘Soul-Crushing’ Housing Market“.
Excuse Me, Mr. Ford, But Is Attainable Housing Affordable?
So back to the concept of affordability. This article from the Toronto Sun, “What Does Affordable Mean?” refers to CMHC’s definition of affordable as a mortgage payment being less than 30 percent of before-tax household income. It refers to a report from Loans Canada that demonstrates that households in Canada are commonly exceeding that by 30 percent – or more in the case of Toronto. It’s a scary trajectory; this truly is a housing (and an “affordability”) crisis that requires we try yet bigger, bolder solutions! That’s why we are turning to our governing bodies for policy solutions when our pockets come up empty; it’s no longer a problem of the individual but of the whole.
However, as we know, Doug Ford campaigned heavily with promises to aggressively create more housing supply – in order to create more affordable housing. And very interestingly, during his provincial election victory speech on June 2, 2022, Ontario Premier Doug Ford said “he aimed to build more housing to make the housing market more “attainable” for everyone”. Huh? Why did Ford make this slight vocabulary change from ‘affordable’ to ‘attainable’? It was both subtle and profound.
Switching these words means for homeowners and dwell hunters in pricey metros that the provincial government is focusing not so much on the overarching economic issue of unaffordability, but is switching goal posts. While neither concept is particularly well defined, one would hope that in doing “attainable” there would be quantifiable tasks that would be impactful on affordability.
Without question, this is a political hot potato. Even in an interview this week between Premier Doug Ford and Toronto’s Mayor John Tory, according to TVO Today’s article “Toronto is poised to take on the housing crisis… in 2023“, the political leaders are extremely aware of how polarizing it is for voters, such that tackling it will occur after the next municipal election. Really?
There are lots of reasons, both for the growing financialization of housing and the possibility low-density, single-family neighbourhoods may be required to allow larger multi-unit dwellings, which are dangerous topics for politicians. To pull back too much is to cause a decrease in asset value and household wealth for current homeowners (although this is already happening). To stay too close to the status quo is to let unaffordability swell – with far-reaching economic and socio-economic consequences – as I wrote about in The Growing Trend Of Financial Landlords In Toronto Real Estate. And, as I wrote in Toronto Real Estate, Yellowbelt Zoning & The Missing Middle: Part One & Part Two, allowing multi-unit dwellings in single-family neighbourhoods gets ratepayers crazy mad but if done correctly I believe those ratepayers more resistant would realize it has many benefits, including creating housing where they could age-in-place.
Increasing the supply of shelter has been identified as one of the solutions to unaffordability in housing. But increasing supply has to be done strategically for it to be impactful. It has to be relevant to need, or one runs the risk of inflating prices. My 30-year career has seen gentrification in the original City of Toronto displace existing tenants for new and shiny (and more expensive) homes (here’s my post Gentrification, Densification, And The History Of Toronto Real Estate). This process is part of the natural life cycle in the rise and decline of neighbourhoods but it’s also opportunistic. In The Affordability Conundrum For Toronto House Buyers: Location, Condition & Costs I share how my own role in the adaptive reuse conversion of factories into loft condominiums – which were sold as ‘unfinished shells’ to help with affordability – also fueled the revitalization of urban neighbourhoods into vibrant communities that became expensive.
In How Toronto Real Estate Is Shifting From ‘Fixer-Upper’ Flips To ‘Tear Down’ New Construction I explain how the entire downtown core, once a patchwork of working-class and middle-class neighbourhoods today has newly constructed luxury executive houses that cater to the new elite. This effectively wiped out pockets of affordability. In How Toronto Real Estate Near Queen Street – East & West – Is Climbing In Value I explore how Toronto’s reinvention from an industrial city to a post-industrial global centre impacted real estate values along one major arterial route with public transit. And back in 2015, when a $4 million mansion in Forest Hill was replaced by A $15 Million Mansion In Toronto’s Tony Forest Hill, the rippling effect on property values was tremendous. That one sale signaled an incredible shift in what Toronto real estate would be worth from that day forward.
This article from TheConversation.com – “Ontario Must Commit To Affordable Housing For All- Not Attainable Housing” – outlines this, and also calls for participation from all levels of government to assist with relevant and truly affordable housing.
And as pointed out in the article, the creation of housing supply to tackle affordability is a “wide conversation” that requires input – and incentives – from all levels of government to achieve these goals.
This article also points out the necessity of fast-tracking the approvals process (which was a recommendation from the Ontario Affordable Housing Task Force as well). Not only would this make building more efficient, but it also would reduce developer costs; less time under development means fewer dollars spent on carrying costs. All three levels of government must dip into their coffer to pay for these initiatives. We, as taxpayers, are obviously invested in the affordability of the society in which we live!
Another idea is that all three levels of government could free up land on which to build the projects as their contribution. I suspect if we look at any of the three levels of government engaged in creating housing, they’re using sites they own to make this happen. It’s this kind of bi-partisan, overall look at real costs to all stakeholders, which is needed to make affordable housing for everyone.
Inclusionary Zoning: Solution Or Not?
Action to counter unaffordability is crucial. But what is the best approach?
The City of Toronto is betting on inclusionary zoning to increase the much-needed housing supply. Last fall, the city voted to adopt an inclusionary zoning policy. It’s now mandatory for new developments around Protected Major Transit Stations Areas (PMTSAs) to include affordable rental and ownership housing units. Five to 10 percent of condo developments (of a certain size) will have to be designated as affordable housing, increasing gradually up to 22 percent by 2030.
I recommend you read this post from Storeys: ” STOREYS’ 2021 Real Estate Issue of the Year: Inclusionary Zoning“. It discusses the first implementation of such a policy in Ontario, but it has been widely used in the United States to varying success. And, of course, there are pros and cons to inclusionary zoning. The obvious pro is that Toronto’s housing supply would be increased relatively quickly (at least in theory); by mandating (or incentifying as some regions have done) developers, the decision to increase supply is more defined.
However, there are drawbacks to inclusionary zoning, as chronicled by a report by the World Bank. They say that, while inclusionary zoning sets the framework, in reality, the production of new homes can be slow and small in actual numbers. This has been the experience in a number of U.S. cities. As the aim in these U.S. cities is to create affordable housing in pricey markets (much like we see in Toronto!), typically there are substantial costs to develop, which have to be paid by somebody.
Let’s face it, a real estate developer will only develop a site to a higher and better use (whatever that might be) if they – and all their backers – are going to generate a suitable return on investment. And a buyer- whether that is an investor or an end-user – will only purchase a property if they believe their acquisition price will result in a future profit and not a loss. So inclusionary zoning will work if it doesn’t reduce the developer’s profit margin, and buyers believe the market prices they’re paying are fair. Neither party will proceed if they’re being penalized or required to assume the burden of higher costs to offset the expense of creating affordable housing unless it was in the form of a tax benefit or something other incentives which translates into requisite savings.
In order to demonstrate how property prices have created an unsavory and overloaded rental market, Toronto Inclusionary Zoning created a promo video of interviews with Toronto renters, telling the world – “YES, it’s really that bad!” For a few chuckles and gasps, check it out for yourself below, but be warned it includes phrases like, “a slaughtered raccoon, lying in our decorative fireplace”…
This Globe and Mail article “Three Ontario Initiatives Aim To Tackle Soaring Housing Costs, But Will Any Of Them Really Help?” echoes that sentiment, suggesting that in an inclusionary zoning situation, often market prices simply get raised to compensate for the reduction in price with the affordable ones.
The World Bank looks at alternatives, which rely more heavily on incentives than a mandate – such as the in-lieu option. Developers can agree to build affordable units onsite, or they can build affordable units at another location, where land might be less expensive and costs to develop less. In pricey New York City, developers are awarded a floor space bonus for including affordable units. There is still debate over whether the benefit of inclusionary zoning is better if it is mandatory, or if it is done by developer choice, drawn by incentives.
From The Real Estate Trenches
So what is actually happening in the Toronto real estate trenches when it comes to supply?
This CBC article – “Toronto Developer Plans To Tackle Housing Crisis By Building 4 Towers Of Mainly Affordable Units” is one that I’d like to focus on and explore further. It talks about an area developer who is calling for all three levels of government to step up with developer incentives to build affordable housing.
Spotlight Developments are building four towers in northwest Toronto, with a mix of condo and rental units, with 70 percent of the units slated under affordable housing, which is going to result in a substantial number of units. And they are not mandated by inclusionary zoning here. Rather, Spotlight says that they are doing so as an act of goodwill – to step up to help with Toronto’s affordability problem when few are. In fact, Spotlight has partnered with four not-for-profits (Habitat for Humanity, WoodGreen Community Services, BlackNorth Initiative, and Trillium Housing) to maximize the “affordability” of the project.
There may be a strategy at play here to create bigger buildings with more units than one would typically expect. Given the city is implementing an affordable housing requirement for buildings of a certain size, perhaps this developer is going straight for the jugular by requesting something dramatically larger than anticipated and applying pressure on the government by saying “if you really want to create affordable housing, then the density here has to be substantially greater than you think”
And remember, development is a business. A proforma needs a profit even to get lenders on board and to be viable as a business. It’s interesting that this developer is partnering with all of these agencies, which could help on a number of fronts – like with synergies with their various industries to make the housing most relevant – but there could also be cost-saving benefits here, too. For example, the cost of the sales, marketing, and promotions of a new condo project is significant and slick. It has to speak to be on-trend, speak to its target audience, and pull out all the stops simply to convince a prospective purchaser to visit the sales centre.
Here’s a video for a new condominium coming soon on The Danforth at Dawes. This is the first promotional video that is essentially whetting the appetite of buyers without revealing much of anything about the project which, according to Urban Toronto, is a 41 and 24-storey mixed-use development containing 616 units designed by IBI Group for Marlin Spring and Osmington Inc in Danforth Village, Toronto.
Perhaps instead of creating costly videos like this what if the developer instead enlists these four non-profits – Habitat for Humanity, WoodGreen Community Services, BlackNorth Initiative, and Trillium Housing – and taps into their resources (staffing, funding, and pool of potential buyers), thereby reducing or eliminating some of their sales, marketing and promotion costs? The credibility and social value of the developer go up, as do the non-profit agencies who are actively engaged in offering access to affordable housing. In no way is this a criticism. If it works then all the more power to everyone involved because if it helps create affordable housing then it’s a Win-win.
Whatever it takes, right?
Thanks for reading! here are a few more posts you may enjoy, all surrounding affordability:
How Canada’s 3 Levels Of Government Shape Housing Policy & Programs
Dear Urbaneer: Does Canada Have A History Of Building Affordable Economical Housing?
Dear Urbaneer: How Can Millennials Possibly Afford To Buy Real Estate?
Toronto Real Estate, Yellowbelt Zoning & The Missing Middle: Part One & Part Two
The Affordability Conundrum For Toronto House Buyers: Location, Condition & Costs
7 Reasons Why Toronto Real Estate Prices Have Skyrocketed Over The Past Decade
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The Urbaneer Team
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