X.30.2019 - The Illusion of Affordable Housing – Part Two
This is the second installment of a trilogy dealing with housing and homelessness in North America. In this blog, I address the “Illusion of Affordable Housing” and, in the final episode, “Ending Homelessness”, I will offer my theory about how we can bring an end to homelessness in Canada — like universal healthcare, it may take longer in the United States.
Affordable Housing is a term that has different meanings. To many, it means that a person or family can pay for all of their basic needs for food, utilities, recreation, transportation and clothing in addition to the cost of housing. Others use affordable housing to describe social or public housing that is subsidized through various government programs so that people can have a safe and adequate place to call home. I am going to merge these two interpretations by stating that all social housing is affordable but not all affordable housing is social housing.
The 30% rule has been used as a guideline for affordability based on studies that go back as far as the 1800s. That is, a household should spend no more than 30% of their monthly gross income on housing. If you're a renter, that 30% includes utilities. When applying the rule to owning a house, it includes other home ownership costs like mortgage interest, utilities, property taxes and maintenance. The 30% rule was a 25% rule during the industrial revolution when people were moving to the urban centres that offered the promise of employment. It was based on an aphorism that one should not spend more than a week’s wages on a month’s rent.
Thirty percent of gross income seems like a reasonable benchmark for housing affordability. After all, you wouldn’t want to spend so much money on housing that you are left with nothing for the rest of life’s necessities or pleasures. The problem is, many households aren’t abiding by this rule — not even close. In large urban centres like Toronto, Vancouver, New York City (and many others) the average household spends more than 40% of its gross income on housing and they are losing ground with rising rents. People who own homes are finding it difficult to upgrade to larger houses to accommodate growing families because of escalating real estate prices that seem to have no limit. Their gross, household income is not increasing at the same rate. More than 46% of renters are “cost-burdened” and exceeding the 30% rule to the point of being forced to consider alternate housing solutions such as living with their parents, searching for additional roommates or moving to more affordable communities.
There is another measure of housing affordability for renters. Landlords typically require your annual gross income to be at least 40 times the monthly rent. For example, if you and your roommate are looking at an apartment that costs $2,000 per month (a 1-bedroom apartment in 
Toronto averages $2,200), the landlord would require a combined income of $2,000 × 40 which equals $80,000.
As the economy has rebounded since the 2008 market crash, the cost of many goods and services have fallen. The downward trend has especially impacted household food costs. In 1936 the average family spent about one-third of its income on food, compared with roughly 12.9% in 2017. The following chart from the U.S. Labour Bureau illustrates this point.
But some essential goods, like housing, have not followed this trend. That’s because much of the cost of housing is made up of the land on which the housing sits, and the cost of land is largely the result of its proximity to economically productive areas which, not coincidentally, is also where the well-paying jobs are located. This makes housing somewhat similar to healthcare, where the main driver is the good’s cost (skilled labor in healthcare). Healthcare won’t be made much cheaper with technological advances and that’s another reason why universal healthcare is such a controversial issue in the United States. So, we shouldn’t expect housing to account for the same portion of an individual’s budget as time goes on. The 30% rule is only an historical budgeting reference point for many households as opposed to a functional reality.
David Bieri, an economist at the University of Michigan, has been studying housing affordability measures. He argues that an accurate measure would have to take into account the quality of housing, including what benefits residents gain from living where they live. For instance, the average New York family that spends 40% of its income on housing is also deriving benefits, like superior public transportation and competitive food choices, from living in the city. Access to high quality, public education is another “good” that drives up housing prices. It might make perfect sense for a family to spend more money on a home if it means they can then spend less on their family’s education.
We have been addressing housing affordability with the assumption that members of the household have full-time employment that can result in housing options. And, still, it is a struggle financially. Many households are living month-to-month trying to cope with the high cost of housing in North America. A lost job or serious illness can be all that it takes to seriously limit their options and they may even become precariously housed.
Then, we have households — both individuals and families — who can’t participate in the mainstream real estate market at any level. There can be any number of reasons why people find themselves in unfavourable circumstances but without social housing or supportive housing, people will experience abject homelessness or have to settle for unsafe, inadequate shelter. The economy is like a fast-moving river. People who are healthy with stable employment can access the river with all types of boats depending on their social-economic means and successfully float into the future. People who have unreliable or inadequate sources of income and, sometimes, complicated by being unwell will not survive the river experience. And, like the river, the economy doesn’t care.
We have a housing crisis. It is affecting all of us and it’s time to demonstrate that we, as a society, care.
In my final blog in this trilogy, I will offer some solutions to homelessness and I will also provide an economic insurance policy for the future that will help future generations experience safe, adequate and affordable housing.