Housing unaffordability is historically the norm

“Why doesn’t the president of the United States ever get up and say, ‘You can be a full-fledged American citizen and rent an apartment — it’s OK.” David Wessel, economics editor, Wall Street Journal

Americans now pay more for housing than ever before, according to a report by Harvard’s Joint Centre for Housing Studies. In its annual report The State of the Nation’s Housing 2010, researchers write that 18.6 million Americans spend more than half their incomes on housing, up from 13.8% in 2001. While this figure includes both owners and renters, 45.1% of renters are in the bottom income quartile. Homeownership is at a historical low, household income barely increased in the past decade, and rental vacancies are at a historical high. No wonder the authors are calling calling the first ten years of the 2000′s “the lost decade.” But housing “unaffordability” isn’t anything new, nor are our solutions to the problem.

While the Harvard researchers blame falling wages and high unemployment (9.9% in April 2010), high rental vacancy rates and low supply of the most affordable and smallest units are also major issues. Fewer homes were built in the US in 2009 than in any year since WWII, particularly multifamily homes: 62% fewer multifamily developments were begun in 2009 than in 2008. Demolition and conversion of existing low-income rental units is also a major cause for concern. Lower immigration rates are also taking their toll: there was a sharper decline in the number of foreign-born households under the age of 35 than in native-born households from 2009 to 2010. Minority households have been hit hard by the mortgage crisis. In 2009, minorities accounted for 37 percent of householders aged 25–44 and 39 percent of those under age 25. The minority homeownership rate is still expected to increase by 2020, despite lower incomes among foreign-born and minority households and lower immigration rates due to the economic recession.

Some progress has been made in terms of rental housing: rental conversions from foreclosed housing has already been done in many cities, but Housing and Urban Development (HUD) considering introducing market-rental units into its publicly-funded affordable housing developments in order to help pay for much-needed maintenance on the buildings. And the pro-homeownership policies keep coming, including the renewal of the federal tax credit for first-time homebuyers (and its expansion to repeat homebuyers) and Federal Reserve purchases of mortgage-backed securities to help keep interest rates low. But with the expiration of the tax credit program in April 2010, Harvard’s Joint Centre for Housing Studies warns that any good news may not be long-lasting. The problem, they say, is that there is unusually low demand for new homes. The ratio of housing and transportation costs to income has risen steadily over the past fifty years (see Figure 30 and 31 of the report).

As I’ve written before, without massive government programs to support homeownership and assistance for low-income renters, housing has ever been a good deal. Check out the CBC’s digital archives on the development of suburbs. In a video clip from 1954, the narrator explains how expensive homes are for the average person and how far people have to live (up to 50 miles from the city center) to afford them. In 1953, the average Canadian earned $971/month before taxes. Don Mills, the first suburb in Canada, had house prices beginning at $11,000 all the way up to $100,000. Rental rates at that time were $300/month for the average apartment in Toronto (already hovering around 30% of the average Canadian’s income, the level most housing authorities classify as affordable) and $100/month for a basic three-bedroom in the city centre. In the new market-rate high-rise apartment complexes in the suburbs of Toronto, apartments went for less than $100/month. In Montreal, then the largest city in the country, 70% of homes were apartments and the going rent was $70-100/month, only slightly more than the rents in Winnipeg ($80/month). A house in Vancouver was $2,000 cheaper than in the east at the time. While 1950s housing solutions (demolition of existing older housing to make room for low-income public housing developments in city centres, massive concrete high-rises in the suburbs) may have been questionable, they were quite desirable at the time: the wait for affordable housing, like the still-under-construction Regent Park) was 2 years for a $29-90/month rent-geared-to-income apartment. The average rent at Shannon Heights, a 1950s assisted rental development in Halifax, was only $90/month. Commuting to the city became a new drag, and buses quickly replaced streetcars and trains, steps were taken to make commuting more enjoyable. A 1963 video clip records a housewife saying that the lack of transportation options in the suburbs mean she spends considerable time driving her teenagers around; another says her family moved to the suburbs because that’s where they could get a mortgage.

Whatever housing problems we face today, whether it’s affordability or commute distance, they’re nothing new. Solutions to these problems, like artificially stimulating homeownership through tax incentives and policies, are likewise nothing new; housing affordability problems persist. Recently, researchers at the The New York Times compared the cost of living in a suburban house to an urban apartment in the New York City metro area, and found that the suburban option cost a surprising 18% more (“High-Rise, or House with Yard?” July 2, 2010): the big difference was the higher property taxes, and their comparison didn’t include the cost of home repairs. Even the The Wall Street Journal is publishing articles saying homeownership doesn’t work (“Is the Homeownership System Broken?”, June 22, 2010): WSJ economics editor David Wessel is quoted as saying, “So now we have a system where a lot of people own homes but don’t have any equity in them, which means you don’t get any of the virtues of investing in them. And the government has been forced to take over the mortgage financing system, which suggests that it wasn’t a very strong one if the government has to take it over.” This is quite a turn of events. Could North Americans be forging a new path in housing policy?

July 6, 2010 | Tags: , , , , , , | No Comments »

High homeownership bad for Canada?

I’ve often felt that homeownership is not the rosy American Dream that it claims to be. I find homeownership limiting, both economically and geographically: my parents and their friends, and now friends my own age, seem to sacrifice anything and everything in order to make mortgage payments. The years I worked at Canada Mortgage and Housing Corporation, taught me how the federal housing agency was created partly to help sell the idea of homeownership right after WWII and enable it through a series of government-backed programs and policies. Then there’s my own research in the area of immigrant settlement and housing choice, which included a serious look at Canadian federal housing policies that have slowly eroded rental housing, co-op housing and social housing as options while supporting homeownership through numerous incentives. Let’s just say that it’s no surprise that at age 36, I’m still a renter, bucking the DINK and yuppie trends, a little cynical about the myth that renting is just “throwing your money away.” After all, renting has allowed me to remain flexible, pick up and move to different cities, travel, and live in neighbourhoods I never could have afforded if I had bought.

It appears that Richard Florida agrees with me. Higher rates of renting, public transit use and residential mobility are all key themes in Florida’s latest book, The Great Reset: How New Ways of Living and Working Drive Post-Crash Prosperity, released two weeks ago (read a review of the book, and other Florida works and quirks, on Urbanophile). Florida belies the myth that housing is a good investment, particularly when it’s held for 20 or 30 years: the rate of return on housing in the US has generally been quite low, in fact from 1890 to 1990 it was exactly zero. We’ve all seen how difficult it can be to sell a house in recent years in the US, and in earlier recessionary times in Canada: my parents’ current house was bought for $20,000 less than a similar house a few blocks away because the owner had lost her job in the 1990s recession and had to sell quickly. A friend’s parents sold their house in 2007 for almost the same price they paid for it in the early 1980s because the mill in their town had closed, leaving most of the residents out of work.

Overinvestment in housing has decreased investment in other areas like medical technology, software and alternative energy. Florida has written before about the dangers of putting too many eggs in one basket: at the height of the mortgage crisis in the US (in a November 28, 2009 article in the Globe and Mail), he wrote that the mortgage system was directly responsible for the crisis, and that the era of overinvestment in homeownership and car ownership were over. Interestingly, Florida also applies his argument to individuals: Canadians carry more mortgage debt as a percentage of their disposable income than Americans, meaning we have far less to spend on other things. A friend of mine who works in mutual funds and investments tells me the average homeowner pays for their house two and a half times due to interest. This is probably no surprise to those of us living in the country’s biggest cities, where housing prices are astonomical and have not shown any decline in growth since the US mortgage crisis. In fact, housing prices in Canada increased 20% last year.

Florida argues that in cities with higher homeownership, unemployment is also higher because homeowners are less likely to pick up and move when things get tough. He believes that mobility is often the key to employment, and more flexible housing choices are key in times of economic instability. It seems there are other people out there like me, who prefer the flexibility of renting because we want to remain mobile and have no desire to live in one place for twenty years. We aren’t all that uncommon either: 40.1% of the Canadian population moved within the past five years, according to the 2006 Census; 14.1% moved within the last year. Florida correctly predicted that rental housing would play a major role in stabilizing the US economy after the mortgage crisis: families were able to move into foreclosed properties that were renovated and re-marketed as affordable rental housing. This was because the Obama administration wasted no time in investing $4.25 billion on the creation of tens of thousands of federally-subsidized rental units using the federal Making Homes Affordable program.


Vintage 1950s matchbooks featuring real estate ads

In his May 3rd article in the Globe and Mail, Florida goes as far as saying that “home ownership is an impediment to Canada’s long-term prosperity” because high house prices, low interest rates and lax government policies in Canada could spell trouble for the housing market. Even though people have been talking about the “bubble” for over fifteen years, Edward Jones’ recent report predicts Canada’s is about to burst. The federal government recently made it more difficult to get a mortgage and is considering other measures to tighten mortgage availability in order to protect the market from collapse. They eliminated the no down payment mortgage option before the US crisis began, but there is still a 5% down option. What is particularly interesting to me as a non-economist is how the housing market has historically been used to maintain or even increase consumer spending to stave off or recover from economic recession: besides the post-war era, we saw low interest rates brought in after the 1989 stock market crash in Canada and after 9/11 in the US to encourage people to keep buying homes. I guess there’s a fine line between “removing barriers to homeownership” to encourage spending and bringing on an economic meltdown by letting anyone with a a couple of bucks buy a house.

Massive marketing was required to sell the idea of homeownership as a stable, more respectable lifestyle choice. Let’s not forget that those first homes were practically given away at very low prices and low mortgage rates, their construction highly subsidized by federal governments in both the US and Canada. Those cherubic children, war brides and returning vets in 1940s suburban home ads were so convincing that most of us still believe homeowners are somehow better than renters: even Florida hints that switching from homeownership to renting might have “unforseen social costs” for cities and regions. Our own values and biases about homeownership drive the market. Yet a mere 60 years ago, renter households were the majority in both our countries.

The classic French text Un chez-moi à mon coût (2000) (edited by Eric Brassard), which I read at the urging of a fellow renter working at CMHC, carefully dissects all the economic myths of homeownership, arguing that it is often the non-economic factors that are the most influential. The book presents case studies of housing choices of a variety of professionals, both renters and owners, who argue that there is no sound economic argument for homeownership or against renting: it just comes down to personal preference. But we’re so invested in the homeownership ideal that investing in rental housing, or convincing middle-income families to rent, would take a lot of work. The tide may be turning in the US, but with high housing prices and fairly easy access to mortgages, we may not see this shift in Canada until our own mortgage crisis rears its ugly head.

May 13, 2010 | Tags: , , , , , , , , | No Comments »

Renting the American Dream

An interesting development has been sweeping away the iconic ideal of homeownership in the US. It isn’t a new idea, but in recent years it has certainly been an unpopular one: renting. With the housing market so unstable, many Amerians are turning to renting for an affordable and, surprisingly, more stable housing type.

Mark Whitehouse reported in the Wall Street Journal (“Default, then Rent”, December 16, 2009) that many homeowners have recently discovered that “giving up on the American Dream has its benefits”. If this sounds shocking, read on: Whitehouse writes that even as the housing bust “tarnishes the near-sacred image of homeownership, it may be clearing the way for economic recovery.” This is mostly because of mortgages that by far exceed the value of homes and bargain-basement rents, which free up lots of money for struggling families. As the US sees is lowest homeownership rates in twenty years (currently 67.6%), homeowners are seeing major benefits from shedding their mortgage debts and starting over. In fact, even efforts by the Obama administration to get banks to lower mortgage rates to keep households from foreclosing have been criticized as influencing families to make decisions that are not in their best interests.

In many places, such as Palmdale Arizona, luxury homes are being converted to rental properties using the federal Making Homes Affordable program. Former homeowners note that some of the benefits of renting include: not paying property tax, homeowners’ insurance, or dealing with repairs or maintenance.

While foreclosure still carries a stigma, and many feel taxpayers are paying for those who foreclose and can afford to pay their mortgages, these new renters are transforming the real estate market in many areas. Rental managers are being more flexible about who they take on as tenants, knowing the majority are “good people who just got loans or bought at the wrong time,” to quote a rental agent in Palmdale. Since the Obama administration committed $4.5 billion in economic stimulus money to the creation of these types of rental units, renting has become more commonplace.

Housing prices are stabilizing in the US but experts say they will not reach their boom levels again for years, if not decades. In his New York Times blog, Edward L. Glaeser, a Harvard economics professor, writes that the price of a house should be about the cost of building a home in most parts of the country where land is abundant and there’s less regulation. In the denser, larger cities, land is more restricted and regulations are stricter. Glaser writes that Americans should “stop thinking of your home as an investment that will yield comparable returns to the stock market. Housing is a form of consumption that yields benefits in the form of a more pleasant life, not a bigger balance sheet.” With so many houses glutting the market, it will be awhile before prices start to rise.

These are fascinating developments in the US, where homeownership has been the mantra for sixty years. It’s too early to predict if the changes in housing tenure will last, but they certainly give us food for thought. In Canada, the affordable housing bill (C304) has again been stalled by the Prime Minister’s proroguing government, but as a private member’s bill (Vancouver East MP Libby Davies introduced it) the committees will resume their discussions once Parliament restarts in March. We still have a long way to go, but breaking away from a one-size-fits-all model for housing is a good start.

January 25, 2010 | Tags: , , | No Comments »

Housing as consumer product

Housing has for decades been a major component of economic growth–and economic decline–in Canada and the US. The recent economic downturn was linked to the subprime mortgage crisis in the US, in a bid to encourage low-income renters to move into the housing market since house prices declined after September 11, 2001. While Canada wasn’t hit as hard (Canada Mortgage and Housing’s zero-down-payment mortgage only lasted from 2004-2008), every time the housing market threatens to level off, the Bank of Canada lowers the interest rate. Why are we so obsessed with housing as an investment? Why do policy, government programs, and society in general insist that homeownership is necessary? Shouldn’t housing’s postwar definition as a consumer product come secondary to its role as primary shelter?

While I harbour a fascination for conspiracy theories, this isn’t one. Before WWII, renting a home was the norm in Canada. But the National Housing Act was revised in 1944, and the Central Mortgage and Housing Corporation established in 1946. Like the FHA in the US, CMHC effectively controlled the physical design of suburbs because it directly insured residential mortgages and gave grants for social housing. It was basically a national planning agency with strong regulatory and financial power, the first to ever exist in Canada. Throughout the 1940s, Canadian planners began using Chicago School principles to identify neighbourhoods “decaying” or “blighted”. Usually these were areas with a large proportion of older, poorly maintained multifamily housing tenanted by the poor, immigrants, and renters. Urban renewal schemes, and their corrollaries, suburban housing developments, took off in the 1950s. Homeowners were redefined as wealthier, more stable, more family-oriented…and housing was redefined with the single-family home in the suburbs being the ideal.

While homeownership grew in prestige, renting declined. Steadily, the federal government and the renamed Canada Mortgage and Housing Corporation have removed subsidies for rental housing, affordable housing and decreased its role in the development of other types of housing such as co-operatives and cohousing. The passing of Condominium Acts in the 1970s sealed the fate of rental housing: able to outbid rental developers and access federal and provincial subsidies, condo developers have changed the face of high-rise living in Canadian cities. In 2006, 10.9% of homeowners in Canada lived in condos, more than double the 4% who owned condos in 1981. Interestingly, the highest condo ownership rates were seen in Vancouver, Abbotsford, Victoria, and Kelowna. Single-person households traditionally have lower homeownership rates (52.2% in 2006 were renters), and they are one of the most rapidly-growing household types in the country. According to the 2006 Census, Canada’s homeownership rate that year was 68.4%, its highest since 1971. J. David Hulchanski, Director of the Center for Urban and Community Studies at University of Toronto, believes that high ownership rates are the direct result of federal and provincial housing policies that subsidize ownership over renting.

We’re often told that housing is a good investment. But a lot of that depends on where you buy and when you need to sell: what if you buy in a neighbourhood whose value doesn’t increase substantially? And what if you need to sell…well, now? Richard Florida recently compared US house prices in 300 cities and found on average, a 15% drop in prices from 2006-2009. Cities with an even greater price drop include L.A., San Francisco, Phoenix, Miami, Chicago, and Washington, D.C; prices didn’t drop as quickly in New York, Portland, Seattle, Baltimore, Boston, or Houston.

While housing may be a great long-term investment, should that be its primary purpose? What about the right of Canadians to suitable, affordable, and adequate housing? Housing affordability in Canadian cities is a major issue. From 2001-2006, housing costs increased by 12% for renters and 22% for owners. A quarter of homeowners spent over 30% of their incomes on housing, which is one of the three characteristics CMHC uses to measure core housing need (suitability, affordability, and adequacy). In 2006, half (50.1%) the households over the affordability threshold were renters and 41% were homeowners with mortgages. In 2001, renters were four times as likely as owners to be in core housing need. Other major groups in core housing need include those living in Canada’s largest cities, Aboriginals, the elderly, single-parent households, immigrant households, and those whose incomes are less than $20,000/year. These trends and the meteoric rise in housing prices in Canadian cities until last year mean that more people are buying housing merely to “flip” the next year, selling at a higher price to make a profit. This unrestrained profiteering further erodes affordability, although the recent economic decline has temporarily increased housing affordability in Canada.

Nearly 6 out of 10 homeowners in 2006 had a mortgage, which means big business for banks and for CMHC, which corners 70% of the mortgage market plus mortgage insurance (necessary for anyone who puts less than 20% down on their mortgage). Unlike our friends south of the border, Canadian homeowners cannot deduct mortgage interest from their taxes. While we may not have a mortgage crisis here, mortgage debt is very significant for many Canadian homeowners. Housing affordability concerns have started to edge out the market’s need for ever-increasing prices.

It’s particularly interesting that what’s good for renters is not good for owners. When housing prices rise, rents rise as well. This leaves owners richer if they decide to sell, and renters poorer. When interest rates rise, fewer people can afford to buy, which forces more people to stay in rental housing, lowering the vacancy rate. But these high rates also prevent developers from building new rental housing to fill the increased need, i.e. the law of supply and demand does not work for rental housing. Most Canadian cities have built decreasing numbers of rental units since the 1970s, so not only are there fewer rental units per capita than there were back then, but the ones we have are rapidly aging. Rental units are also extremely vulnerable to condo conversion, to the extent that some municipalities, such as North Vancouver, have passed by-laws banning condo conversion if their percentage of rental housing drops below a certain threshhold.

Municipalities have had to get pretty creative in their search for affordable housing options with almost no support from the provincial and federal governments. Vancouver just passed a by-law approving laneway housing in a bid to increase affordable housing options. Single-family homes backing onto a lane will be able to create units up to 500sq. ft. and 1 1/2 stories high to add affordable rental units to the city’s dwindling supply. The units will not allowed to be sold separately from the house, and are intended to supply smaller housing for particular life stages (in other places they’re known as “granny flats”). Vancouver had previously legalized secondary suites, usually in basements of single-family homes, to help deal with its housing affordability problems.

In Canada, many affordable housing and homelessness advocates argue that there is a crisis in housing affordability in our cities that can only be met by increased federal and provincial funding and incentives for rental housing. Richard Florida, in an article in the Globe and Mail at the height of the mortgage crisis (Nov. 28, 2009), recommended a massive increase in rental housing in the US to help alleviate housing needs for low- and moderate-income people, including the purchase and conversion of foreclosed properties to rental housing. He wrote that “Our reliance on single-family ownership is a product of the past 50 years—and the experiment has outlived its usefulness. Not only is it now readily apparent that not everyone should own a home, and that the mortgage system is a big part of what got us into the current financial mess,but homeownership also ties people to locations, making it harder for them to move to where the work is. Homeownership made sense when most people had one job and lived in the same city for life. But it makes less sense when people change jobs frequently and have to relocate to find new work.”

Florida’s recommendations were prescient: a major shift in US housing policy occurred on August 16, 2009. The Obama Administration announced it would spend $4.25 billion of economic stimulus money on the creation of tens of thousands of federally subsidized rental units in American cities. The money will go to build apartments and townhouses, but also to buy and refurbish foreclosed homes to be rented to low- and moderate-income families at affordable rates. Funds for the new units will be available to states on a competitive basis. Analysts call the move a practical solution to skyrocketing foreclosure rates, tight credit, and the economic crisis, saying “the Obama White House has acknowledged that not everyone can or should own a home.” It is expected to ease homelessness, which has increased during the mortgage crisis. In addition to the stimulus money, the government had also set aside $1.8 billion for the construction of rental housing, the same amount Congress approved last year.

While this is a major shift and worthy of celebration, it is very interesting to note what the conservative critics have to say. David John of the Heritage Center said the benefits of homeownership include building equity, family stability, and an overall improvement in society. Other conservative critics have said that homeownership decreases crime and helps people achieve financial independence. Likely these critics agree with George Bush, who in 2002 described the US as a “nation of homeowners.” Since the mortgage crisis, this ideology seems false or at least outdated. In both Canada and the US, the definition of homeownership as ideal, and homeowners as somehow better and more stable than renters, is what got us into the current mess. Not only has the relentless homeownership agenda now displaced thousands of people in the US, but it has made homeownership barely affordable in many Canadian cities as well.

Like the Obama administration, we need to acknowledge that homeownership is not the only answer. Housing needs to once again be redefined as primary shelter to which every Canadian has a right, rather than a consumer product that helps keep the economy buoyant. It is rather significant that it took a crisis as earth-shattering as the sub-prime mortgage crisis to redefine housing in the US. Let’s not wait for that moment in Canada.

August 21, 2009 | Tags: , , , , , , | No Comments »