Affordability, Supply and the Rental Market

Awhile back I was asked what policies cities should be pursuing to ensure an adequate supply of rental units. Here is what first came to mind.

Context is important. Five things stand out.

First, housing is a social determinant of health and wellbeing in society. Affordable housing is a contributor to better population health. A population that is adequately housed is healthier than a population that is inadequately housed or precariously housed. For instance, affordability is an important indicator of the risk of homelessness. Cities with affordability problems generally experience a higher incidence of homelessness. Homelessness is terrible for your health.

Second, when we talk about housing it is more constructive to refer to the housing system rather than the housing market. When we talk in terms of the housing system we acknowledge that both market and non-market mechanisms are used to allocate housing. In Canada, a vast majority of us obtain housing through the private market by buying housing but a significant number of us rent. Non-market housing tends to be the source of housing for low-income groups who cannot purchase or rent housing at market rates. The important thing to recognize is that this Canadian system is one kind of housing system. In other parts of the world, Europe in particular, there are much higher proportions of renters and a greater diversity of non-market forms of housing.

Third, housing affordability is shaped by wider economic and social trends. Population growth, household formation (how many singles versus families are seeking housing), and migration all affect the demand for housing. When demand rises quickly, too quickly for developers and home-builders, prices rise. This is exacerbated in regions and cities with high incomes. The cost of land, labor and construction materials can also cause prices to rise.

Fourth, housing affordability is affected by government regulation and policy. Governments at all three levels – Federal, Provincial and Municipal – play a role in the housing system. The Federal government influences lending rates and securitizes mortgages, the provincial government operates housing programs, and the municipal government oversees urban development and home-building.

Fifth, when it comes to analyzing housing affordability it is crucial to settle on a clear and measurable definition of ‘affordable housing.’ What kind of affordability measure is best suited? A common definition of affordable housing is housing that costs a household no more than 30% of their income. This is the definition used by Statistics Canada. It is also measurable (albeit recent changes to the census aren’t helping work in this area!).

But to your question…the private, rental market is a vital part of the housing system when it comes to affordable housing. Unfortunately, two trends have shrunk the supply of affordable rental units in the private rental market.  First, inadequate government policy in the area of rent control (or lack thereof) have made it too easy for rental property owners to raise rental rates during periods of high demand and low vacancy. Second, the high demand for housing coupled with high incomes and cheap, easy credit from banks has fueled the conversion of rental units into privately rented condos removing a significant proportion from the private rental market. This was particularly pronounced in Edmonton beginning in 2007.

In the meantime there is a significant population who need to rent in the private market to stay housed. What to do?

There are a range of policy options available but unfortunately no magic bullet solution. In practice, a combination of different approaches involving private and public stakeholders and all three levels of government is required.

One traditional approach has been to build social housing consisting of units that are subsidized at below market rates. But this form of housing brings with it a whole host of issues not least of which is stigmatization of tenants and, relatedly, their overconcentration within inner city neighborhoods (as they generally receive stiff resistance in wealthier suburban neighborhoods).

A more recent approach has been inclusionary zoning. In this approach a municipality mandates that a developer allocate a certain percentage of units in a development to be not only rental units but also made available at affordable rates. This generally requires not only the buy-in of developers but also governments and in some cases charitable organizations who must step-forward to subsidize these units so they can be offered at below-market rates. In most cases it is a matter of finding the right incentives. It is also a matter of carefully considering neighborhood location and context.

Third, there are some recent urban planning approaches that encourage creative forms of infill housing. Here I am thinking about ‘granny suites’ (secondary suites) above garages or separate dwellings at the back of lots. Some cities offer homeowners incentives (in some cases it has been cash) to develop these suites with the understanding that they would be rented at below market rates for a set period of time.

Finally, there is the more classic welfarist approach that involves giving low-income individuals and families a stipend (or voucher as they are called in the U.S.) to purchase rental housing in the private market. The challenge in places like Alberta is that there are examples of working individuals and families who are not low-income but nonetheless cannot afford rent in the average apartment (especially single parents with children who require multi-room dwellings). Another challenge is that when vacancy rates are near zero a housing voucher does not do a family much good.

Now, I’ve only outlined a few, there are many, many more. And I’ve really only captured the more conventional approaches. There are some very interesting and important models being developed in the cooperative sector (co-op housing) aimed at meeting the housing needs of a diverse range of people. I think approaches such as those being developed in the cooperative sector are really important to profile because in many regards it is there where ‘new ground’ is being broken.

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