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The thing to understand about housing costs is that ultimately they are governed by the simple law of "supply and demand". If a community has 100 apartments and 500 people looking to rent, or, 100 houses and 500 people looking to buy, then rents and prices are going to go up so the 100 people willing to pay the most end up renting those apartments and purchasing those homes. Conversely, if there are 500 apartments and 500 houses, and only 100 renters or buyers, then the 100 cheapest apartments and homes are going to be rented and bought.
The important thing to do when looking at proposed solutions to expensive housing, therefore, is to always ask yourself "what would the impact of this particular proposal on the supply/demand relationship?"
To illustrate this point, consider the US policy of allowing home owners to deduct mortgage payments off their income tax:
Original or expected balance for your mortgage. Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible. (From the "American Tax Foundation" website)When I explain this program to acquaintances I am often saddened to find out that they think that this is a good thing. The reason why it isn't, is because it is a universal program that does nothing to deal with the core problem of housing affordability---supply and demand. The reason why people naively think that this is a good thing is because they only think of themselves as getting a tax break---they don't remember that all the people that they are competing with to buy a house will get it too.
To understand this point, let's go back to those 500 people chasing after 100 houses. Let's say that the government of Canada brings in the American mortgage tax deduction and it puts an extra $2,000 into the hands of everyone who buys a house. If everything else is kept the same, the 100 successful bids are going to go up by the amount that the extra $2,000/year can carry at the current interest rate. The only people who benefit are the small number of people who sell their homes and pocket the money instead of buying another one. Real estate increases only benefit you when you get off the merry-go-round, not when you change from one horse to another.
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The second thing to understand about housing is that it is something economists call a relatively "inelastic" demand. Demand elasticity is when a consumer has the ability to switch to something else if the price goes up more than they want to pay. For example, if Coca-Cola doubles in price and Pepsi stays the same, a consumer can choose to switch from Coke to Pepsi---or they can start drinking tea. Elasticity is what allows competition to control prices. But some demand has less elasticity. For example, if you have a heart attack you don't have the time to shop around for the cheapest medical care---you need the doctor NOW! Moreover, the medical system is not set up to encourage competition. The paramedic stabilizes you, puts you in an ambulance, and, drives you to the closest hospital. You don't get to do a cost comparison. What this means is that you are pretty much at the mercy of the medical system---which is why costs are outrageous in the USA. It is also why Canada has created a system where government accountants tell medical providers what they can get paid---and not a penny more---for any given procedure. (This is how a "single payer" medical system keeps costs under control.)
Housing is also an "inelastic demand". You simply cannot decide "nah, housing costs too much---I'll just do without". You have to live somewhere. There are "work arounds", but they are far from ideal. The most common one is get together with other people and share the rent on a house or large apartment. This can be relatively OK. But it can also be a bit of nightmare as rents go up and people cram more and more individuals in a small house or apartment. To cite a personal example, years ago I once had to find a place to live fast and the only thing I could find was a rooming house owned by a local real estate company. It was a single-detached house on York Road that was a bit of a nightmare. There was an illegal apartment in the basement that only had access through the kitchen. There was an enclosed back porch that was being rented out as a bedroom. The living room had been walled off and made into another bedroom. I had one of the original bedrooms upstairs---for $500/month, which was a princely sum 40 years ago! As you might imagine, it was a dreadful place to live and I got out ASAP.
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| Image from "financialrisk". Photo used under "fair use" provision |
Having admitted that these two options are ways of avoiding the financial pain of renting or purchasing accommodation, no one would suggest that they are options for everyone. Some of us can't cram ourselves in a house with a lot of other people without a resulting violent crime. And not everyone owns a vehicle---even if there were enough places for everyone to park overnight. (And, let's face it, winter would be an issue---.)
Having said that, shared housing and living in your vehicle do have the advantage of actually dealing with the supply/demand issue. A vehicle is a new residence (of sorts), so it increases the supply. And sharing housing lowers the demand---and significantly. A lot of people live in shared housing, and if everyone of them suddenly were forced to live exclusively in bachelor apartments, we'd find that there simply aren't enough to go around.
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Another way that people deal with high-cost housing is to commute long distances between work and home. There are several problems with this solution, however.
For one thing, there are costs associated with long distance commutes. As I pointed out in the last post, according to the CAA calculator, a regular commute between Guelph and Brampton, using a late model, compact car will cost something like $8,000/year. Moreover, we need to consider the time involved in the trip. Google maps suggests that a one-way trip takes about an hour, so a weekly commute would add an extra ten hours a week to your work life.
Another thing to remember is that commuting doesn't deal with that supply/demand relationship I mentioned above. Building a highway or commuter train system doesn't create a single new house. All it does is harmonize the cost of home ownership over a larger area. For example, if a person finds that the house they want to buy costs $1 million in Toronto, they might be over-joyed to see that it "only" costs $500,000 in Guelph. If a commute by the GO train works, then the solution is to buy in Guelph and commute. It's possible that this will lower the cost of housing in Toronto somewhat---but at the cost of raising it in Guelph.
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The "fundamentalist" free market types might suggest that as the price goes up, there should be an interest in building more housing. There is, but there is an unfortunate problem in that we are trying to put a constantly expanding item (the population) in a container that is a fixed size (the earth.) Biologists talk about the "limiting factors" that control expanding populations, and the same thing applies to human beings. Basically, the idea is that a population needs several different things in order to sustain a specific population---no population can exceed the supply of any of these "limiting factors". In the case of Guelph, one specific limit is our water supply. Guelph gets all its water from wells, which have a limited production capacity---which we are close to maxing-out. Our water table is recharged by a ring of moraines that surround the city. If we start bulldozing them for more housing, we run the risk of expanding demand while at the same time cutting supply. Food is another limiting factor. This part of Ontario has the best farmland and climate in the entire country, and we need to preserve it for future generations. So, if we don't bulldoze the wooded hills (the moraines), and instead build on the nice farmland (what's left), we will destroy another irreplaceable asset. As I discussed in a previous post, the province has decided that we need to end new sprawl---so just building more subdivisions really isn't an option.
Having said that, developers should be able to create more intensive housing: condos and apartment buildings. And indeed, they are. The problem is, however, that this doesn't seem to have had any effect on the prices asked in rent or purchase, which keep going up and up. I suspect that there are three reasons for this.
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I've been grinding away at this blog for a year and a half, and I think it's improved a bit from those first few posts. I've also had to reassess exactly what I am trying to do. Originally, I had thought that I would just work primarily as an editor and publisher. I thought that there were a lot of people in the community who are involved in NGOs and social advocacy groups that would love to have a public venue where they could "drill down" and explain in detail the issues that the mainstream media wasn't interested in exploring. Unfortunately, I found out that most of these people are busy doing other things and most of them don't like to write either. In contrast, I've found that I'm learning how to do the "journalism thing" a lot faster than I thought I would. What has really surprised me, however, is the response by the "experts" on the subjects I write about. I've gotten a lot of very positive feedback on abstruse and arcane subjects that I was terrified I'd get wrong. Instead, I've had people say "you nailed it!" and "I really like reading your blog!" Sometimes I've been somewhat embarrassed by the positive support.
I've always appreciated the financial support too. Putting out this blog is a lot of work. I go to the odd meeting, do interviews, sometimes spend hours in the library pouring over microfilms, and, lots and lots of time in front of a computer screen. But I think that this is important to the community. We need to have some source of accurate, in-depth information for the community. And now for the "ask"---we won't have it unless people get into the habit of paying for it. It's understandable that people hesitate to subscribe through Patreon or toss something in the "tip jar". People are always afraid of "new" and "different". But a lot of folks used to pay a significant amount of money for a subscription for a local newspaper---why is subscribing to "The Guelph-Back-Grounder" any different? (Thanks to Andrew and Jeff---my latest subscribers---for being so awesome!) The great thing about this format is that if you can't afford to pay for it, you still get it. But if you can, why not? Even a buck a month makes a difference.
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This sentimental commitment to single detached homes is so strong that politicians feel that they have to recite it like a catechism at regular intervals. The first time I heard the current mayor talk on municipal issues, he mentioned that he wanted to change things so "young couples could buy a house with a backyard for their children to play in". Another example was a "progressive" Councillor who in the middle of a discussion about affordable housing felt obligated to opine gushingly about "the Canadian dream" and how we should never oppose the idea that immigrants should be able to buy that house with "grass in the backyard for their children to play". It almost seems like a ritual you need to perform in order to survive as a politician---like kneeling and making the sign of the cross when you enter a Catholic church or kowtowing before the altar in an Asian temple.
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| I am the destroyer of suburbs, slayer of dreams! Look upon my awful visage and see your children waste away! Image by MrPanyGoff, c/o Wiki Commons |
Luckily, the Ontario Liberal government finally listened to the chorus of city councils that were fed up with having huge numbers of legitimate planning decisions overturned by the OMB, so it was finally shut down. But unfortunately, places like Guelph have had to deal with about fifty years of deferred apartment construction, and, developers can only build so fast.
Alas, city councils also listen to the outraged screams of people who own single detached homes. This means that whenever some developer wants to build apartments there is usually an angry mob that will show up at council to complain bitterly about "shade", "property value", and, "community profile". The result is usually some sort of King Solomon's compromise---which usually involves removing a few floors from the proposed tower. And with fewer floors, the profit starts to decrease, which will invariably mean that the rents for the occupants have to increase to keep everyone (except the people who live there) happy. Until people get over this ridiculous antipathy towards apartment buildings (and condo towers), it is going to be very difficult for developers to build enough housing stock to start pushing down prices.
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These are all important issues, but the most important is one that people often overlook: wealth stratification. In a perfectly responsive housing market this wouldn't be an issue. If you have a situation where there are two strata of society, one which is very wealthy and another relatively quite poor, you would think developers would just build housing for each group. You could envision a society where there are suburbs of mansions for the rich, and, high-density slums for the poor. (Envision? That's how housing was organized in most cities pre-WWII.) Unfortunately, as I pointed out above, increased concerns about preserving farmland and water recharge capacity mean that the city can't keep letting developers pave over more land. This means that land prices go up dramatically as the rich compete with the poor for land. And also, because people who live in mansions (or even modest bungalows) go berserk if a developer wants to build some high density housing in nearby, it also means that in many cases it is illegal to build higher density housing, because the scarce land available has to be preserved so wealthier people can have grassy backyards for their children.
As I pointed out in my last post, the Canadian Mortgage and Housing Corporation ("CMHC") has provided us with the household income in Guelph, broken into $20,000/year cohorts:
- less than $20,000/year, 5,770 or 10.5%
- $20,000 to $40,000, 8,320 or 15%
- $40,000 to $60,000, 8,920 or 16%
- $60,000 to $80,000, 7,635 or 14%
- $80,000 to $100,000, 6,690 or 12%
- $100,000 and over, 17,530 or 32%
I admit that if you are making less than $20,000/year you are in financial trouble and will probably require some sort of social housing no matter what. But what if you are making the median income in Canada? The median income for an individual in 2011 was about $30,000, and, for a household it was $73,000 according to Statistics Canada. Just by way of a historical comparison, I bought my home in 1995 for $60,000 (it was half of a top/down duplex that cost $120,000 in total.) At the time, my yearly income was $30,000, which translates---according to a constant dollar calculator---to $41,000 a year in 2011. A while back I had my home appraised for a bank loan, and it is now valued at $180,000 (that's just my half---the entire structure was conservatively valued at $360,000.) The latest information I can find is from 2015, which says that the median individual income in Canada was then about $34,000. In the same period between buying my home and today, according to information in my last post, the median price of a townhouse (something similar to my duplex) in Guelph has gone from $125,000 to $300,000. The median price of a townhouse in Guelph has more than doubled at the same time that the median single person's income has only increased by 13%. In effect, the rate of increase for a significant fraction of the population's salaries has decoupled from increase in the cost of housing.
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Let's take a look at this problem from the "big picture" point of view. Here's a nice animated over-view of the problem of wealth stratification from the Broadbent Institute.
The video makes a point comparing what people want, to what they think exists, to what the reality is. This is tremendously important, because what we want and what we think exists are the two things that influence politics. And politics impacts policy at least as much as reality when it come creating social policy. When what people want, and, think is true is totally decoupled from what really exists we are bound to end up with terrible public policy.
Here's a table from Statistics Canada that show the change in wealth among Canadians between 1999 and 2012. (Some of these numbers might seem old, but remember that statistical analysis is always about what happened in the past---not what's happening now. As well, there is always a lag between a study being done and being made available to the public.) As always, click on it for a clearer image.
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| Table from Statistics Canada, (click on it for better view.) Image used under "Fair Use" provision. |
- a "quintile" is "one fifth" of a sample. So this is a breakdown of the population into five groups of 20%---sorted on their income and assets
- the authors included the value of accrued pension benefits plus real estate, which is why even the bottom fifth had an average of $109,300 in net worth in 1999
- the first part is average the second is median. The distinction is tremendously important when we talk about inequality. If you sample one hundred people and 90 people own $5, 4 own $1,000, and, 6 $1---the average that everyone owns is
$445.6$44.56. The median is $5. That's because the average just tosses everything in a single pot and assumes some sort of equal distribution. The median just takes the individuals and figures out which number is in the middle with half the population below it, and, half above it---so it is a much better indication of how much each individual owns.
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There is an aspect to this housing story that needs to be emphasized and yet rarely is. There is this thing known as "intergenerational wealth". This is simply the process where families---usually parents helping children---get ahead in life. Many people benefit one way or another in purchasing their first home by having their parents help out. This can be a gift of a down-payment, some sort of "sweet heart deal" on purchasing a house from an elderly relative, co-signing a mortgage, offering an interest-free loan, or, simply dying and leaving the children a sizable inheritance.
This is a tremendously important aspect of wealth stratification because a lot of lower and middle income people simply could never afford to buy their own home without some help from family. This wealth---in the form of equity in your home---is also tremendously important in supporting middle class people. People starting new careers and new businesses often put a mortgage on their homes to raise the money needed. Owning your own home is the only viable way that the vast majority of people in our society are able to accumulate the capital necessary to be a full participant in the economy. If a generation of young people loses the ability to buy a home, it can mean that they---in effect---are losing their status as middle-class citizens.
In order to understand what effect this has on society, consider the example of black Americans. Studies have shown that a huge factor in black poverty in the USA has come about because of this issue. But to understand why, you have to learn a bit about American history. The US middle class grew dramatically after World War II due in large part because of social programs that were instituted to quickly integrate returning service people into the economy (the "GI Bill") and other programs that were brought in to prevent a resurgence of the Great Depression once the contracts for war material ended. (Same sorts of programs had the same effect in Canada.) Unfortunately, in the US federal government programs are administered by the states, and in much of the US "Jim Crow laws" effectively kept blacks from benefiting from a wide range of programs---things like guaranteed home mortgages, small business and farm loans, free university tuition, etc. This meant that during the time that poor and working-class whites amassed huge amounts of wealth by buying their first home, starting a business, improving the farm, etc, blacks found it impossible to similarly accumulate capital that they could pass onto future generations. The results are still with us, as shown by the following comparison.
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| Comparison of intergeneration wealth white versus black. From the Pew Research Institutes article "Black Incomes are Up, but Wealth Isn't". Image used under the Fair Use provision. |
This is why buying a home is such a HUGE issue for many people. It is also why people want to buy the nicest home possible, because by doing so they are amassing capital that they can then use to do other things for both themselves and for future generations. Unfortunately, it is also why developers don't want to build "starter homes", "affordable condos", or, "affordable apartments". They simply aren't a good investment. Until the market gets glutted and these things stop being "sound investments", and, we stop the wealth stratification that is going on in the economy, housing is going to cost more and more to buy or rent.
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Sorry to end on a "downer", but this is long enough for me to write and you to read. I'm planning to offer some solutions in my next article. Remember to vote!
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