Social Housing and Guelph

Synopsis

Social housing is controlled by the county, yet the lion's share of the county's units are in the city. In addition, most of the money that gets spent on it comes from the federal and provincial governments. And those two levels of government have a long history of using that money as a "political football" that comes and goes in response to the back-and-forth battles between left and right. Put into the context of the entire economy and the private development sector, however, the average financial commitment has tended to be woefully inadequate. Indeed, it is hard to believe that any government would be willing to put the amount required to actually deal with the enormous housing problems that we currently face. To this end, it is pretty clear that any municipal government that really wants to address the housing backlog in Guelph is going to have to undertake actions that will be profoundly unpopular with a large part of the electorate. 

What is "Social Housing"?

It's important to realize that there are two components to the idea of "social housing". First, there is the actual building being constructed, which generally has some sort of subsidy towards its creation. An equally important element is a monthly subsidy by the government to the landlords of individual tenants, which is called "rent-geared-to-income".

Rent-geared-to-income is a provincial program governed by the Housing Services Act of 2011 (this link provides updates to 2018.) It is really, really, really hard to understand this act and obviously requires a social worker to navigate through the dense legal language to understand who is and is not able to get this help. (Just to give you one example, the people who are helped out under this program aren't identified as "people", "families", "households", "clients", or, "recipients" but rather as "benefit units".) But as a general rule, people who qualify for rent-geared-to-income find that the cost of their housing is restricted to about 30% of their income. You cannot get rent-geared-to-income in just any apartment, however, as this would encourage private landlords to gouge the province. Instead, the money is tied to specific units that are generally built with money provided by the federal government or the province through specific funding programs. These housing units come in a wide variety of forms---depending on who lives there, and, how they are owned and administered.

One way to think about the different types of housing is to consider how they are owned and managed. In the city of Guelph there are 52 different complexes that provide a total of 2,473 units of social housing. You can break these down into five categories of ownership:  

• non-profit corporations (952) (these can include both Non-Government Agencies (NGOs) and the city of Guelph)
• housing co-ops (253)
• county-owned (882)
• Affordable Housing (27) (defined as being 20% below the average market rent)
• "Rent Supplement Housing" (183) (housing that is privately owned but which has units that the County assigns to people where rent-geared-to-income money is paid directly to the landlord)  

Non-Profits

A non-profit corporation is an incorporated, limited liability company. "Limited liability" means that under the law the individuals involved do not have any personal financial responsibility for the company (unlike a partnership.) A "non-profit" corporation has no obligation to shareholders to make a profit (this is the "fiduciary duty" that I mentioned towards the end of one of my articles about solid waste issues.) Instead, the  duty of the organization is towards the ends that the incorporation articles set out in their charter---in this case, providing low cost housing for people in need. A non-profit need not be a "charitable" company, as that specifically refers to the ability of a group to issue legal tax receipts to donours, which is tightly regulated. (Even though as a matter of fact, some housing non-profits are charities.) Some of Guelph's non-profit housing corporations do have a relationship with larger charities---such as the Abbeyfield Houses Society of Guelph, which is part of a national charity that began in Great Britain.

As a general rule, however, non-profits tend to act as "subcontractors" for the federal and provincial governments who take on the task of applying for money from government programs that fund social housing. They also apply for grants from "hands off" government-supported charitable agencies---like the Trillium Foundation---to build and administer these social programs.

In addition to the Non Government Agencies (NGOs---like Abbeyfield), we also have the Guelph Nonprofit Housing Corporation. According to it's website it has 512 rent units", of which 80% are rent-geared-to-income and the rest are "market priced" (that's something like 410 units.) It has a contract with the county that means that all of the Guelph properties are managed by the same staff that deal with county-owned ones.

Co-ops

In contrast, a housing co-op consists of people who band together to create and manage a housing complex that they "own" co-operatively. It's important to realize that is a system that is different from standard "freehold". There are two ways that a co-op can be organized: "equity" and "non-equity". An equity co-op allows each individual owner the right to sell their property (the individual apartment or townhouse unit they live in) to another person in order to recoup the money that they personally put into it. These sorts of co-ops are very common in other countries, but exceedingly rare in Ontario. (A condo is different in that it is organized and built by a private developer for a profit. A co-op is organized by the owners at-cost.)

Instead, what we generally have are non-equity co-ops that were built under a federal program that operated in the 1970s and 1980s. Under that system, governments supplied start up capital that citizens used to build the housing complex under the understanding that a certain percentage of the units would be set aside for low-income individuals under a rent-geared-to-income scheme. In exchange for this help, the co-op members forgo building any equity in the complex---all capital accrued instead is deemed as belonging to the co-op as a whole. Theoretically, once the money loaned by the government is paid back, rents might be lowered. But in actual fact by the time this happens most of the money raised by rents end up being ploughed back into maintenance. Rents tend to be lower in general, however, because their is no owner taking a profit.

The program to create co-ops were primarily introduced on the assumption that they would prevent a city from shunting all lower-income people into one area. This had been attempted in many social housing programs in the 1950s and 1960s, and it was believed that they failed because a certain fraction of the poor tend to make "bad life choices" (think crime) which tended to drag under other people who were struggling to "get ahead" but who were poor through no fault of their own. Co-ops were designed to have a mix of people from all classes, which would prevent this problem. For a variety of reasons (beyond the scope of this article) the program that supported them was cancelled in the 1980s and they are no longer being built as part of social housing.

(Having said that, there is no reason at all why individuals cannot use their own private capital to build equity co-ops---and I know of at least one current Guelph project "in the works". But these would not be independent from the current market forces---so they would not necessarily be any more affordable than any other type of housing. As such, they have nothing at all to do with social housing.)

County Owned

Wellington county also owns outright a large number of properties that it provides to people of limited income. The lion's share are in Guelph---because that's where most of the need exists. But having said that, it also owns properties in other parts of the county:  Fergus, Elora, Erin, Rockwood, Eramosa, Mapleton, Minto, Arthur, and, Mount Forest. Since this blog tries to deal exclusively with Guelph matters, I won't be dealing with any of these properties. Suffice it to say that there is a need for social housing just about everywhere.

Affordable Housing

As part of the on-going attempts by Council to help the housing crisis, the city of Guelph has been attempting to negotiate with developers to bring in new affordable units whenever a new proposal comes before them. (I talked about this in a previous post.) Some of this has been done through the use of subsidies---either directly or through deferred taxes. The result has been a stock of so-called "affordable housing" units, which is defined as being "20% below the market average".

According to the numbers I found in my first article on housing, here are the average rent costs for various sized apartments, followed by their "affordable cost" (ie: 80%), then the yearly income that a household would have to make to make this equal to at most 30% of their gross income. The way to understand the math is that if you are paying 30% of your monthly income in rent, you can get your monthly income by multiplying your monthly rent by 3.33. And that translates to your yearly income by multiplying by 12. But you can simplify the calculation by multiplying the 3.33 by 12, which gives you 40. So to find out the yearly income of people who are only paying 30% of it in rent, you just multiply the numbers by 40. Unless a rent really is 30% or less than your income, it is hard to say that it is really "affordable". The last number is this hypothetical income where what the city calls "affordable rent" is only 30%.

• bachelor apartment: $750 (average), $600 ("affordable"), and income of $24000.
• one bedroom: $980 and $784, and income of $31,360
• two bedroom: $1,124 and $899, and income of $35,960
• three bedroom: $1200 and $960, and income of $38,400
• average cost of an apartment: $1,066 and $853, and income of $34,120

And again, as I mentioned in my other articles on this subject, the problem is that household income is too low for this definition of "affordable" to be of any service to the poor. That is, if you break down Guelph household income into six groups, you see the following:

• 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%

The numbers aren't precise, but at the very least 10.5% plus some other figure---let's assume 4.5%---of the households in Guelph (ie: 15%) make less than $24,000/year in gross income. This means that what Guelph defines as affordable really isn't "affordable". For this reason, it's hard to believe that "this affordable housing" category really has an significant impact on housing issues---especially since there are only 27 units in the city.

Rent Supplement Housing

These are privately-owned apartments that the county has entered into an arrangement with to provide rent-geared-to-income. The supplement is paid directly to the landlord. Obviously in a hot rental market like Guelph most landlords would rather rent to the general public. But there are some buildings that for one reason or another the landlord is happy to rent out this way and the county considers "value for the money".  I suspect that there could be issues to pursue here---but this article is already ballooning in size, so I'll leave it at that.

&&&&

Federal and Provincial Social Housing Initiatives:  History 101

I had mentioned early on that the federal and provincial governments had been involved in building social housing. I also mentioned that housing co-ops were primarily built under a program that was cancelled in the 1980s. There have been a great many different programs and it would take a lot of time to explain the timeline. Luckily, the Ontario Non-Profit Housing Association (ONPHA) has created this nifty graphic that shows the various programs that the federal and provincial governments have set up, starved for funds, and, eliminated over the years between 1945 and 2011. I'd suggest that anyone who is interested in this subject take the time to linger over it, and make the effort to think about what was going on in the larger Canadian society. Consider, for example, that Jean Chretien was prime minister at the time (1993) that the federal government decided to stop funding any social housing---I assume as part of the general attempt to balance the budget. You can also see that Mike Harris was premier of Ontario when the provincial social housing program was also cancelled (1995.) (I suspect that this was when I remember seeing beggars show up in downtown Guelph for the first time. Politics has consequences in people's lives.)  (Sorry, but this is the best resolution of the graphic that I could get.) 

The Context

I don't have the time to write a complete history or synopsis of federal and provincial social housing policy---and I'm pretty sure that most of you wouldn't read it if I did. But I think it's important to realize a few points.

First of all, ask yourself "What fraction of society is this housing program supposed to be helping?" Canada has several different housing problems going on all at the same time. These include housing on First Nations' reserves. It also includes providing housing for people who are in crisis because of mental illness, drug addiction, physical disability, or, spousal abuse. As well, there are huge geographic areas---like the Greater Toronto Area (eg:  Guelph)---where the commercial real estate market has decoupled from the incomes of most people and no longer provides affordable housing for many middle and lower-income people. All these needs are something that different levels of government need to deal with, but require a huge amount of money. Equally important, each constituency has dramatically different levels of influence over public policy. In a democracy there always is a tendency for politicians to deal with the problems of people who carry lots of votes over those who objectively may have more real need---simply because of electoral concerns. So, when a proposal comes forward for social housing, it's important to ask "social housing, for who?" As I pointed out above, the fraction of housing called "affordable housing"---as defined as being 20% less than the average market rent---appears to only be aimed at lower middle-class people instead of the genuinely poor.

Secondly, it's really important that any program that a government puts forward be placed in a context. When a government minister announces that so much money has been set aside to provide housing for so many households, it is tremendously important to always find out what percentage of the budget the money provides and what percentage of units this will provide to the entire housing market. For example, according to the 2016 federal census, there were 55,900 places to live in Guelph. Of those 5,470 were social housing of one sort or another---or 9.8%. As I showed above, the actual need---as defined as rents for 30% of gross income or less---is really something like 15% of the population, or, 8,390 households. This suggests that if the only way that Guelph can provide affordable housing for the poor is through social housing, it has a backlog of almost 3,000 units.

I don't have a figure for how much it costs to create an average unit of social housing---and I would be dubious about any such number if it was presented to me simply because there are so many different types of housing that fall under that umbrella, and, the cost would fluctuate wildly from community to community based on the cost of land. But to get a feel for the amount of money involved, let's look at something that the city staff have developed a figure to describe. As I mentioned in my last article, city staff have suggested that a subsidy of $60,000/unit is necessary to get private developers to create new "affordable" housing. What this means is that if the County, Province, Federal Government, etc, were to use this subsidy mechanism it would cost something like 174.9 million dollars in Guelph alone to deal with the shortfall in social housing. And let's not forget that this isn't the real cost for creating social housing. Instead, it's the price of creating apartments that are 20% less than the market average for a limited amount of time. And at this price they are unaffordable by that bottom 15% of the market that are most in need of housing. Social housing units that really do help the desperately poor would cost a lot more per unit. Just to put this figure of $174.9 million into context, the entire operating budget for Guelph in 2018 is $233 million.   

I think that the magnitude of the housing problem really needs to be understood. The federal government recently created a "National Housing Strategy" that commits to spending $40 billion over ten years. This sounds like an astronomical amount of money, but the casual reader needs to remember a couple things. First, this only comes down to $4 billion per year. Secondly, this is for the entire country. Think of it this way, Guelph only has a population of 131,900 people. Canada has 36.29 million. This means that Guelph has only .3635% of the population of the entire country. That means that proportionally the federal government has committed to providing $14.54 million to Guelph. This is nowhere near enough money to effectively deal with the crisis we are currently facing. And don't forget that Guelph's population is growing rapidly and it's stock of existing, low-cost housing is shrinking because of gentrification. 

We also have to admit to ourselves that social programs---like creating and maintaining social housing---is always going to be treated like a political football. That means that programs will be "spun" to look bigger than they actually are, and, cancelled for totally capricious reasons. To cite a couple specific examples, consider the fact that the federal Liberal party announced that their funding was "$40 billion over ten years" and that $500 million dollars was set aside in the provincial Climate Action Plan to maintain and upgrade social housing in Ontario. Trudeau's government has no way of knowing what will happen to their government after the next election---let alone in ten years. And our dear, beloved new Premier just ripped up the cap-and-trade agreement that was funding the Climate Action Plan---which means no money for social housing buildings to replace worn-out heating systems.  

I've discussed social housing in some detail because I've had local politicians tell me that the real solution to the housing crisis is to get the federal and provincial governments to build more social housing. But when I began to understand the scale of the problem, it seemed to me to be total moonshine to think that the electorate will let politicians of any stripe make that size of social investment. It might actually be true that this would be the best way to do things (see the example of Vienna I raised in my last article), but it just doesn't seem politically feasible in Canada. Moreover, social housing has historically seemed to be easy to cut when voters are more concerned about taxes than they are about homelessness. Once you accept this unpleasant truth, the interested citizen is left with the question "well, what exactly are we supposed to do?"

&&&&

I'm not about to suggest that the federal government shouldn't be building new social housing. But we need to see social housing as a last resort instead of the be all and end all. Government simply lacks the financial resources that would be needed for the task at hand. The only answer that I can think of to solve the mess we are in is to bring in private developers. Whether individual readers agree with capitalism or not, the fact of the matter is that Canada is a social democracy. And that, fundamentally, is based on the idea that we allow private business people to run huge swaths of the economy. But it isn't a libertarian utopia---we believe that democratically-elected governments should step in and nudge businesses in directions that serve the public good. That's why we have inspectors to ensure that butchers don't sell people contaminated meat. It's also why we have public planners who force developers to build housing that doesn't immediately degenerate into slums. But somewhere in the planning process the idea that zoning should ensure that there is an adequate supply of housing for everyone has been forgotten.

As I have pointed out in various articles, there are a variety of ways in which our zoning seems designed to make housing not affordable. We pass zoning bylaws that mandate far too much required parking---which mean that it is illegal to build walkable "down towns" with apartments over the top of stores. It also means that the driveways for houses cannot be widened to provide parking for basement apartments---and that owners who lack the extra parking can't even rent to people without cars. For years the OMB ruled that any type of increased density was illegal in any area where people lived in individual houses---so as to "protect the neighbourhood character".  We have rules against building towers any higher than an arbitrary limit "to preserve the sight line". We mandate what seems to be a very large amount of parkland (one hectare---the size of a football field) per 1,000 residents (about 300 apartments.) We have regulations to prevent sprawl in order to prevent encroachment on farmland and water recharge areas.  The last of these regulations is important and should be preserved, but the others should be relaxed in order to let developers increase the housing stock at least to the point where everyone has a place to live that they can afford.

&&&&

There is an important real estate concept that I came across while reading a Parliamentary Research Paper on the history of social housing in Canada: "filtering".  This is the idea that when a building gets to a certain age the rents it charges tend to decline. I'd never come across this term before, and further research told me that housing policy rarely considers it's impact on affordability. But once I understood the concept, I immediately understood its importance. When I was a student and afterwards when I was working at crappy janitorial jobs I lived in nothing else than old, cheap apartment buildings or run-down shared houses. Guelph used to be filled with them. But when I think about where I lived then, every single one of those buildings has been renovated and "gentrified". Indeed, my current home is an old, middle-class home that had gone through a "filtering" process over 100 years. First it was duplexed in the 1950s, then it ended up a run-down boarding house for students before I bought it. Over twenty years I fixed it up and is now worth a great deal of money. This is "gentrification" and that's a concept that everyone understands. What they don't is that filtering and gentrification are the opposite ends of a housing continuum. When there is an adequate, optimal, or, surplus supply, housing for the poor is created by filtering. When there is an inadequate supply of housing, what little does exist gets removed by gentrification. Filtering has ceased in Guelph and gentrification has dramatically cut the supply of housing for the poor. The solution to this change is not to chastise people for fixing up old houses and apartment buildings, but to instead increase the supply of new houses to the point where there isn't so much competition that filtering gets totally eliminated.

&&&&

According to an article by Christopher Chung in The Tyee, Vancouver politicians are beginning to seriously consider tackling that city's housing crisis by changing the zoning policies across the entire city---including the hitherto sacrosanct areas that consist exclusively of single family houses. As he reports

Independent mayoral candidate Shauna Sylvester is also for zoning reform. Yesterday, she tweeted points from her housing platform: “Instead of just stacking people along big, busy streets and arterials or building condo towers at busy centres, I want to create opportunities for human-scaled homes in real neighbourhoods.”

Doesn't the line "stacking people along big, busy streets and arterials or building condo towers at busy centres" sound familiar? If it does, it's because that is exactly what is being done in Guelph. The downtown and the Gordon Street bus line seems to be the only place in the city where developers are allowed to really pull out all the stops and build a lot of intensive housing.

According to Chung this idea isn't just something being put forward by fringe candidates, either:

Outgoing Mayor Gregor Robertson wants staff to go farther and look into the possibility of allowing “triplexes, quadplexes and other multi-unit forms to significantly bring down the purchase cost per unit of housing in low-density neighbourhoods.”

Indeed, I listened to a Vox "The Weeds" podcast on this subject this summer and it seems that the core problem with housing just about everywhere is not that there isn't enough housing being built in the poor parts of town, but rather that most of the land belongs to the more well-off and they don't want any new housing built in their neighbourhoods. (Unfortunately, I don't seem to be able to add a link to the episode due to a compatibility problem between Linux and the Apple universe. If you want to see if you can get it to work, the episode is titled "We're Not Going to Pay Rent" and was originally aired on August 17th, 2018.) And when you look at the rules that Guelph has governing zoning, it is very hard not to believe that ultimately this is what underlies a lot of it---the people who already own houses simply do not want to be even slightly discomforted in order to provide housing for other people. Indeed, at a recent municipal breakfast meeting I had this attitude starkly presented to me. A fellow baby-boomer told me that he wants the value of his house to go up and up forever because that's money in his bank. When I suggested that we need to think about other people, he said "I own my own home, and so do my children. I don't care about my grandchildren, and I certainly don't care about anyone else's. I did OK and they can find their own way." 

&&&&

I will let that statement speak for itself. Thus ends my series on housing in Guelph. My next article will be on a very different subject. 

&&&&

And now a word from a poorly paid, yet hard-working writer---.

For many years I was quite bitter about the quality of journalism I was reading. For example, I would get angry when a reporter just repeated a figure from a politician instead of attempting to describe it as a percentage so the reader could put it into a context. I'd say to myself "why couldn't that guy to a little bit of research to figure out whether or not this is a substantial issue or just more empty spin?" Writing this blog has given me some insight into this. Research takes a LOT more time than simply showing up, asking a few questions, and, editing the response into a story. 

I have also learned to respect those reporters. By hammering out those little stories they were recording the history of the community. Now that they are gone we aren't creating a record of the city for future generations. Some future version of myself will not be able to go to the public library and wade through volume after volume of copies of the old "Guelph Mercury" to learn in detail what was happening in the city back in the early 21st century. That really is a tragedy. We do have a group of people trying to fill the gap---guys like Adam Donaldson and myself. But we need community support if we are going to make this business model work. Nothing that requires this level of effort can be sustained unless people get paid to do it. (And certainly, unless some more money comes down the pipeline, everything we do is just one computer crash away from disappearing forever.) 

I get new supporters as I publish new articles. (Thanks to Stephanie, Ralph, and, Nina for being so awesome!)  But I need to keep reminding folks to support the Back-Grounder. As little as a dollar a month helps---if lots of people do it. You can use the Patreon button at the upper right side to set up a regular subscription and there is also a "tip jar" for one-time contributions.  Even if you can't afford to help financially, it really helps if you spread the word through your favourite social media. My last article went viral, and that works wonders for subscriptions. 

Why Housing Costs So Much

In my last two posts I worked through the numbers to explain the situation that confronts anyone in Guelph who wants to rent an apartment or purchase their first house. It is pretty grim. But I'm not going to stop there, I want to take a leap and suggest why I think that housing in Guelph is so expensive.

&&&&

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.

&&&&

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.

&&&&

Image from "financialrisk".
Photo used under "fair use" provision

Some people end up living in their vehicles. This isn't as rare as you might think. It's even something of a "movement" by folks who have decided that they just don't want to have to "lock themselves into" a mortgage or expensive rental situation. (Presumably, these vans don't have bumper stickers that say "I owe, I owe---so off to work I go".)

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.

&&&&

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.

&&&&

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.

&&&&

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.

&&&&

The first problem is from social expectation. People simply assume that when they have children they absolutely MUST have a single-detached home with a back yard. Anything else is not much less than child abuse. As a result, what should be a somewhat elastic demand (ie: house in the burbs versus row house, duplex, or, condo; house versus apartment; etc) is really inelastic because a very large fraction of the buying public simply refuse to even consider alternatives. This bleeds from the people who have children to the people who aspire to having children---so you get young couples, and, even singles buying single detached homes because "some day" they want to have children.

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.

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

You might say "great! that means that there is less demand for apartments, so their price should stabilize and start to decline". The problem with that is that this emotional commitment to suburban sprawl is so deep that for decades it has held back building apartments. That's because the supreme dark lord of all planning decisions---the Ontario Municipal Board (the "OMB")---decided that one of the core principles of "good planning" was that everyone living in an area of single-detached homes should have a veto over the creation of higher-density housing. The operating principle seemed to be that one apartment tower or old-folks home is enough to make the "Canadian dream" shrivel up and die over an entire subdivision.

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.

&&&&

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.   

&&&&

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.

Table from Statistics Canada, (click on it for better view.)
Image used under "Fair Use" provision.

To understand this table, remember the following things.

• 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.  

The first thing to notice from this chart is that while it is true that the bottom quintile has see it's income go up by an average of 7.9% and a median of 5%, the other quintiles have seen much larger increases---13.8, 14.6, 15.9, 22.4 on average, and, 13.4, 14.7, 14.8, 20.7 of the median. Think about that---the higher your income started out, the faster it rose. This has a tremendous impact on a housing market that is experiencing very high competition for a limited number of single detached homes, condos, and, apartments. It means that the people at the higher end of the income scale not only can pay more than the people on the lower end, it means that the gap between keeps expanding as the years go by. If you are a developer it doesn't make any sense to try to build homes on the basis of lowering costs, because the people who make their determination on cost are progressively getting priced out of the market. Instead, the smart person building subdivisions and especially condos and apartments is going to try to compete for the wealthiest end of the market. That's because as the market's income increases, they will be searching for the nicer units---that means granite counter-tops, stainless steel appliances, etc. Anything that is aimed at the lower income market is not going to accumulate in value over time at nearly the same rate as the stuff with lots of "lipstick". This is especially important for rental units. (Why build a tower with units that rent for $500 each when you can have ones that rent for $1500? Especially if you are going to have to go through a long and raucous approval process.)

&&&&

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.

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.

&&&&

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!

Affordable Housing in Guelph: Home Ownership

In my last blog post I tried to explain how the rental housing stock in the city has completely "decoupled" from the needs of the lower 26% income earning households in the city. I also showed how even lower-middle class people---like single working mothers with children in childcare---would find it extremely difficult to find an apartment that would be considered "affordable". This part of the article will deal with home ownership.

&&&&

According to the 2016 census, 70.2% of Guelph households own their own home. This is a decline from 72.1 in 2006. In addition, across Canada there seems to be a generational shift in ownership taking place, as in 2006 72.2% of seniors owned their homes, versus 74.6% in 2016. Conversely, every cohort under 65% saw it's percentage of home ownership decline. To understand this phenomenon, consider that in 1981 that 55.5% of people age 30 owned their own homes in Canada, versus only 50.2% in 2016.

One way of understanding this change is to look at the cost of home ownership broken down by year.

Cost of a single detached house in Guelph (click on image for bigger version),
from Guelph & District Association of REALTORS
fair use copyright provision.

As you can see, in 2001 ("Q1" just means "first quarter of the year") the median price of a home in Guelph was something like $160,000---now it appears to be over $540,000! And be careful to realize that this is a median price, not an average. That means half of the houses for sale were more than $540,000. It isn't the case of a small number of hyper-expensive mansions drawing up an average with a lot more much cheaper homes. Take note of the time frame between 2011 and 2016, this isn't an extension of the constant arithmetic progression between 2000 and 2015, it changes the curve and starts to look like an asymptote (think crazy exponential growth.)

Let's look at the same time frame for something generally considered cheaper:  townhouses.

Cost of a row house in Guelph (click on image for bigger version),
from Guelph & District Association of REALTORS
fair use copyright provision.

As you can see, almost exactly the same phenomenon is at work, only at a lower price:  the median cost for a row house in 2000 was about $125,000 and in 2018 it has risen to about $425,000!

It's important to compare the increase in house prices to household income. The median family income in Canada in 2000 was $50,080 and in 2015 it had risen to $80,940 ($81,480 in Ontario.) At the same time the median price of a single detached home in Guelph had risen from something like $160,000 to over $400,000! (And please notice that 2015 is the last year before the slope on the graph dramatically angles upwards.) Obviously, this wild growth in house prices is not being driven by an equally dramatic increases in people's wages. 

&&&&

Why has the cost of a house risen so dramatically? There are a variety of potential suspects. First, it could be that the cost of borrowing money has declined so much that people are just taking on bigger debts because it costs so much less to borrow. Second, it could be that the new restrictions on urban sprawl have cut access to land so competition has increased for space. Third, it could be that people are using real estate as an investment and we are currently in the middle of a financial "bubble".

What have the mortgage rates been like from 2000 to 2018?

Image from RateHub.ca, used under Fair Use provision.
Click for a larger size.

As you can see from the above chart for a five year mortgage, rates have been declining slightly, but mostly stable during the time that housing prices have been exploding. It's important to remember, that even with low rates the cost of borrowing can be quite high. Just looking at the Toronto Dominion Bank website I see that they are offering a 10 year fixed rate of 6.1% and a five year variable rate closed (you are limited about how much principle you can pay in a year) of 2.85%. Let's say a person borrows $100,000 at 6.1% for ten years, that means that if you pay it off over ten years, you would have to pay $256/week and at the end of that time you would have paid $33,112 in interest. At 2.85%, it is $221/week and $14,847 in interest.

Ten years is a rather fast pay down, though. So let's look at what happens if you expand the time of pay down to 25 years. Let's also look at the median price of a single detached home in Guelph, $540,000, with a 20% down payment, which cuts the mortgage down to $432,000. At that point, 6.1% translates to $643/week and the interest costs $403,297. And, at 2.85%, it comes to $464/week and $170,848 in interest. This means that at 6.1% over 25 years a $540,000 home in Guelph costs $943,297 and at 2.85%, $710,848. (I've been using the Canadian Mortgage and Housing Corporation's Mortgage interest calculator to come up with these numbers.)

Ever wonder why some people are upset about banks?
Image from Pixabay, registered public domain. 

Even at today's interest rates borrowing money for a mortgage is really expensive. So borrowing a huge amount of money at a slightly lower rate of interest is hardly any great cost saving over borrowing less at a higher rate. I think it is safe to say that house prices are not going up primarily because of low prime rates---although it might have some effect.

&&&&

Recently the leader of the Conservative Party of Ontario, Doug Ford, raised the idea that the big reason why housing prices have gone up is because land has been preserved in the Ontario Greenbelt.

It appears that when he made these statements, he was just parroting a line being promoted by developers. This is important to remember because even though Ford backed down under pressure from the public once the above video was leaked to the Toronto Star, readers should remember that this is one of those unique opportunities that ordinary people have to see what big business people really think---instead of what their public relations people tell us. Ford---in his usual ill-informed way---seems to think that land is just land, and we can easily trade off one "farmer's field" for another. But as I've pointed out in my article about the Greenbelt, the land being preserved by it mostly consists of unique types of geography that simply cannot be found anywhere else and which serves vital needs for the province's citizens: the Oak Ridges moraine, the Holland Marsh, and, the Niagara Tender Fruit Belt. 

Beyond this issue, the idea that we can just "build out" of the present situation misses the consensus among urban thinkers that suburban sprawl is just too expensive to service. Here's an interesting graphic that illustrates the differences in servicing costs per household that comes from Halifax. (Click on the image to get a larger version and read the fine print.)

From the Smart Prosperity Institute, 
Image used under Fair Use provision of copyright law.

The other thing to remember is that commuting back and forth to work by car is not a trivial expense. According to the CAA auto cost calculator, an annual commute between Guelph and Brampton (73 kilometers) in a new compact car will cost $7,730/year. If you live in the burbs, you'd better consider doubling that, as your spouse will probably need a car too---and unless you are very well off, you need a spouse's income to afford a house. So now we are at $15,460 or $297/week. If you don't remember, that's more than it cost to pay off a $100,000 mortgage over ten years according the calculations I mentioned in the section about the cost of borrowing money. The cost of commuting by car is now at the point where you simply cannot "drive your way out" of real estate costs.

&&&&

This leaves the question of whether or not we are in the midst of a housing bubble. An economic bubble is when the price of a commodity goes up beyond it's intrinsic value. Generally, this comes about because a consensus arises that the items in question will continue to go up in price, so people keep paying more and more for them on the expectation that prices will continue to rise. The classic historical example of this was the "tulip mania" that took place in Holland during the early 17th century. At it's height, one prized bulb could be sold for as much as 10 times the annual income of a skilled worker---which would be something like $1,000,000 in today's money. The thing to remember about bubbles is that they aren't strictly speaking irrational, because if someone gets into a bubble, they can make a lot of money---as long as they know when to get off the merry-go-round.

Tulip bulbs---each one worth $1,000,000!
Public domain image c/o Wiki Commons

Consider that insanely expensive flower bulb. If someone pays $100,000 for it and sells it at $1,000,000 they are a canny investor who just made $900,000! Lest this sound like something far fetched, I have an friend who has made a LOT of money off a couple recent bubbles. I can remember before the 2008 stock market crash him ranting and raving about the way the way the US stock market was tied to a crazy real estate bubble and he was chewing his finger nails off trying to figure out when he should dump his stocks and put them in something else. Sell too soon and he'd lose lots of potential earnings, sell too late and he would lose a lot of money. After the crash, I bumped into him and asked him about how his investments were faring. He said he was doing fine---he'd sold out and bought shares in Canadian banks and said he thought that they would pick up some undervalued holdings in the USA. A few years before that, he came over to show me his fancy new sports car that he picked up when Jim Flaherty announced that he was axing the "Income Trust" investment vehicle. He had invested against the promises by Stephen Harper that the conservatives would keep this tax loophole---even though it was costing the government huge amounts of money in tax revenue.

The key point that my savvy investor friend has made to me is that whenever he makes an investment decision like this, the "professionals" always try to talk him out of doing it. They invariably say that the there is still lots of room for improved earnings. In effect, they say that the tulip bulb will continue to increase in value---maybe up to $2,000,000! The other thing that this guy says is that he makes investment decisions based on what the front page of the newspaper says, not the financial section. In both cases, what he means is that bubbles are examples of "Groupthink".  That is, when a consensus emerges inside an institution or body of people that refuses to think about an issue based on evidence and doesn't consider minority points of view. Instead, they look towards each other for reinforcement---especially when it reinforces a point of view that promises rewards for those that hold it. In his case, the people who were making money selling investments to people---both in brokerage offices and as reporters for the financial sections of newspapers---had a vested interest (primarily unconscious) in promoting the idea that "the sky was the limit" for both NINJA mortgages and Income Trusts. I'm sure much the same thing happened in the 16th century Netherlands.

In the case of real estate, I once had a conversation with a fellow at my day job that pretty much epitomizes the Groupthink. I suggested that real estate was over-valued, his response was "houses NEVER go down in price". I suppose the reason he said that was because in his personal experience he'd never seen a house decline in price. Unfortunately, a lot of people actually believe this. If you do, take a look at the following graph of Toronto housing prices (in constant 2017 dollars.)

Image from "TorontoHomesforSale.com",
Fair Use Provision.

If you see the graph, there are two peaks---one in 1974 and another in 1989. These are when housing bubbles crashed and house prices declined. (I bought my house after the 1989 one.) Yes, Virginia, houses do go down in price. 

The important issue with regard to housing is that there is a very strong tendency towards Groupthink because of two factors. First, for most people their home is the only real investment that they make. That means that there is a strong fear that if they don't buy a house, they will never have any sort of financial security in their lives. Secondly, there are very strong ideological and emotional ties to the concept of home ownership. The iconic image of a good family life is the white picket fence and a grassy backyard for "the children to play in". A lot of people literally think that if they cannot provide a single detached home they have failed as human beings and are committing some sort of child abuse.   

Yup, this is the "bare minimum"---anything less means failure as a parent!
Public Domain image c/o the Wiki Commons

The thing to remember about a bubble is that the key issue is whether or not what you pay for a thing exceeds its intrinsic value. I previously did some calculations for a median priced ($540,000) single detached house in Guelph. I assumed that there was a 20% down payment, which means that the real value of the money borrowed was $432,000. I also assumed a 25 year pay-off window. I worked this out according to the highest rate of interest I could find, 6.1%, which meant that borrowing cost was $403,000 in interest; and; the lowest rate I could find, 2.85%, which translated into $171,000 in interest. In 25 years there are 300 months, which means that the interest charges come to $1340/month at 6.1% interest, and, $570/month at 2.85%. That interest per month is the amount of money you are paying to "rent" the house you are living in while paying off your $432,000 in equity.  What really is useful to think about, however, is to compare these monthly interest payments to the average rent payments that I talked about in my last article.

• bachelor apartment: $750
• one bedroom: $980
• two bedroom: $1,124
• three bedroom: $1200
• average cost of an apartment: $1,066

As you can see, just the cost of the interest that people pay for buying a house compares very favourably to the rent that people are paying for apartments in Guelph. This means that if a person can scrape together a good down payment and afford to pay the full mortgage costs (interest plus principle) buying a home is still intrinsically a good thing---if the housing market doesn't crash and the cost of borrowing doesn't increase dramatically. And it is even better if houses still keep increasing in value. I would suggest, therefore, that no, Guelph isn't in a classic housing bubble. But having said that, I doubt if there is a lot of room for houses to increase at the wild rate that they have over the last ten years. I expect the prices to plateau and maybe even decline slightly.

Of course, in the calculations above I haven't taken into account the cost of paying off the principle, which is $1,440/month. But if a person can afford it, that really isn't a cost because it is money that they are paying themselves. It is an investment into personal equity. But that is pretty cold comfort to someone if they have trouble making those monthly payments of $2,780/month at 6.1% or $2,010/month at 2.85% (interest plus principle.)

&&&&

I recently heard a podcast by "Canadaland" where Jesse Brown interviewed a professor where they talked about the impact of modern technology on journalism. One of the ideas that really caught my attention is that the news consumer market always consisted of two streams. The first consists of 'hip' people like the readers of "The Guelph-Back-Grounder" who were always interested in getting more in-depth information than was ever provided by newspapers. Others are people who only ever picked up news as a "by-product" of other interests. They are the people who bought a subscription to the local paper for "match, hatch, and, dispatch" (marriage, birth, and, death notices), and would glance at the front page along the way. They are also the people who would watch a sitcom and suffer through the tv news because they were too lazy to get off the couch and every other channel had news on at the same time anyway.

The internet and sources like "The Guelph-Back-Grounder" is providing better information than newspapers and tv newscasts ever did. For the hip folks like the people reading this blog, there has never been a better time for news. But, unfortunately, for the folks who never actively sought out news, this is the worst time ever. There is no paper providing "match, hatch, and, dispatch" anymore---so they never get exposed to the front page stuff. And with Netflix and the 1,000 channel universe you never end up sitting through a news cast because there's nothing else on. These are the people who believe that the Pope endorsed Donald Trump and the Hilary Clinton is a pedophile who buys children from a Washington Pizzeria. I suspect that they are also the people who are going to vote for Doug Ford in the next election.

One way you can push against this tendency is to share real information with the crazy members of your family. And the way to do this is very simple---simply share "The Guelph-Back-Grounder" on social media. Share it on Twitter, share it on FaceBook, if you see it on Reddit, vote it "up". Push back against the paid advertising and the trolls from Russia, by simply sharing real news instead of just complaining about the fake stuff.

Oh, one last thing you can do---support "The Guelph-Back-Grounder" financially. You can commit to a monthly micro-payment through Patreon or make a one-time payment through the "tip jar". (Thanks to Douglas for your payment after the last post---you are awesome!) You may think I am a filthy capitalist scumbag who doesn't deserve a sou, but the fact is that unless people will pay for real news you are eventually going to get nothing except propaganda on the web. And believe me, that would suck mightily! 

&&&&

As I mentioned before, Stats Canada says that the median household income in Ontario is $81,480. In the last post I brought up a graphic from the Credit Counselling Society which I think bears another look: 

Image added under the Fair Use provision.

If you look at the pie chart there are three elements that refer to purchasing a house:  housing, savings, and, dept payments. Let's consider a couple of people who earn the median income of $81,480, that means that the 35% of their income that the Credit Counselling Society believe should go to housing comes to $28,518. Divide that by 12 and you get $2,377/month. That comes pretty close to the numbers I came up with in the above at 6.1% ($2,780) and 2.85% ($2,010). Having said that, it is very important to remember that these are just the numbers for paying principle and interest. There are significant other costs that come from owning a home:  taxes, insurance, maintenance, and, renovations. But having said that, the $540,000 home that I based all of this calculation on is a median-priced, single detached house. This means that half of the single detached houses in Guelph sold for less than that. It also means that there are cheaper options, such as row houses, duplexes, semi-detached, and, condos---most of which are cheaper than fully detached houses. It is also possible to cut the costs of maintenance and renovation by doing the work yourself. 

It is also important to understand, however, that the money that people spend on buying a house is not completely "housing". It is also a form of "savings", and, paying off a mortgage is also a form of "debt". So if you follow the pie chart above, you could say say that what people really put into their homes could be as high as 60% of their income (35% housing, 15% debt repayment, and, 10% savings). And 60% of $81,480 comes to $48,890 or $4,074/month, which makes home ownership seem a lot more affordable. Of course, not a lot of people are going to want---or even be able---to devote 60% of their income to buying a place to live, but it is important to realize the implications of the numbers. It isn't much fun to scrimp and save for decades in order to buy your own home, but lots of our parents did the same thing---and the result is what usually is the biggest chunk of personal wealth that anyone owns.

&&&&

It seems to me that the real problem we are facing in Guelph is wealth stratification. That is, people who can afford to buy a house can use that purchase to amass more wealth in the form of equity whereas the people who cannot will end up just losing all the money that they pay in the form of rent. Luckily the CMHC has provided household income tables that break down Guelph residents into increments of $20,000. (Unfortunately, the latest numbers are from 2011, but I think it shows a trend that if anything has gotten worse since then.)

• 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%

As you can see, 44% of Guelph's households make $80,000/year or more. These are the people who can buy homes without enormous personal sacrifice---depending on what they buy. People making less than $20,000/year can't even find a place to rent. But what about the households making between $20,000 and $80,000/year? That comes out at 45% of the population. These folks have to compete with the upper 44% for houses to buy and it can be tremendously frustrating to never find anything you can afford, even though you are making what used to be considered not a bad income. There are a lot of issues raised by this, but this post is already getting rather long, so I'll save that stuff for a future article.