The Affordable Housing Problem

People living on the street have come to symbolize the global housing crisis but they are only the tip of the iceberg. While the examples of Finland and Houston demonstrate a focussed plan pursued diligently can resolve the housing situation for the chronically homeless, addressing the affordable housing problem is much more complex. 

Defining Affordability

First things first – an agreed upon definition of affordability. Early in my banking career I would take applications for and recommend mortgage loans. The gold standard – total debt service coverage (“TDS”) of 27% based on a maximum 25-amortization. Translated,  this meant that the total of capital, interest and municipal tax payments could not exceed 27% of a household’s before-tax income.  We calculated each debt service ratio individually to determine what size mortgage a household could afford. Over the years, that standard crept up to 30% over longer and longer amortization periods.

And now, in setting targets for the development of affordable housing, the commonly accepted definition of “affordability” is 30% of median family income. Now this gets boring – but it is core to resolving the affordable housing problem. “The median is the middle number in a sorted, ascending or descending list of numbers and can be more descriptive of that data set than the average. It is the point above and below which half (50%) the observed data falls, and so represents the midpoint of the data.” The effect, about 50% of the population is left out in the cold. 

Victims of the Affordable Housing Problem

According to 2020 census data, median household after-tax income in Canada was $73,000. So who are some of the people that earn less than that? 

• Teachers – from a low of ~$36,000 to a high of ~$72,000
• Nurses – from a low of ~$58,000 to a high of $88,000
• Childcare providers – from a low of  $25,000 to a high of $36,000
• All of these incomes are pre-tax so the net, after-tax incomes are much lower than $73,000. 

So what are average rental rates in Canada? 

• One-bedroom – $1,760 pm or $21,120 pa
• Two-bedroom – $2,120 pm or $25,440 pa

To respect the 30% of income target the required pre-tax annual incomes would be $70,000 for a one-bedroom flat  and $84,800 for two bedrooms. 

Abandon the 30% of Median Income Measure

So, who do you want living in your neighbourhood? Your child’s teacher or caregiver? The nurse at the local clinic? And if the baristas that make your morning coffee have to be on the job at 6 am, they need a decent place to live nearby. 

One single measure of affordability will always exclude a segment of the population. Affordability should be on an “individual needs” basis. Functioning models for this kind of approach exist in Western democracies. Example : Austria has a highly functional model that targets housing costs of between 20% and 25% of individual household income. But then, Vienna faced the affordable housing problem right after the the First World War.