The affordable housing question [Real Estate][Economics]

One of the problems that the GTA faces in the upcoming years is the challenge of affordable housing. How the government plans to solve this problem is multi-pronged, they plan to issue subsidies through their municipal branches, subsidies which should incentivize individuals to offer their rental units as social housing units. This type of program is designed to help solve the supply side problem of quality housing units to live in. In an ideal world, there would be an adequate supply of housing to satisfy societies housing demand and since government policy can’t really affect demand, this is why this subsidy is a supply side solution. Municipal governments seem to be taking a more direct role by expanding their social housing stock. Forget the fact that in 5 years, the municipal and federal government will again fight over who’s going to pay for fixing those units they build today, but seems like that’s not a problem we’re keen to avoid since we allow this behaviour by our government. We’re fanning the flame since as we allow more social housing to overtake non social housing, this increases the cost of all the non-social housing units. To put this idea into perspective, if a developer buys a plot of land for $1M and 4 houses can be built on that plot of land, the developer might built homes for another $1M and then sell each unit for 600k. The cost of each house is 500k ($1M + $1M / 4 houses = $500k cost per house) so the developer ends up making $400k profit from selling the 4 houses. Now if the government comes in and says one house has to be offered at a 20% discount (aka 400k), all of a sudden that $400k profit turns into $200k. The developer will likely increase the cost of each of the 3 remaining homes, from 600k to 666k so at the end of the day, the developer still makes 2 M from the transaction. The purpose of this is to show some of the effects social housing can have on other housing in a region. To the point above regarding inaction on social housing maintenance, the city of Toronto faces a $2.56B backlog for repairs to over social housing over the next 10 years. The city governs 58,800 units which represent $9B in total value, so municipalities (Toronto, in particular) will have to make difficult choices over the next few years as they decide whether to spend 28% of the total value of all social housing to fix units in need of repair.

RBC Economics publishes a quarterly housing trends and affordability index, which is supposed to be a number representing what percentage of pretax median household incomes which would be needed to afford a house (or a condo) in those markets around Canada. So if the index was at 110% (like it is for detached homes in Vancouver for Feb 2016) this means that it would take 110% of the median household income to afford mortgage payments, utilities and property taxes. Luckily, we don’t live in Vancouver and we can afford (just barely) detached houses in the GTA. For Toronto this value was 72%, which means you’d still have 28% left to pay income taxes, eat and maybe go see a movie or two (unlikely). Now luckily the affordability index for condos in both cities is in the 30% range so young people can still afford to live in these cities and next week’s blog post (Apr 29th/16) is going to explain programs that are essential knowledge for young people (or first time home buyers) navigating the choppy waters of buying their first home.

 

 

Article was written by gtareguy (Greater Toronto area real Estate guy) . I release a new article every Friday and I write about economics, the nba and real estate in the GTA. 

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Author: gtareguy

Real Estate Investor Raptors fan (don't cry for me this year) Mech Eng Graduate

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