The affordable housing riddle: Cost to build only a third of the story

Vice President , The Regional Group of Companies Inc
  • Oct. 31, 2019

A few weeks back, a report from the International Monetary Fund asserted that the answer to providing more affordable housing to those who need it in Canada is to build more homes.

If only it were that simple.

The price of real estate, whether for purchase or for renting, does comes down to supply and demand. How else can you explain the October National Rent Report from Rentals.ca and Bullpen Research & Consulting?

It found that the Ottawa community of Kanata now has the most expensive two-bedroom apartments in all of Canada.

Cost pressures easy to understand

Why? Likely as a result of the large and growing high-tech industry here. 

Few people think of Ottawa as an industrial town, but while we don’t have any heavy industry, we do have a large and world-class group of high-tech companies. The people who work for them often are very well-paid and want to live closer to where they work.

Voila! You end up with higher rents.

My neighbour’s son has taken a job with one of the high-tech firms in the San Francisco area. If you think rents are high in Ottawa, down there you can expect to pay more than US$2,400 a month for about 500 square feet. 

It isn’t difficult to understand the cost pressures in some markets when you consider the average incomes and lifestyle choices of local residents.

Certainly there are some very inexpensive areas of Canada in which to live, but the major centres, particularly the big six city areas (that VECTOM block of Vancouver, Edmonton, Calgary, Toronto, Ottawa, Montreal), are not on the list of cheap-rent communities. 

Equally unfortunate is that the less expensive areas are not areas of much employment growth. In the larger cities, accessing lower-cost housing often involves living far out from the city centre, which can make commuting to work prohibitive if not impossible for those of limited means.

Which brings us back to affordable housing – and the big problem it faces in our major cities.

Just as there are people with high-paying jobs who bid up the price of commodities including rent, there are some people who don’t have incomes at even the average household level. Yet, they still face competition for housing from the rest of us.

Someone always gets the short end

As a society, we really don’t want people living in squalor.

One of my early memories is going with my father to collect his lost wallet. It had been found by a lady who lived with her children in a shack on the shore of the Rideau River about four kilometres south of downtown Ottawa and opposite the RA Centre.

This lady was as honest as the day is long but lived in this shack, and the one thing that I will never forget is the smell of poverty that permeated their home . . . if you could call it that.

To a very large degree, we have left this sort of poverty behind us but there will always be people who get the short end of the economic stick.

From a public policy perspective there is a political attraction to provide affordable housing, but the challenge is – HOW? 

Housing has three long-term cost components. First is the cost of building new (including the land acquisition costs). Second is the permanent and ordinary day-to-day maintenance. Last are long-term repairs and replacements. That third one is the killer.

It’s just not politically sexy to spend money on maintenance. The reality is that, over the longer term of say 50 years,  housing will require annual repairs costing in the range of one to two per cent of its ever-increasing replacement cost to keep it from falling apart.

So, if a current replacement cost new is about $200 per square foot, someone is going to have to budget $2 to $4 per square foot, every year, to keep the housing in good condition.

This amount will rise with inflation and the beneficiaries of affordable housing may not be in any kind of position to fund these long-term costs.

We need a solid affordable housing plan

This demands a solid plan for maintaining affordable housing. Without it, these properties fall apart in no time from neglect.

Every building wears out and must be maintained, or its useful life will be very brief. It’s obviously a much wiser investment to maximize the useful life of an existing building than to pay the much higher bill for demolition and replacement.

This is particularly true when you consider the average value of housing in our major cities these days is well above $200 per square foot.

The average house price in Ottawa was recently reported at just under $485,000, or slightly over five times the median household income. Vancouver’s multiple is a bit wild with median household income at just under $66,000 and average housing prices at about $995,000, for a multiple of about 15. 

If you assume an average house to be 2,000 square feet, in Ottawa housing would then cost $242 per square foot while Vancouver is $498 per square foot.

One other way of looking at this is that for every dollar of average household income in Ottawa, it costs about $5 to get somewhere to live, and in Vancouver it’s about $15.

The difficulty is that what people can afford to pay for housing is not proportional to income, since everyone also needs to eat, move around and be clothed. Lower-income households again get the shorter end of the housing stick. 

There is no easy answer

Finding the capital to build affordable and decent housing is a constant task, but more important is finding the will and the resources to maintain these buildings over the long term. 

I wish I had the answer for how to achieve this, but I don’t.

For various reasons, people at all levels are attracted to the Big City with its higher-priced housing. Economic immigrants in search of a better life help to fuel the inflation that drives up their cost of living. That means the lower-income group that can’t compete will inevitably get left behind.

To discuss this or any valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am always interested in your feedback and suggestions for future articles.

 


John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

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John Clark is Vice President with The Regional Group of Companies Inc. He has more than 33 years of experience in the real estate appraisal field, is a fully accredited…

Read more





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