Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 162

The Missing Middle Initiative, which is a research group housed at the University of Ottawa's Institute for the Environment, just published this detailed report on Southern Ontario's housing affordability crisis.

As we know, things are not good: In 2005, 21 of 26 single-family house markets in Southern Ontario could have been classified as either affordable or deeply affordable for middle-class families, and none were unattainable.

Today, none of these markets can be considered affordable or deeply affordable, and 11 of them are now unattainable. In every single one of these markets, buyers should expect to pay 25% or more of their pre-tax income on mortgage payments.

Below is one of their charts showing the price-to-income ratios for single-family houses in various markets since 2005. Outside of the Greater Toronto Area, the turning point toward worsening affordability was generally in 2016, and the peak was in 2022.

Here's some historical context. Canadians who had mortgages in the late 70s and early 80s often like to talk about how crippling rates were back then. But interestingly enough, monthly payments — relative to wages — are actually worse today than they were during this high-rate period (according to the report).

This is partly because home prices were a lot lower back then and so high rates didn't have the same impact to mortgage payments. Instead, the two worst periods of time for affordability (payments relative to wages) were during the late 80s housing boom and then during/after the recent pandemic.

Following the real estate crash of the early 90s, monthly payments relative to wages declined along with home prices. And they didn't return to the same levels seen during the preceding boom until 2022 — some thirty years later.

The same thing is happening right now. This reset is naturally improving affordability. But it really should be viewed as an opportunity to course correct before the next cycle begins. MMI's report does a good job explaining that housing is objectively less affordable today than it was for prior generations.

Charts from the Missing Middle Initiative ; cover photo by Victor Ballesteros on Unsplash

I started thinking about this the other night. For the first 18 years of my life, in other words, up until I moved away to university, I lived for the most part in a detached single-family house in the suburbs of Toronto. But since then, I have almost exclusively lived in apartments/condominiums ranging from converted houses to high-rise buildings.

This was true when I was at the University of Toronto and it was true when I lived in Philadelphia for grad school. In my first year of grad school I lived in a converted house in a questionable area of West Philly. In my second year I lived in a high-rise brutalist building. And in my third year I lived in a small three level walk-up apartment above a pet store and a really great deli. This perhaps not surprising given I was a student.

But since moving back to Toronto, the same has been true. I initially invested and lived in a single-family house, but then decided I preferred living in a condominium and so I have done that ever since. Maybe this changes with kids or maybe it doesn't. But it's interesting to think about the housing types we have chosen or were handed. Location and other factors certainly play a role.

What housing type have you lived in the most throughout your life? Let us know in the comment section below.

Cover photo by Michal GADEK on Unsplash

The Liberals just announced that, if elected, they will form a new entity called Building Canada Homes (BCH) which will, "get the federal government back in the business of building homes." Broadly speaking, this new entity is proposed to have three key functions: it will build affordable housing at scale (including on public land), it will help to "catalyze" the private sector, and it will provide financing to affordable housing developers. There's a lot that is interesting in the policy teaser, but let's focus on function number one today: Do governments make good developers?

The outlined intent is that BCH will "act as a developer to build affordable housing" and "partner with builders for the construction phase of projects." So it sounds like they will not be constructors. The language they use also suggests that BCH will be an acquirer of land. Sometimes it will develop on already-owned public land, but in other cases it will go out and buy new land, sometimes offering it back to the market via land leases.

Acquiring new land will be challenge number one. As we have talked about many times before on this blog, land should be the residual claimant in a development pro forma. Meaning the value of land depends on what you can build on it. So if BCH is looking to build affordable housing and the rest of the market is looking to build some higher-and-better use, it will be very difficult for them to complete in the market. This is the same reason why, historically speaking, the City of Toronto has struggled to acquire new parkland with the funds it collects from developers. It can't compete.

On the flip side, it's very possible that in a downmarket, like the one we're in right now, BCH might be the only real buyer of development land. Affordable housing requires subsidies and if the subsidies BCH has access to result in both feasible projects and higher residual land values, well then they'll be able to win sites. But it will depend on the market conditions at the time. It also raises an important question: What is the right level of subsidy for the affordable housing that BCH intends to develop itself?

The second challenge is going to be execution. Development is a risky endeavor, but most of the time the private sector accepts these risks because they believe they will be compensated accordingly. And once they have taken on these risks, they become highly motivated to deliver for their investors and partners. Will the federal government be equally motivated? Perhaps. There are, of course, lots of examples of public housing developers in other parts of the world. But is it the most effective way to deliver new affordable housing? An alternative approach would be motivating the private sector to participate.

Getting the federal government "back in the business of building homes" may sound promising, but there's reason to be skeptical. There will be lots of details to figure out if it's actually going to be efficient and effective.

Cover photo by Eduardo Alvarado on Unsplash