A typical young person needs 21 years to save enough for a 20% down payment on an average Toronto home. Home ownership has become a wedge that lifts those who can afford to buy in and crushes those who can’t. We are failing to provide housing for the people that make our city work.
Affordable homeownership helps the city at large
There are cascading effects when middle-income households can’t afford a home. Low-income households in the GTA face a widening gap between housing costs and incomes due, in part, to the 200,000 middle-income renters who pay less than 30% of their income on rent. Many of these households who can comfortably cover their current rent would normally move into ownership, housing freeing up rental units and alleviating upward pressure on rents. Instead, for many of these people, home ownership lies just of out reach.
How do we make homeownership attainable for middle-income households? Non-predatory shared equity mortgages can help households transition into the private market without requiring on-going government support. There are a variety of shared equity models but a non-profit model developed by Home Ownership Alternatives and Options for Homes has proven successful in Toronto. The approach requires the owner to put down a 5% deposit on the home. A loan between 10% and 15% of the value of the home is provided to the owner and recognized by banks as equity. This additional equity effectively increases their down payment, lowering the total mortgage requirement and monthly costs. There is no repayment schedule and no payments while the owner is living in the home. When the owner sells, or if they rent out their home, the loan is repaid based on the current value of the home. The interest rate on the loan is equal to the increase in the value of the home. If the value of the home has decreased, only the principal is repaid and no interest is charged.
Shared equity increases access to homeownership
Recent research from the Toronto Region Board of Trade (TRBOT) maps Toronto’s housing crisis from the perspective of middle-income workers. A series of maps use median incomes for kitchen staff, paramedics, retail employees, social workers, and construction workers to show that there are virtually no home ownership options downtown for those earning less than $100,000. The few affordable options that exist tend to be away from downtown and major transit contributing to long commute times. A pair of articles by Tess Kalinowski add depth to the TRBOT research with profiles of people in these industries, here and here.
Shared equity can deepen housing affordability for the types of vital workers profiled by TRBOT and benefit society as a whole. They also diversify dependence on homes as primary sources of wealth generation. Shared equity homeowners share any upside appreciation and limit their downside risk since they do not pay interest if their home decreases in value. By holding a diversified portfolio of shared equity mortgages, the risk to the lender is less than an individual owner. This model allows the lender to share in the proportionate increase in the value of a home over time. Interest earnings are pooled to create a self-sustaining revolving fund that generates equity to fund future shared equity mortgages and affordable housing projects.
Mapping housing options for middle-income households with and without shared equity
To explore the potential impact of expanding shared equity in Toronto, I overlay a shared equity model onto the TRBOT affordability calculations. Given how few ownership options for single-detached, semi, and townhomes were affordable, I focus on condo apartments. In April 2019, the median price of a Toronto condo was $562,000. To approximate CMHC’s commonly used definition of affordable housing, 30% of pre-tax income, I consider an area to be affordable if the median home price results in monthly costs at or below 40% of the applicable after tax income.
With a median annual pre-tax income of $91,000, a paramedic could afford to buy a condo apartment in 10 of the 35 areas in Toronto with only a traditional mortgage. With a shared equity mortgage, the number of affordable areas increases to 14 with several areas located closer to downtown and subway lines. Below is the original map from TRBOT showing the percent of income a paramedic must spend to afford a condo in Toronto. The second map highlights additional areas that become affordable with access to a shared equity mortgage as well as areas where affordability has been deepened by shared equity.
Shared equity is one piece of the puzzle
Shared equity programs should compliment other initiatives to form a comprehensive approach to housing affordability. 50% of Toronto residential areas are dedicated to detached homes and 2/3rds of neighborhoods are stagnant or declining in population. Planning reforms to permit "gentle density" in Toronto neighbourhoods primarily reserved for single-family homes would grow the supply of housing for young families and workers, re-populate neighbourhoods, and support local business. Along with steep reductions in fees, these reforms would help make the construction of triplexes, fourplexes, townhouses, and three-to-four storey apartment buildings viable for developers. This idea is gaining traction in Toronto (see House Divided) and similar conversations are being had across North American. Places like Oregon and Minneapolis have recently eliminated restrictive single-family zoning. A recent survey shows that 71% of Vancouverites think more density should be permitted in neighbourhoods.
Substantial and sustained government funding for affordable housing should also play a large role in financing the construction of affordable and market rentals.
Controlling speculators through speculation and vacancy taxes can be an effective, albeit controversial, method of limiting how much investors can skew homes prices upwards. In Vancouver, $115 million has been raised by this type of tax in its first year to fund new affordable housing.
Providing direct subsidies to those that need them is arguably the most effective way to assist people who can't afford suitable housing. Putting money or housing vouchers into the hands of poor people improves their ability to secure housing without dictating the location or housing type. The federal government has included a housing benefit program in the housing strategy but only commits 70% of the $2 billion program beginning in 2024.
The federal government has also proposed the First Time Home Buyers Incentive (FTHB) , a shared equity program of its own to help first time home buyers. To avoid inflating housing prices the program is very targeted but it will help some young families enter the private market. It will be interesting to see how the FTHB program is received when it is rolled out in September of this year. One criticism has been that tax payers will take on the risk of future housing prices. In a private shared equity model, the risk of future appreciation is borne by a lender, here taxpayers foot the bill if home prices decline.
As much as what we do to make housing affordable matters, how we do it can have huge impacts. Demand side subsidy programs, like housing vouchers or shared equity mortgages increase people’s ability to pay for housing but also increase housing demand and potentially home prices. If these programs are started before or in lieu of supply reforms, funding, and measures to limit speculation, they are likely to drive up housing costs instead of creating more affordable housing. If more housing isn't being built due to regulatory barriers and speculators are able to deploy more and more credit into housing, we can only expect home prices to rise.