Speak to any financial adviser, landlord or lender and there is a magic number that pops up again and again: housing shouldn’t eat up more than 30 percent of income to be considered affordable. In New York, they’ll tell you your income should be 40 times the rent, but the math is exactly the same. This number is embedded in online budget calculators, federal housing policies and is used to determine mortgage maximums. There’s just one problem; it’s essentially arbitrary.
The ratio’s roots date to 1937, when the United States National Housing Act decreed that to qualify for public housing support a tenant’s income could not exceed five to six times the rent. By 1940, minimum income limits were replaced with a maximum rent standard in which rent could not exceed 20 percent of income. By 1981, the rent ceiling was raised to 30 percent, which remains the standard for most housing programs in both Canada and the United States today.
The 30 percent rule was deemed the amount that a family could spend and still have enough left over for food, clothing, utilities and other essentials. Applied to individual situations, it’s a huge oversimplification. “If your income is $300,000 a year, you can pay 50 percent and still have plenty of money left,” says Shannon Simmons, founder of the New School of Finance.
So in the simplest terms, ‘affordable’ means exactly what you always knew it meant; housing is affordable if it does not interfere with your ability to pay for other important stuff. But what ‘affordable housing’ does not (necessarily) mean is housing that is subsidized by the government.
Fewer than 5% of Canadians live in subsidized or social housing, according to the Canadian Mortgage and Housing Corporation. The rest live in housing provided by the private market. And as is prone to happen to markets, high demand and tight supply – particularly for rental housing – means that rents are soaring.
Unfortunately, this is happening at the same time that incomes are flatlining. More and more Canadians are finding their homes are unaffordable. Forty percent of Canadian renters currently spend more than 30 percent of their income on rent according to the Rental Housing Index released in September 2015. Half of these households pay more than 50 percent of their income in rent. A study released by the McKinsey Institute shows that the number of people paying more than half their income in rent is expected to grow by at least 25% over the next ten years.
So shouldn’t the market take care of this? Shouldn’t developers build tons of new apartments to soak up increasing demand, thereby preventing huge rent increases? What about all the condos springing up like weeds all over cities like Toronto and Vancouver?
As the New York Times points out, “as long as there are plenty of upper-income renters looking for apartments, there is little incentive to build anything other than expensive units.” Increasing prosperity (i.e. income inequality) is driving demand at the high end of the market, and builders are focusing their efforts there. There is nothing to gain by building for people who need it most: those at the lowest end of the rent spectrum.
So, high demand and low supply equals expensive things. When those things are, say, Lamborghinis, it’s no big deal— you’ll be okay if you don’t satisfy your dream of owning a fancy sports car. But when the thing in question is housing, it is a big deal. Because everyone—rich and poor—needs somewhere to live. This is the simple reason why housing cannot be left to the whims of the free market. People need it even if they can’t afford it.
Where is affordable housing supposed to come from? That is the bajillion dollar question. Right now, it comes from a messy mix of local, provincial and federal tax credits, private and non-profit incentives, and building projects. And social housing. But no one thing represents a solution and the combination does not add up to a comprehensive affordable housing policy. The failure of governments to implement coordinated, evidence-based policies is contributing to affordable housing crises in developed countries across the world.