Housing affordability is a growing concern in Canada, especially in urban centres such as the GTA, where the average price of a detached home in the 416 area code now exceeds $1-million according to the Toronto Real Estate Board’s latest resale stats. However, there is no consensus on how to quantify the problem. That might soon change with the recent debut of the shelter consumption affordability ratio, or the SCAR index, as the Canadian Centre for Economic Analysis (CANCEA) calls it.

The SCAR index essentially divides the costs associated with owning or renting a home, including utilities, maintenance and repairs, by the discretionary income left to pay for those shelter-related costs after taxes, financial obligations and basic needs such as food and clothing.

It may seem simple on the surface, but these two categories capture a complex web of factors that are at play in the housing market. The costs associated with owning or renting a home reflect factors including demographic changes and population growth as well as shelter types and transportation costs. The discretionary income left to pay for those shelter-related costs after covering basic necessities reflects factors including household debt, interest rates and labour demand.

Increases in the SCAR index indicate rising affordability pressures, with rises above the long-term average indicating issues of sustainability. The aggregate Canadian SCAR index of 41 per cent in 2014 pegs affordability pressures at an all-time high, or 11 per cent above its 30-year average.

The SCAR index comes as the product of an independent research project commissioned by the Residential Construction Council of Ontario (RESCON).

“We felt that our understanding of housing, and housing affordability, was very limited — in fact, there were vital pieces of information that we didn’t understand, because housing is basically connected to everything,” said Richard Lyall, president of RESCON. “And the research has, at this stage, actually demonstrated just that, that there are a lot of components that have been overlooked or at least not brought together in totality.”

CANCEA did a qualitative analysis of the factors influencing the housing market, which culminated in the December, 2015 report Understanding Shelter Affordability Issues: Towards a better policy framework in Ontario. RESCON hosted the release of CANCEA’s report at Ryerson University’s Centre for Urban Research and Land Development, bringing together experts, industry and government.

In a proposed phase two of its research, CANCEA will do a quantitative analysis of Ontario’s housing market, by municipality, using advanced computer simulations. Its ultimate goal is to model the impact of public policies to determine how best to confront growing affordability pressures.

Young households under significant pressure

In its report, CANCEA pinpoints two shortcomings of existing measures of housing affordability.

One is that various stakeholders have blinders to important factors outside their fields of view. For example, the Bank of Canada’s Housing Affordability Index, which shows housing affordability improving in recent years, closely tracks the trajectory of a mortgage payment investment index.

The other is that the use of aggregates and averages obscures underlying trends among particular demographic, geographic and socioeconomic groups. CANCEA’s preliminary analysis shows that Ontario’s average SCAR index is 38.5 per cent. That average hides the fact that 840,000 households in Ontario (or roughly one in four) have a SCAR index of 62 per cent. What’s more, 60 per cent of the 840,000 households facing “significant pressure” are younger than 45.

At a time when millennials are entering their prime home-buying years, Sal Guatieri, director and senior economist at BMO Capital Markets, said that another recent study found affordability in Toronto and Vancouver is poor and will get worse. Speaking at the launch of the CANCEA report, he attributed runaway prices to a number of factors, but suggested that it basically boils down to supply and demand. Demand is strong, and both Toronto and Vancouver are running out of the serviceable land required to build detached homes, for example.

Currently, the typical family that wants to buy a bungalow in the GTA would have to spend roughly half its gross income on housing-related costs, said Guatieri. And as families spend greater shares of their incomes on housing-related costs, they become increasingly susceptible to financial shocks such as interest-rate hikes or income loss.

“You’re basically left with a lower quality of life, more people spending time in their car, trying to get to work, or just cramming their families into ever-shrinking condos,” said Guatieri, “and you end up with an economy that’s going to grow slower and is more vulnerable to downturn than would otherwise be the case.”

Public policy costs passed on to purchasers

The shrinking condo unit — down from an average of 908 square feet in 2005 to 767 square feet in 2015, according to RealNet Canada data — is the result of designers working with the resources they’ve been given to extract the highest value. Designers have increasingly had to make do with fewer resources, explained Sheena Sharp, principal of Coolearth Architecture, speaking at the launch of the CANCEA report.

“From a design point of view, we’re hitting the edge of that,” she said. “I mean, how low can you go and still call it a bachelor apartment?”

Sharp expressed concerns about the inefficient use of resources due to conflicting government policies. Plus, the prospect of future requirements for net zero buildings, while positive in the fight against climate change, could mean another layer of costs is coming as efforts are being made to rein in existing costs.

“What I’m hoping for from this study is to be able to pinpoint some of the things, and the opportunities that we have, so that we’re not wasting resources, so that we are coordinating policies and we are able to deliver something that you could actually live in,” said Sharp.

Speaking at the launch of the CANCEA report as well, Cherise Burda, executive director of the Ryerson City Building Institute, talked about the Crombie report released just days earlier. An expert panel led by former Toronto mayor David Crombie produced the report as part of the province’s coordinated review of its growth, greenbelt, Oak Ridges Moraine conservation and Niagara Escarpment plans.

In particular, Burda zeroed in on the Crombie report’s recommendations around building complete communities. Features of complete communities include a range of housing types geared toward a range of income levels, as well as density targeted along transit lines.

The relationship between housing and transit is especially important, she noted. When growing young families look to trade up from a condo in the core to a detached home, they now have to travel increasingly farther into the suburbs to find affordable prices. The irony is that the location demands that they own one or more cars, which has been shown to cost more over the long haul than the higher upfront cost of homes in the city.

Burda also nodded to the Crombie report’s recommendations to remove the barriers to intensification that reduce the desirability of building in preferred locations. To name a few, the costs of applying to amend outdated zoning bylaws and meeting minimum parking requirements add up. Potential solutions include as-of-right zoning and relaxed parking requirements.

“For example, I live in a mid-rise condo and I have a parking spot that I don’t use, because I don’t own a car, because I live next to a subway, four streetcar lines, the GO and the UP Express,” she said. “Yet I have paid the $50,000 to $60,000-price for building an underground spot that gets passed down to the homebuyer.”

Ongoing government work on the housing file

City councillor Ana Bailão, chair of Toronto’s affordable housing committee, called the affordability issue a “housing crisis” at the launch of the CANCEA report. She also quickly added that the issue spans income brackets.

“When I talk about affordable housing, a lot of people automatically think I’m talking about public housing,” said Bailão. “Nowadays when you talk about affordable housing, you might be talking about your son or daughter that just graduated from school with a huge school debt, and probably graduated as a nurse and works in one of the hospitals, and cannot afford an apartment in downtown Toronto.”

The city councillor readily acknowledged the municipal government’s role in addressing the problem. One of its initiatives is the Open Door Program, which is designed to support Toronto’s work with private and non-profit sector organizations to meet its targets for delivering affordable housing.

Through the program, the city will identify land it owns that is available for such development; streamline the approval process for these types of applications with dedicated planners for each community council; and establish a calculation to create certainty as to what incentives the city will bring to the table in the form of benefits such as waived fees and property taxes. More details of the recently approved program are coming in June.

Minister of Municipal Affairs and Housing Ted McMeekin was also on hand to speak at the launch of the CANCEA report. He said he doesn’t buy the argument that Ontario’s growth and greenbelt plans, which are aimed at curbing urban sprawl and protecting important resources, such as farmlands, are to blame for rising house prices. McMeekin pointed to the Crombie report, which found that the existing greenfield areas designated to accommodate projected population growth up to 2031 would not be developed by then and could be used to satisfy some or all housing demand through to 2041.

The land use planning review represents just one of many ongoing Ontario government initiatives on the housing file. The province last year amended the building code to lift the height limit on wood-frame construction from four storeys to six and recently passed the Smart Growth for Our Communities Act with the goal of bringing predictability to the development charges system, planning and appeals process. (Since the launch of the CANCEA report, the Ontario government has also unveiled an update to its Long-Term Affordable Housing Strategy, which, among other measures, proposes legislation for inclusionary zoning.)

Min. McMeekin indicated that he thought the SCAR index would be a helpful policy tool and that he looks forward to seeing phase two of the research.

“I think we can all agree that affordability is an issue,” he said. “We may not agree exactly on what the barriers are, but that’s why … we need to keep talking.”

A way forward with a responsible mixed market?

Paul Smetanin, president and CEO of CANCEA, suggested that the answer to the affordability challenge is some sort of “responsible mixed market,” in which the government acts as referee. As Smetanin explained, economic theory expects consumers to make rational decisions about housing based on their ability to pay. The problem is, shelter is a basic need, so opting out isn’t a realistic choice if prices are beyond their budget.

Compounding the issue, he said, is the fact that consumers who are trying to meet their basic needs are competing with consumers who are pursuing housing that exceeds their basic needs as well as investors. With the right confluence of factors, this can crowd out consumers who are trying to meet their basic needs.

“How do you allow society to consume what it wants without restricting the needs of others within that same society?” Smetanin asked rhetorically.

Ultimately, he said, the combination of consumers pursuing shelter that exceeds their needs and rising house prices is not a problem on its own, with one big caveat: that it’s sustainable. What’s at stake is wider economic stability. Amid rising affordability pressures and rock-bottom interest rates, over-leveraged homeowners pose a potential hazard to the housing sector.

“From our point of view, if nothing changes, the system might be able to right itself out,” said Smetanin. “The problem is, everything’s changing all the time; if you get high interest rates, inflation or job losses, it will be of interest to see what begins to happen, but there is a risk to the economic contribution of the residential construction market.”

Michelle Ervin is the editor of CondoBusiness.