Tapping into the Stock of Spare Bedrooms to Increase Housing Affordability
By Paul Smetanin, Canadian Centre for Economic Analysis (CANCEA)
It would be hard to argue that the Greater Toronto and Hamilton Area (GTHA) does not have a serious housing affordability problem. Yet, comparing the region’s average housing price-to-income ratio (a common way to measure affordability) with other cities worldwide, reveals that the city of Toronto compares favourably to other large, wealthy cosmopolitan cities, ranking alongside Berlin, Boston and Melbourne.
The GTHA housing market is complex and defined by many apparent contradictions. Here’s another one: although there is a shortage of 350,000 bedrooms needed by current households that are living in units too small for their families, there are 2.2 million spare bedrooms in the region belonging to households living with more bedrooms than they use. This equates to six times the number needed to fill housing requirements.
To understand how these factors are linked to each other and to (un)affordability, the first step is to consider what truly makes housing affordable. Housing is different from most goods because it isn’t only demanded, it is needed as shelter…but four walls alone do not make a home. To be livable, a housing unit must be equipped with utilities and be in an area that makes daily commutes to work and school possible and reasonably convenient. Its size and number of bedrooms should also fit the needs of the household. Compromising on these factors has real financial costs, not to mention serious implications for well-being. Therefore, a better definition of affordability goes beyond the market price of housing and includes the costs of making a house a home.
The price-to-income ratio does not capture the worsening affordability felt by residents of the GTHA because it fails to take these costs into account. An alternative measure of affordability called the SCAR index (Shelter Consumption Affordability Ratio), developed by CANCEA, includes these factors to provide a fuller measure of affordability. According to this metric, affordability in the GTHA has worsened by about 40 per cent since the early 1980s and by 15 per cent since 2000. According to the numbers, the housing needs of over a third of GTHA households aren’t being adequately met. This includes growing families living in apartments with too few bedrooms, individuals facing long and tiresome commutes, and retired couples paying too much for utilities and for the maintenance of their large family homes.
So how did we get here? Unsurprisingly, rapid population growth and decreasing average household size have put pressure on the GTHA housing market. This is driving households to settle for units that aren’t exactly well-suited to their needs. Families and larger households are particularly affected. One quarter of 4-person households are living in units that are short two bedrooms or more. Still, this is only one side of the story, and these patterns are far from uniform across the GTHA.
Consider population growth: in the last 15 years, half the city of Toronto by area has grown by 480,000 inhabitants, while the other half has shrunk by over 230,000. The shrinking neighbourhoods happen to also be where the bulk of empty bedrooms can be found. The households concerned are not exclusively high-income. In fact, 45 per cent of them earn less than half the median income. This begs the question…why aren’t these households downsizing, rather than continuing to live in houses with more bedrooms than they need? One clue is what they have in common: their age. A clear majority of households with empty bedrooms are retirement-age “empty nesters.” These households have no appropriate downsizing alternatives, so they hang on to their houses. House prices in these neighbourhoods therefore remain high, which means that few growing families and newcomers can afford to move in, creating this shrinking effect.
If this were a simple numbers game, households of different sizes would swap condo and apartment units for houses and vice versa. Unfortunately, a condo tower in a different part of town will generally not suit the needs of most detached housing owners looking to downsize. A better alternative is the ability to own or rent “gentle density” housing, such as semi-detached, row homes, townhomes, multiplexes, and courtyard apartments. But this type of housing is uncommon in the GTHA. Currently only 20 per cent of GTHA households live in units falling under this category. Zoning regulations in many neighbourhoods that only allow detached housing are a contributing factor. In addition, rental options across the GTHA are limited. Each year, fewer and fewer purpose-built rentals are built. Between 1990 and 2016, the per capita stock of units available for rent has fallen by one third.
Relieving the pressure on the housing market will require the development of new housing, specifically 450,000 units across the GTHA. One strategy is to build units for the currently underhoused households. This will be a costly and time-consuming undertaking, as most of these units would have at least 3 bedrooms.
“Right-sizing” the housing stock presents an alternative solution. Simply put, this means building for the needs of households who are ready to downsize, which would in turn free up larger units for bigger households in need of bedrooms. Virtually all new units could count one or, at most, two bedrooms. Ideally, the new developments would be gentle density and located in areas where population is decreasing. Retirees would then be able to remain in their communities, and the arrival of new families would help revitalize these neighbourhoods. This type of development would be more cost effective, land-efficient and require less time to build. Furthermore, as part of the right-sizing process, housing affordability would be expected to be improved by 7.5 per cent, and house sales would grow from 7.1 to 10.1 per cent annually.
Spurring the right kind of developments for right-sizing requires aligning the incentives of developers with policy and increasing their ability to quickly respond to market demand (e.g. streamlining inspection and approval processes). Changing demand-side pressures is perhaps less straightforward. Little can be done to curb demographic trends, and shifting cultural norms to make renting more socially desirable will not happen overnight. But as the gap between housing and rental prices deepens, downsizing to tenured rental properties will look increasingly appealing to homeowners. Right-sizing the housing stock offers a way forward and can pave the way for a housing market that better serves both buyers and sellers. More importantly, it has the potential to improve affordability, revitalize neighbourhoods, and in doing so, make residents of the GTHA feel more at home.
Paul Smetanin is the President of the Canadian Centre for Economic Analysis. For more information, visit www.cancea.ca
This article first appeared in the Summer edition of The Collection.
