Archives for March 2018

The affordable units provided by IZ are subject to various controls to protect the long-term affordability of the units. The following addresses one of the key aspects of those controls: how the maximum price and income limits are set for the resale of the affordable ownership units.

The principal purpose of these particular controls is to ensure that the public stake in this housing is never lost. This refers to the value of the price reduction that has been engineered by these programs – or more specifically, the current difference between the initial market value of the unit and the initial permitted affordable selling price but as adjusted to the time of the resale.

In effect, under these controls, when an affordable unit is resold within the control period (now typically 30 or more years), it can be resold only at or below the permitted price and to a corresponding income-eligible household of the same size. Units sold after the control period can be sold on the open market, but the home seller only receives the current value of the permitted sales price, while the remainder of the value goes to the municipality for re-investment in affordable housing.

These controls are also affected by another consideration. All of the affordable ownership programs attempt to provide the owners with some reasonable share of the equity gain whenever the units are resold. This equity sharing is considered necessary to promote the proper upkeep of the unit, and also to help the owners to sell and move on when they want.

These two considerations are somewhat in conflict, and this leads to two different equity-sharing approaches that will be noted shortly.

Some of the programs set the limits in terms of price and others in terms of income. But they come to the same thing because one can be readily converted to the other using the current loan-to-income ratios determined by the prevailing mortgage interest rates and related factors. This is important because the programs in a sense must operate in two languages: the developers are most concerned about price and not income, and policymakers about income and not price.

(Note: the PPS definition does not treat them as interchangeable, and that is just one of the many unnecessary complications raised by this flawed definition.)

The resale price and/or income limits are set according to an index or formula registered in the title of the affordable unit when first sold, and then passed from owner to owner whenever resold. This same index or formula is used for the resales within and after the control period. As already noted, the only difference is where the public stake goes; it is either locked into the price of the unit, or it goes to the municipality.

There might be as many as a dozen indices or formulas that have been used to set the permitted resale price in affordable ownership programs in the US and Canada. For example, these include the CPI, a fixed percentage, and a fixed percentage with a cap. Many have been found wanting because of the skewed results that can occur when used over a long term.

Two of these make the most sense, and have used in the great majority of the affordable ownership programs. One is price-based and the other income-based.

The income-based approach uses the local median income as the index. So, for example, if the developers were required to sell the unit initially at a price affordable to a household at 80% of local median income, that unit can be resold to another household of a corresponding size at 80% of the median income as adjusted over time. The US government facilitates this approach by annually providing the median income for each household size for every jurisdiction in the country.

(Note: the income data needed to use this approach is not available. To be more specific, what is lacking is median income data for every jurisdiction that is updated annually and broken down by household size.)

The price-based approach uses average market price as the index. So, for example, if the unit was initially sold at 75% of the average market price, the homeowner can resell it only at 75% of the new market price current at the time of resale.

Two approaches lead to different equity-sharing arrangements, which serve two different policy objectives. The homeowners share in the price-based approach are likely to be much lower than the income-based because incomes generally have risen at a much lower rate than prices. Nevertheless, nearly all IZ programs use this approach because their objective is to provide and maintain affordable housing over the long term. Strictly speaking, this can only be done by ensuring the housing continues to go to households at the same income level.

The price-based approach, on the other hand, is used in programs where the emphasis is on using homeownership as a way of building household wealth and financial security. Notably, Habitat for Humanity takes this approach. Under this approach, the affordability of the units from an income viewpoint will steadily erode at each resale, but the price will always remain below the full market price.

The duration of home ownership is not relevant in these controls. For example, homeowners are not required to own the unit for (say) five or more years as a protection against windfall gains. Under these controls, the unit could be flipped the day after purchase because no special or unearned benefit will go to the seller.

The programs do not guarantee the permitted sales price; they only put a cap on it. If there is a downturn in the housing market, or if the housing is not maintained, the affordable homeowner will suffer the consequences like any conventional homeowner.

RD  22Feb2018

A number of myths continue to be associated with IZ, although there is no evidence to support them. These myths serve to cloud and confuse the debate on how best to design these programs.

As will be seen, many of these myths deal in one way or another with the cost burden associated with providing the affordable housing.

IZ is a “partnership”

This term is frequently used by the development industry in Ontario. It is used to suggest that the other levels of government, particularly the municipalities, must somehow have “skin in the game” – that is, contribute financially toward the affordable housing.

This is a made-in-Ontario concoction. No reference to either this term or the notion is found anywhere in the US with regard to IZ.

To the contrary, IZ programs in the US have been designed for the most part to operate with little or no financial support from the municipalities. Indeed, these programs were designed this way because the municipalities in the US, like those in Ontario, lacked the financial resources needed to provide this support.

The programs also are designed to operate independently from state-level programs. States are typically involved only when they provide financial assistance to secure affordable housing at a deeper level of affordability than achieved by the IZ programs on their own.

IZ raises housing prices for the market homebuyers

IZ is often described as driving up the price of housing for other homebuyers, either generally across the community or more specifically in the same development. This is said to happen because the developers will pass on the cost of the affordable housing to the other buyers.

But developers cannot hike house prices in this way. The market as a whole sets the price of housing, and not the individual developers. And it is reasonable to expect that developers are already selling at the highest possible price. So, they cannot raise the price to cover the affordable housing obligation or any other cost increase.

There are two authoritative studies coming out of the US that clearly support this position. More specifically, the studies show that the price of housing in municipalities with IZ programs is virtually the same of that in comparable municipalities without these programs.

Developers must absorb the cost burden of the affordable units

If the developers cannot pass the cost burden onto the market homebuyers, so the argument goes, then the developers must absorb the cost by taking a hit on their profits.

The possibility that the developers will accept any significant reduction in profits is remote. The more likely response is that the developers will postpone the development until the market conditions favour going ahead.

In any case, IZ programs are not designed with the expectation that the developers will absorb this cost. These programs intentionally fix the affordable housing obligation so that the developers can take into account the associated cost when bidding to purchase land for development. In this way, the cost associated with the affordable housing will be “passed back to the land” – that is, seen in the form of reduced land prices.

IZ depends upon concessions

While most IZ programs do provide concessions, the value of these concessions and rationale behind them is often misrepresented.

The concessions offered by IZ typically are related to the development requirements and approval process. They principally include waivers of development-associated fees and relaxation of various development regulations. As noted earlier, they certainly do not include financial subsidies.

These concessions are offered by the municipalities for a simple reason: they consider it unfair or inappropriate for them to be adding to the cost of affordable housing, while at the same time requiring the developers to reduce the price of that housing. So they do what they reasonably can to eliminate those costs.

It is notable that these concessions generally remain fixed over time, and are granted uniformly to all eligible developments. They certainly are not adjusted to meet any prescribed standard nor to satisfy any viability criteria relevant to any particular development.

The value of these concessions is also relatively modest. They typically represent no more than a small fraction of the price write-down associated with the affordable housing. They are determined by what the municipality can reasonably give and not by what might be required to sustain by any development.

Here is a final important point. While it is true that most programs do provide these concessions, there are many that do not. That these programs can produce affordable housing in the absence of concessions is proof by itself that they are not needed to make IZ work.

IZ works only with up-zoning

Under this thesis, up-zoning is necessary because the increased density allowed by the up-zoning is seen as a necessary way of paying for the affordable housing.

The experience in the US does not support this. The vast majority of 500 or so programs there apply IZ to all approvals, including developments proceeding “as-of-right” with no density increase. It is only in the dozen or so “big city” programs that IZ is tied to up-zoning. This occurs, not because IZ needs up-zoning, but because virtually all development in those cities needs up-zoning.

IZ relies on density bonusing

Density bonusing refers to offering additional density to compensate developers for providing affordable housing. The additional density is automatically granted on some standard basis fixed in advance and applicable to all eligible developments.

Density bonusing is rooted in an old way of thinking about inclusionary zoning. It comes out of early programs, and especially the so-called incentive-based (or voluntary) programs. In these programs, the developers are asked to provide affordable housing, and so must be rewarded amply to secure their participation. (This approach is reflected in the continued use of the term ‘incentives’, although ‘concessions’ and ‘compensation’ are more suitable terms under mandatory programs.)
These programs have been proven to be ineffectual, and so they are no longer considered as useful vehicles for IZ. While they still do exist, they have lost all relevance for new programs.

There is another reason for the change in thinking. Density bonusing represents bad planning practice. This is because the affordable housing obligation is established first, and then the density increase automatically follows. In other words, this means that affordable housing trumps all other planning considerations with regard to the allocation of density.

Mandatory programs typically take the opposite approach. In these programs, the permitted density is first determined by appropriate planning grounds, and then the standard affordable housing obligation is applied.

This approach is used by all of the “big city” IZ programs, where up-zonings are prevalent. It is also the practice in the City of Toronto when applying s37: the appropriate density is first established and then the community benefits negotiated, not the other way around.

RD 2Mar2018