The Ontario IZ legislation does not include a definition of affordable housing, but instead relies on the definition set out in the 2014 Provincial Policy Statement. The municipalities are able to construct their own definitions, but they must use standards at or below those in the PPS definition. (See End Note 1.)
This definition of affordable housing, however, is seriously flawed in many ways. These flaws, which are examined in the following paper, need to be addressed before effective and operational programs can be implemented.
The most significant of the flaws in the current PPS definition (see End Note 1) include these:
- It uses thresholds that appear to have been arbitrarily set, and are probably too lax to require the provision of affordable housing in many jurisdictions.
- It uses multiple and competing standards (income along with price or rent) that produce no apparent benefit, and will only serve to complicate the administration of these programs.
- It is reliant on income data that is not available in a timely and appropriate way, and will in effect render the definition inoperative.
- It does not provide a way for interchanging between the income thresholds and price/rent thresholds, and this will further complicate which is essential to operating these programs.
The US programs take a different approach to defining affordable housing. This approach serves as an instructive alternative model for what is needed. (See End Note 2.)
Does “affordable housing” mean “below-market housing”?
This is the central and underlying question that needs to be addressed. In the US, affordable housing provided by IZ programs is recognized as “below-market” housing. This concept is firmly established and widely understood there, but not here in Canada, and is fundamental to explaining what those programs are trying to achieve.
“Below-market” housing is essentially housing provided at a price or rent lower than that for similar housing already being delivered by private developers. It is housing that extends downward the affordability of the housing available on the market.
Put another way, this housing is generally seen as serving households that have been left out of the private market by the rapidly rising prices. It is for those no longer earning enough to afford market housing, but also too much to be eligible for government assistance. As such, It is meant to fill the large and growing gap in the affordability of the housing being provided by the private and public sectors.
The US programs do not provide what might be called “low-end-of-market” housing. This is more housing at a price or rent already being served by the private market, albeit in the more affordable range. Providing more choice for those already able to afford market housing is not considered to be a responsible use of these programs.
Ontario’s documentation on IZ makes only one brief reference to this concept. That is in the province’s ‘Consultation Discussion Guide to Inclusionary Zoning’ released in May 2016. It noted that inclusionary zoning was a way to “to require private-market development to include below market-rate rental and/or ownership housing”. No further explanation nor commitment has been made.
The province needs to endorse this concept, or identify a credible alternative, in order to explain what the IZ programs in Ontario are expected to provide. Until then, the definition depends on standards that appear to be arbitrarily selected and without a clear and justifiable purpose.
Flaws in the PPS Definition
Lax Standards
The PPS definition in effect says that affordable housing is for households earning less than 60% of the local household income distribution. The province has offered no explanation about how this threshold was determined. In absence of the explanation, it is hard to take 60% for being anything other than arbitrary.
Of central concern is whether this standard will deliver below-market housing or just more low-end-of-market housing. This question goes to the heart of why these programs are being established and what they are intended to do.
While the available evidence admittedly is limited, it does indicate that the below-market threshold is more likely to found nearer the 50% level. For example, this threshold was identified by the recent study by the City of Toronto for its new affordable ownership definition.
The municipalities can address this problem by setting their thresholds at more rigorous standards than those in the PPS. But this unlikely to happen without the province endorsing the below-market approach, and also providing clear direction on how to determine it.
The continued use of the PPS standard as it stands could mean IZ programs here could deliver little or no affordable housing, at least under the more rigorous standard used in the US.
Questionable Approach
The purpose of this definitional approach also has to be questioned. The PPS definition attempts to apply the same numerical standards province-wide. Considering the wide disparity in housing conditions across the province, it is unlikely that the standards will be relevant in many (if any) jurisdictions.
In a sense, the province has this backwards. It should be establishing a province-wide conceptual basis for its definition of affordable housing – presumably, that it be “below-market” – and then allowing the municipalities (with guidance) to determine what that means for their local markets.
In the US, where each municipality sets its own “below-market” standards, the resulting thresholds range widely, going anywhere from 50% up to 150% or more of the median income or even higher. A similarly wide range of thresholds is likely to be seen here if the same approach is taken.
Redundant Yardsticks
The PPS definition uses three different yardsticks: income and price for affordable ownership, and income and rent for affordable rental. All of this is unnecessary and clumsy. It only creates more work and confusion. It also has the potential for complicating the administration of the long-term affordability controls, which will depend upon establishing clear legally-binding contractual arrangements.
There is no apparent benefit coming from the use of multiple standards. No IZ program in the US has ever found a need for anything like this.
The definition can and should be based on one single yardstick, preferably an income-based one. The key advantage of using income is that it can be applied both to ownership and rental housing. In turn, this will make it easier to co-ordinate all housing programs and ensure that they work together to meet the full range of housing needs.
Competing Yardsticks
The PPS definition puts into play two sets of thresholds – one based on income and the other on either price or rent. Because the two are determined independently of each other, they in effect are in competition, and the municipalities are required to use the one that is currently more rigorous.
For an operational program, what is needed is a definition that allows for readily switching between income and the two. In other words, the income and price/rent thresholds must be interchangeable. Municipalities will be primarily concerned about the incomes that must be met, but developers will really only care about the price that must be delivered. In a sense, the programs must be able to work easily in both currencies.
In the US, primacy is given to one yardstick (typically income) and then a standard ratio used to determine the other. In the case of affordable ownership, the relationship of the price to income is determined by the current loan-to-income ratio used by the mortgage industry. That ratio, which fluctuates over time, is based upon the current interest rate along with a minimum fixed loan period, maximum amortization period, and minimum down payment requirement.
In Ontario, this ratio in effect will be determined by the current lending standards approved by CMHC for its mortgage insurance program because all of the affordable homeownership buyers are most likely to require this insurance.
It must be realized that the private mortgage lenders, not the municipalities or province, will be the final arbiter of who can buy an affordable home. So, any mismatch between the program requirements and mortgage standards will lead to administrative confusion. If the programs are more restrictive, they will arbitrarily rule out some households that could get a mortgage. If less restrictive, they will approve some households that will be denied a mortgage.
Inadequate Data
For its income yardstick, the PPS definition uses percentage of income distribution. This is essentially the same as the median income yardstick as used by all of the IZ programs in the US.
The problem is not with this actual yardstick itself, but with the lack of the essential data needed to use it. That data is not now available in a timely fashion nor in an appropriate format. This effectively renders this aspect of the definition unusable.
To be able to use the definition, the municipalities need household income data that is the following:
- updated at least every year;
- specific to the market conditions in each jurisdiction; and
- broken down by the relevant household sizes (so that the households can be matched to the appropriate unit sizes).
In the US, the above data is supplied by the federal government annually for every jurisdiction across the country, and it is used in all housing and poverty programs, not just IZ programs.
The province should take a similar role. This would be more cost-effective than expecting the municipalities to generate the data, and by establishing consistency also would allow the province to monitor these programs more readily.
Other Inconsistencies
Under the PPS definition, the purchase price of the affordable house cannot result in annual accommodation costs exceeding 30% of the gross annual household income of the homebuyers. But in determining eligibility for a mortgage, the mortgage industry will typically use a gross debt service ratio of 32% for the total housing costs. As already noted, the definition should be consistent with the common mortgage practices, as the mortgage lenders will determine who gets a mortgage, and not the government.
The definition uses two different regional income distributions: the composite household distribution for ownership units and renter-only household distribution for rental. The latter should be dropped as part of a move toward using one yardstick for all housing programs. Again, the latter is unnecessary and only makes for more work and confusion. It presumably was introduced to establish a lower standard for renters because they as a whole have lower incomes than the ownership households. But this can be achieved more simply by lowering the rental threshold while using the very same yardstick.
The definition bases its priced-based ownership standard on 90% of the resale purchase prices. As already argued, the price-based definition should be dropped in favour of a single income-based standard. But, if the price continues to be used, it should be based on some percentage of the average purchase price of new sales because these programs will be dealing solely with new construction.
Summary of Needed Actions
In summary, developing a workable and effective definition of affordable housing will involve at least the following:
1) confirming that affordable housing is meant to be “below-market” affordable housing; or if not, providing a clear alternative clarification of its public purpose.
2) dropping the province-wide numeric standards – including specifically, the 60th percentile.
3) establishing an income-based scale as the single primary yardstick.
4) developing a standard methodology for the municipalities to use in determining the income limits relevant to their market areas.
5) providing household income data that meets the following criteria:
∙ updated regularly every year;
∙ specific to each jurisdiction or market area; and
∙ broken down by the relevant household sizes.
6) establishing standard formulae for converting the income thresholds to the corresponding price and rent thresholds.
The province should be taking the lead in addressing these problems, if it wants to facilitate the widespread adoption of IZ programs, and also to establish common province-wide practices that can be readily monitored.
End Note 1: PPS Definition of Affordable Housing
The 2014 Provincial Policy Statement sets out these definitions that in effect define affordable housing.
Affordable: means
a) in the case of ownership housing, the least expensive of:
1. housing for which the purchase price results in annual accommodation costs
which do not exceed 30 percent of gross annual household income for low and moderate income households; or
2. housing for which the purchase price is at least 10 percent below the average
purchase price of a resale unit in the regional market area;
b) in the case of rental housing, the least expensive of:
1. a unit for which the rent does not exceed 30 percent of gross annual household income for low and moderate income households; or
2. a unit for which the rent is at or below the average market rent of a unit in the
regional market area.
Low and moderate income households: means
a) in the case of ownership housing, households with incomes in the lowest 60 percent of the income distribution for the regional market area; or
b) in the case of rental housing, households with incomes in the lowest 60 percent of the income distribution for renter households for the regional market area.
End Note 2: Summary of US Approach
All of the US jurisdictions take the same approach in defining affordable housing. That approach includes the following key features:
- The definitions are used to target “below-market” housing.
- The definitions are based on a single income-based yardstick – namely, the median household income. It is used universally both for rental and ownership housing, and also for poverty programs generally.
- Using this yardstick, each jurisdiction sets their own income limits that are appropriate to the local market conditions. These thresholds, which can vary widely, are expressed as a percentage of the median income.
Depending upon local market conditions and housing type (i.e., ownership or rental), these thresholds vary from 50% of the median household income up to 150% and even higher in some expensive communities.
- The income limits are converted into the corresponding permitted price and rent thresholds.
In the case of ownership units, the conversions use the standard mortgage loan-to-income ratioes that are based upon the current interest rate and a conservative approach toward the loan period, amortization period, fixed rates and down payment.
The federal government has a central role in this system. It annually provides the median household income for every jurisdiction in the country and broken down by basic household sizes. The latter allows the income of each of these household types to be matched to the rent or price of the units of an appropriate size.
Richard Drdla
12 Jan 2018
Leave a Comment