The Federal Housing Plan for the Middle Class Is… Missing. Let's Change That.
It's time to GOST the federal government
Highlights
The federal government has been unable to articulate a clear message on what needs to happen to home prices.
In an earlier piece, “Federal mixed messages on home prices stem from a deeper issue”, we argued that the government does not know what it is trying to accomplish with middle-class housing and lacks clear goals and objectives.
In an effort to be constructive, the MMI team has provided a rough sketch of a housing plan that the federal government can use.
“If you’re so smart, why don’t you do it?”
Saturday’s piece on how the federal government lacks a coherent vision for the future of middle-class housing generated a fair bit of commentary. Some agreed with the piece, some disagreed, and a few people responded, “If you guys are so smart, why don’t you tell the government what their plan should be?”
To that last group, we say, “Challenge accepted.” Here is our first rough sketch of a housing plan.
Setting the ground rules
An exercise like this can be easily misinterpreted, so we need to set a few ground rules to avoid a deluge of angry remarks on social media:
This is a federal government plan. We will abide by the constitutional division of powers, noting that while the federal government cannot dictate provincial or municipal action, it can incentivize it using tools like the Housing Accelerator.
This is a middle-class housing plan. The federal government must also have plans to address homelessness, housing for low-income Canadians, etc. Because of that, you will not find much in here about social housing or the Homelessness Prevention and Housing Benefit or the like. It’s not that we think they are unimportant; they are key components of projects we have worked on, including the National Housing Accord, the Blueprint for More and Better Housing, and the Housing Canada plan. But rather, our focus is on a plan that directly targets the middle class, with the acknowledgement that a functional housing system for low-income Canadians will have a positive indirect effect on the middle class.
This is a first sketch. Detailing an entire federal housing plan is too much to ask for out of a single post. This is meant to be the start of a conversation, not the end. Expect omissions.
This plan will be based on the GOST framework.
The GOST framework requires us to set goals, objectives, strategies, and tactics. So, let’s do that.
Figure 1: GOST Framework Element Definitions
Source: StrategyKiln.
Goals: The Missing Middle North Star
In the GOST framework, goals should be qualitative, broad, and long-range and guide direction. We would be happy to lend the federal government our North Star to be the goal of their housing plan.
Missing Middle Initiative’s North Star: A Canada where every middle-class individual or family, in every city, has a high-quality of life and access to both market-rate rental and market-rate ownership housing options that are affordable, adequate, suitable, resilient, and climate-friendly.
One benefit of adopting this North Star for the federal government is that we have already defined all of the terms (yes, including middle class!), which can save a ton of time when designing the quantitative objectives. You can’t measure what you can’t define, so having solid definitions is vital.
Objectives: Price-to-income and rents-to-income
These can be thought of as key performance indicators for the government’s housing plan. How do we measure our progress against the goal? There are a number of points to consider (as an aside, if you dislike numbered lists, this piece probably isn’t the piece for you):
Factors to take into account when designing middle-class housing objectives
The primary objectives should have a direct link to the terms of the goals. Objectives such as “affordable” and “suitable”. Goals such as “build 500,000 homes each year” should be secondary. They are a means to an end (affordability), not an end in themselves. They can be included to help assess performance, but need to be supported by objectives with more direct links to the goals.
They should be easy to understand. There will be tensions here between nuance and simplicity, so we suggest erring on the side of simplicity.
We should be able to measure them frequently, with monthly data being ideal. We need to know how we are performing, and the federal government should create a publicly available dashboard that updates Canadians on progress.
The term every city requires us to track data at a regional level. Metro-level data is fine.
Our set of objectives must include both rental and ownership.
We must have objectives based on affordability. Affordability is primarily a function of both prices and incomes, but secondary factors such as mortgage rates and taxes play a role. The easy-to-understand restriction kicks in here. As much as we would like to advocate for using WHAM Score, it is not easy to understand. Instead, we would suggest using price-to-income and rent-to-income measures, which are easy to understand, incorporate both wages and prices, can be measured at a metro level, and can be updated monthly.
Our objectives also must consider suitability, which incorporates family size and the number of bedrooms in a home. The government must avoid “unit-is-a-unit” thinking; a studio condo is not equivalent to a 3-bedroom home. Homes with three or more bedrooms matter.
We should not forget the other parts of the goal, including ‘resilient’ and ‘climate-friendly’. These are harder to measure and cannot be updated monthly, so they should not be primary objectives. But they should also not be forgotten about, either, and should ideally be included as secondary objectives.
Taking all of these into account, we propose the following, as the first three objectives, which can be thought of as targets:
A one-bedroom rent-to-weekly individual income ratio of 1: A median-wage full-time worker should be able to rent the average one-bedroom apartment for less than one week’s worth of pre-tax income.
A three-bedroom rent-to-weekly working couple ratio of 1: A median-income working couple should be able to rent the average three-bedroom apartment for less than one week’s worth of combined pre-tax monthly income.
A three-bedroom price-to-annual income ratio of 4: A median-income working couple should be able to find an average three-bedroom home for sale, priced at less than four years’ worth of family pre-tax income.
These objectives (metrics) should be tracked monthly at the metro (CMA) level, using CMA-level data on prices, rents, incomes, and wages to account for regional differences. It will also require the government to collect much better data on home prices and rents. Partnering with groups already collecting this data will help.
The exact ratios used as targets will depend a bit on how prices and incomes are defined. If we use CREA's single-family benchmark rather than a three-bedroom home, and define income in the same manner as in Can Homes Become Affordable Without Prices Going Down?, then a price-income ratio of four is reasonable. Twenty years ago, price-to-income ratios were under four across Canada, except for in the Greater Toronto Area and lower mainland British Columbia, whereas today they are relatively rare. And while income growth is important, relying solely on income growth to reach a price-to-income ratio of four will take decades in some markets; see the end of this piece for details.
With our objectives in place, we can now sketch out our strategies.
Strategies: Solve the cost-of-delivery crisis
More than a few observers have recognized that fixing Canada’s middle-class housing system has an inherent challenge. We need more supply, and that supply will help lower prices. But once prices start to fall, building more supply becomes unprofitable (or, more accurately, profit margins dip to the point at which developers will be unable to access financing), which creates a floor on how low prices can go, and a ceiling to how much new supply will be created.
But that logic assumes that costs are unchanged. Developers will continue to be able to build and access financing if costs fall further and faster than prices. In short, the federal government needs to fix what Brad Jones and Beau Jarvis at Wesgroup have coined the cost-of-delivery crisis.
In the piece Make New Homes Affordable Again we identified the following ten pathways to creating middle-class housing affordability:
Ten Pathways to Making New Housing Affordable Again
Raising middle-class wages.
Keeping mortgage rates lower than they otherwise would be.
Lowering the cost of and allowing for the more efficient use of land.
Lowering the hard (construction) costs of homebuilding.
Lowering the soft costs of homebuilding, such as legal fees.
Lowering transaction costs between buyers and sellers.
Lowering financing costs during construction and pre-construction.
Lowering government taxes and fees.
Allowing projects to get funded at lower profit margins.
Reducing approval costs and timelines.
The federal government should prioritize things it can do independently. Lowering municipal development charges requires negotiations with other orders of government, but the federal government can lower the GST on new ownership housing construction by itself, so it should start there. That said, coordination and negotiation with other orders of government are vital because, without them, the Impossible Trinity of Housing will send land values to the stratosphere. Governments must make tough choices and be honest with themselves when it comes to issues of urban boundary expansion, how much densification they are really willing to allow, and immigration.
But we cannot forget quality in pursuit of quantity. Changing the building code can allow for apartments with better layouts and cross-ventilation. If neighbourhoods are to increase density, we need to think of millions of little issues like garbage storage and parking. While these are well outside of federal jurisdiction, they must be kept in mind if the federal government is expecting and incentivizing the construction of more missing-middle type housing in existing neighbourhoods.
Tactics: These are the policies to lower costs and improve quality
In the GOST Framework, tactics are the shorter-term actions related to your strategies. Or, as we described in Make New Homes Affordable Again, they’re the policies related to each pathway. By working our way down from Goals to Objectives to Strategies to Tactics, we can ensure that our policies are well designed to meet the outcomes we are trying to achieve and are not simply policy-for-policy's sake.
The federal government should first slot in their existing and proposed policies into each of the ten pathways. That would help identify which pathways are well covered, which need additional work, and which have been neglected entirely. I believe they will find they need to go harder on taxes and fees (including more ambitious GST reform), and that they have missed some pathways entirely, like lowering transaction costs.
Until the federal government considers the ten (and potentially additional) affordability pathways, its plans will not be as effective as they could be because it will not be asking the right questions.
A to-do list for the federal government
Here are the five things that the federal government must do immediately to develop an effective and comprehensive middle-class housing plan.
Develop a well-articulated goal. They can borrow ours if they like, or they can develop one of their own.
Identify objectives which act as key performance indicators. Affordability and suitability should be at the forefront, not simply counting housing starts. We would advocate for price-to-income and rent-to-income metrics at the metro (CMA) level.
Monthly data must be collected for the objectives, and a monthly tracking dashboard must be made publicly available.
Strategies must be created to address the cost-of-delivery crisis and enhance the quality of new homes and neighbourhoods (both new and existing).
The government must audit each strategy to identify where tactics (policies) are falling short and strengthen policies in those areas.
We hope the federal government finds this framework useful. Using the same approach, we would encourage provinces and municipalities to develop their own middle-class housing plans.
As promised, price-to-income ratios by market
Taken from Can Homes Become Affordable Without Prices Going Down?
Here is how long it would take every housing market in Canada to achieve a price-to-income ratio of 4, assuming annual nominal wage growth of 3% per year, no change to mortgage rates, and flat nominal home prices.
Figure 2a: Length of time to achieve a price-income ratio of 4, assuming no change in nominal home prices and annual nominal wage growth of 3% per year
Figure 2b: Length of time to achieve a price-income ratio of 4, assuming no change in nominal home prices and annual nominal wage growth of 3% per year
Figure 2c: Length of time to achieve a price-income ratio of 4, assuming no change in nominal home prices and annual nominal wage growth of 3% per year
Figure 2d: A summary of the previous three charts
Download a PDF version of this article below
