How high housing prices can choke a city’s economy

By John Lorinc - Published on November 18, 2015
John Lorinc explains why house prices outpacing salaries is an issue everyone should be confronting.

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When I talk about housing issues with the students in my masters of journalism class at Ryerson University, almost all of them say they are resigned to the fact that they will never own a house, or even a condo, in booming Toronto – a city that contains the most sought-after media jobs, but also real estate prices that seem utterly beyond the reach of Millennials on the cusp of uncertain careers.

Pessimism and anxiety among soon-to-be-graduating university students are hardly uncommon. But their foreboding points to a corrosive dynamic embedded in the residential real estate markets in a growing number of prosperous cities.

How are these urban regions supposed to function and generate wealth if the workers driving their economies can’t afford to live in them?

The numbers tell the tale. According to 2013 figures, the average household income in Toronto is about $73,000. But the income required to afford an average house in Toronto, according to an analysis by Workopolis, is $113,000. In effect, when housing prices rise faster than wage hikes and investment returns, the affordability gap widens inexorably. Even if mortgage rates remain low, it is almost impossible for many people to save enough to get into the market.

For other notoriously expensive cities, the figures are even starker. In London, England, for instance, the median house price in 1995 was about 4.4 times higher than median income. By 2012, that ratio had soared to 12 times higher.

If you’re carrying a lot of student or consumer debt, as many of us do, or if you don’t have access to family money, the math in such locales not only doesn’t work; it will never work, barring some kind of apocalyptic correction. (It’s worth noting that while a new Organisation for Economic Co-operation and Development report warned of a sharp downturn in Toronto’s torrid real estate sector, prices have marched steadily up since the mid-1990s, with values showing no response to the 2001 dot-com bust or the 2009 recession.)

Some cities have begun to scrutinize the impact of housing affordability on those professions – a.k.a. “key workers” – considered to be indispensable to urban well-being: teachers, daycare workers, health care workers, etc. These jobs aren’t considered precarious, like other low-wage service sector positions, and they pay enough that those who perform them don’t qualify for housing allowances.       

So what happens when cities become too expensive for the people who do these essential tasks? After all, prosperous urban regions can’t function only on a workforce made up of lawyers, bankers and senior managers.

Earlier this year, VanCity, the B.C. credit union, examined 88 categories of so-called “in-demand” jobs – everything from clerical positions to paramedics – and came up with a sobering conclusion. Within a decade, people employed in 85 of 88 of those job categories won’t be able to afford to live in Greater Vancouver, where home re-sale prices rose 63 per cent between 2001 and 2014, but average hourly wages only went up 2.2 per cent per year (i.e., aggregate growth of over 36 per cent for that period).    

The implications, according to VanCity, are troubling: outward migration as people, especially younger workers, leave the region because they simply can’t afford to live there; pressure on employers to hike wages, thus increasing the cost of doing business in Greater Vancouver; and boosting demand for scarce rental housing. “In ten years,” the report warns, “most individuals may forgo a career opportunity in the region and relocate to a different labour market. If there is an abundance of outward migration, a labour crisis will occur.”

While municipal governments in Greater Toronto have fretted for many years over housing affordability, income segregation, and the deteriorating condition of public housing complexes, officials and decision-makers haven’t paid much attention to the long-term challenges facing those in the key worker sector. 

Developer Mitchell Cohen heads Daniels Corp., which is re-building Toronto’s once-troubled Regent Park neighbourhood. He points out that when the federal government invested in tens of thousands of co-op housing developments in the 1970s and 1980s, employee and community groups were able to build such projects – mostly self-managed mid-rise apartment buildings – for their members, many of whom fell into these job categories.

“It was very, very effective,” says Cohen, an outspoken advocate of housing reform. But federal mortgage subsidies for co-op buildings have been allowed to expire in recent years, which means they are increasingly forced to charge market rents, thereby exacerbating the housing squeeze facing a broad middle segment of the urban labour force.

According to University of Toronto housing expert David Hulchanski, cities like San Francisco, Seattle and London offer subsidies or other supports for key workers who wouldn’t otherwise qualify for traditional social housing allowances. But such measures, he observes, tend to be band-aid solutions, and don’t dent the accelerating housing affordability crisis in desirable metropolitan areas.

Indeed, if policy makers don’t pay close attention to the daunting financial pressures facing key workers, Toronto – and cities like it – could be facing a reversal in the economic vitality that drove up real estate prices in the first instance.

It’s an issue we should be confronting, not ignoring.       

Urban affairs journalist John Lorinc is a senior editor at Spacing Magazine.

Read more:

Are London’s ‘endies’ a warning for Canada’s housing market?

Five ideas for confronting high rent and real estate prices

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