Few Problems Are One Dimensional
Posted on July 30, 2020
by Don Shaughnessy
There is quite a concern where I live about “affordable housing.” The issue seems to revolve around how much market rent is now and how new developments of rental housing should be at some lesser amount to deal with affordability. That viewing point ignores the real problems.
The real problems:
Market rent is at least 20% higher than what is deemed affordable. The problems are three:
- It is expensive to build to the current building code and to the many bylaws and regulations imposed by the city. In addition the costs for buidling permits and to service the properties is exceptional and may be well in excess of the actual cost. No one seems to know. While financing is currently inexpensive, there is no reason to believe it will remain so over the earnout period on the project.
So developers behaviour is economically reasonable. Who knew?
- In the previous 20 years or so too few rental properties were built or created becasue the cost structure was unattractive. That together with rent controls and the Landlord Tenant Act made it worth a developer’s trouble to look to projects other than residential rentals. Too few rental properties were built to satisfy future demand.
- Wage rates in the city have not kept pace with the cost of housing. That is just part of the story as about 15% of eraners are self-employed and that is both riskier and often lower paid than employment. In the absence of choice, it is the default. Historically Peterborough was not a business-friendly place. As recently as 2014 it was in the bottom quintile of ranking by the Canadian Federation of Independent Business. In 2018, it had climbed to 63rd out of 125 primarily as the result of policy improvements. 23.3 out of 33.3. Scores in Presence,11.6/33.3 and perspective, 18.5 /33.3 dragged it down. You can find more detail here. CFIB 2018 Entrepreneurial Survey.
If you want people to have enough income to afford market rate housing, you must assume there is a reason for employers to pay the wage rate that makes it possible. Businesses do not pay the people what they are worth, they pay what it is worth to have the job done. If the jobs are low value, then people earn less than they are worth because they have no choice other than going elsewhere. The municipality can make the city more business friendly and expect to see higher value jobs appear. They will not have that happen so long as municipal tax rates are punitive, city staff manage a dense inventory of regulations that add little if any value, and the council and staff are not proactive in attracting businesses.
Businesses have choices.
Transportation of goods is easy enough, and ability to transact business from nearly anywhere means local markets are less important than they once were. So businesses go where they are welcomed and supported.
The old idea of a good job is any job that pays more than you were worth has disappeared in the private sector.
While some established businesses choose to stay, some are investing money to expand elsewhere. When it comes to decide where to consolidate, where will they go? What happens to affordability then?
- Affordability is about cost and also about the ability to pay a fair price.
- Cities can have some effect on the cost to build and the time it takes to get at it.
- Wage rates and salaries require higher value-added jobs to be better
- Cities will discover that businesses know they are being treated poorly and will react. Cities must realize you get more of what you reward and less of what you punish.
It really is that simple.
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates.
Please be in touch if I can help you. firstname.lastname@example.org 705-927-4770
I wonder how companies like Airbnb play into market rents in Peterborough. Here’s an older article that touches on this issue, albeit in the context of American urban centres.