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Municipal policy and program options for affordable home ownership: a City of Toronto case study Urquhart, Heather J. 1993

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MUNICIPAL POLICY AND PROGRAM OPTIONS FORAFFORDABLE HOME OWNERSHIP:A City of Toronto Case StudybyHEATHER JANE URQUHARTB.A., University of Toronto, 1988A THESIS SUBMITTED IN PARTIAL FULFILLMENT OFTHE REQUIREMENTS FOR THE DEGREE OFA MASTER OF ARTS (PLANNING)inTHE FACULTY OF GRADUATE STUDIES,SCHOOL OF COMMUNITY AND REGIONAL PLANNINGWe accept this thesis as conformingthe requir d stanUNIVERSITY OF BRITISH COLUMBIAApril 1993© Heather Jane Urquhart, 1993Date 9 9,-,5Department oThe University of British ColumbiaVancouver, CanadaIn presenting this thesis in partial fulfilment of the requirements for an advanceddegree at the University of British Columbia, I agree that the Library shall make itfreely available for reference and study. I further agree that permission for extensivecopying of this thesis for scholarly purposes may be granted by the head of mydepartment or by his or her representatives. It is understood that copying orpublication of this thesis for financial gain shall not be allowed without my writtenpermission.(Signature)DE-6 (2/88)AbstractAs the level of government closest to people, municipalities are left face-to-face with thefailures of the housing market and the lack or failure of senior-level government housingprograms. The federal government has practically withdrawn from social housing since themid-1980s, and most of its home ownership programs do not address home ownershipaffordability. The Ontario government is the only provincial government to step into thegap, and it is now under increasingly serious financial pressure. Municipalities, therefore,are often looking for ways in which they can help ameliorate their local housing problems,though they have a much more limited tax base upon which to draw. The question thispaper attempts to answer is, "What kinds of home ownership assistance programs couldmunicipalities undertake to meet their housing policy objectives?" The question in thesetight fiscal times also encompasses, "How can municipalities undertake such a program atminimum cost?"This paper reviews, categorizes, and assesses a variety of home ownership assistanceprogram mechanisms from Canada, Britain, the United States, and Australia. It identifiesa set of options and means to implement them that are most likely to effectively meet theneeds of municipalities. It presents, through the City of Toronto case study, a process bywhich municipalities can characterize their housing market for their low-to-moderate incomecitizens. The "affordability gap" -- the gap between housing prices affordable to thosehouseholds and local costs to produce adequate housing for them -- is one useful measureof the depth of the problem, of the potential cost of addressing it, and a rule against whichto measure the effectiveness of various possible assistance measures. One implication of thispaper is that a quite detailed analysis of the local housing market demand and supply isneeded to identify the most effective and lowest-cost home ownership assistance measures.iiTable of ContentsAbstract ^Table of Contents ^  iiiList of TablesACKNOWLEDGEMENTS ^  viIntroduction: Context  1^1.1^Overview of the Paper ^  21.2^The Policy Context  31.3^The Affordability Gap  13Home Ownership, Affordability, and Assistance:A Brief Review of the Canadian Context and Other Jurisdictions ^ 192.1^Home Ownership Access and Affordability in Canada ^ 192.2^Major Home Ownership Programs and Policies  202.3^Major Initiatives in Other Jurisdictions ^  24Vehicles for Home Ownership Assistance ^  303.1^Proponent as Grantor  323.2^Proponent as Lender  323.3^Proponent as Insurer or Guarantor ^  363.4^Proponent as Regulator ^  363.5^Proponent as Trustee - I  383.6^Proponent as Trustee - II  39Mechanisms to Maintain Affordability ^  424.1^Repayment Mechanisms  434.2^Controlled Equity Appreciation Mechanisms (Freehold and Strata TitleStock) ^  464.3^Controlled Equity Appreciation Mechanisms (Land LeaseholdStock)  504.4^Assessment ^  53City of Toronto Case Study  565.1^The Policy Context ^  585.2^The Affordability Gap  625.3^Options for the City of Toronto ^  695.4^Summary and Recommendations  89iiiConclusions6.16.26.36.4Bibliography^  99Options ^  100Who Would Benefit? ^  102Planning Implications  104General Observations  108^  112Appendix AA Sample of Assisted Home Ownership Programs ^ 120ivList of TablesPercent of Renters Who Can Afford to Buy a Home ^ 15Affordable Unit Prices ^  65Residential Sales In the City of Toronto ^  66Development Costs and Affordable Prices  68Changes in the Affordability Gap and NPV of Project Cash FlowRelative to the Gross Debt Service Ratio ^  74Changes in the Affordability Gap and NPV of Project Cash FlowRelative to the Down Payment ^  74Changes in the Affordability Gap and NPV of Project Cash FlowRelative to Maintenance Fees  74Changes in the Affordability Gap and NPV of Project Cash FlowRelative to Sundry City Costs ^  74Changes in the Affordability Gap and NPV of Project Cash FlowRelative to Land and Construction Costs ^  75City of Toronto Tenant Household Disposable Income ^ 76Toronto Social Planning Council Selected Budget Guides  77Zimmerman Model for Homes First Society ^  85Option One: Controlled Equity -- Costs and Beneficiaries ^ 91Households Now Being Served By Cityhome  93Table 1.1Table 5.1Table 5.2Table 5.3Table 5.4Table 5.5Table 5.6Table 5.7Table 5.8Table 5.9Table 5.10Table 5.11Table 5.12Table 5.13ACKNOWLEDGEMENTSThis paper began life as a research project of the housing policy analyst who preceded mein the City of Toronto Housing Department Policy and Research Section. It was aninitiative spawned by the Toronto house price boom of the late 1980s, the City of TorontoOfficial Plan review process (Cityplan '91), and by Ataratiri, a large scale redevelopmentproject which was supposed to generate 7000 new housing units, many of them affordablehousing, on an old industrial site. When I took over this research project in 1991, manyexamples of home ownership assistance programs had already been collected, but the projecthad begun to slide as a priority. The housing and development market had peaked andfallen off, and as I picked up the task, the boom-driven affordable housing exactionsproposed in Cityplan '91 were dismissed as anti-development by the municipal councillorsand private developers, and Ataratiri, may it rest in peace, died an unhappy death. Unlikethe politicians, however, my supervisors were far-sighted enough to realize that the City ofToronto would probably once again have need of advice on how it might help make homeownership in the city an attainable goal for many more moderate and lower-income tenants.I am grateful to many colleagues in the Policy and Research section and the DevelopmentGroup for their interest, comments, and encouragement as I developed this material, andespecially to my supervisors, Lesley Watson and Rob Cressman, for giving me the freedomand authority to pursue many lines of enquiry.I am also grateful to Vykki Silzer, senior planner with Policy and Research in the City ofToronto Planning and Development Department. We worked together on many of theissues involved in this topic, and she is an amazing resource in the field of housing policyplanning. She was also kind enough to review this thesis at the last minute and providemany useful comments.Many heartfelt thanks are due to David Hulchanski, my "informal" thesis supervisor, whovolunteered to supervise me after we had both moved from Vancouver back to Toronto, andwho kept that promise even through the long delay while I struggled to get back on trackand finish this thesis. Thanks also to Alan Artibise, my formal supervisor, who permittedand abided by this arrangement. It made life a whole lot easier.I also want to acknowledge some people who don't often get credit in this process -- myfellow students in 1988-1990. Many of us shared quite a common vision of what we wantedto accomplish in Planning, and we learned as much from each other as through the formalwork of the program. The memories of this special group kept fresh in me the reasons whyI wanted to complete this paper and degree.viChapter OneIntroduction: ContextThe problem of access to affordable housing, especially affordable home ownership, issignificant for, but not limited to the City of Toronto. Since the start of the federalgovernment's withdrawal from housing supply programs in the mid-1980s, the problem ofaffordable housing has been pushed down to the provincial and municipal levels ofgovernment. Outside Ontario, most municipalities do not have unilateral provincial housingsupply programs to help develop affordable housing.As the review of Canadian home ownership assistance initiatives in Chapter Two indicates,the federal government has not addressed affordability in its programs. While it hasimproved access for some, its policies have not addressed the distribution of access acrossthe income spectrum. This issue may have significant implications for municipalities.The purpose of this paper is to assess possible municipally-initiated policy and programoptions for creating affordable home ownership opportunities in Canada, using the City ofToronto as a case study to examine what could be done and who would benefit. This paperfocuses on municipal government options which directly address the problems of becominga home owner.Specifically, the paper seeks to answer the following questions:What policy objectives might drive home ownership assistance programs?What kinds of home ownership assistance programs have been used and whatobjectives have they met; who have they served?1What are the housing policy objectives in the City of Toronto context, in terms of thepolitical arena, and in terms of the author's assessment of the housing situation?What is the status of home ownership "affordability" in the City of Toronto; who canaccess home ownership in Toronto?Which kinds of municipally-initiated home ownership assistance programs might meetpolicy objectives in the City of Toronto context, and more generally in Canada?How can a municipality get "the biggest bang for the public buck" in such programs?How effective would such programs be, i.e., how much would it cost, and who wouldbenefit?1.1^Overview of the PaperThis chapter provides an initial policy context. It addresses the question of why governmentsin general and municipalities in particular might be concerned about assuring access to homeownership, and defines the concept of "the affordability gap." The affordability gap is ameasure of the magnitude of the home ownership affordability problem, and of the costbarriers to be overcome to solve it.Chapter Two briefly reviews the history in Canada of home ownership and assistanceprograms, and comments on how these programs have affected home ownershipaffordability. It also reviews home ownership assistance in Britain, the United States, andAustralia, and comments on how appropriate these approaches are in a municipal context.Chapter Three examines a variety of vehicles for home ownership assistance. It categorizeshome ownership assistance program options according to the role of the proponent, how theassistance is directed to the beneficiary, and what the expected program outcome is.2Chapter Four deals in more depth with the expected program outcome. A starting premiseof this paper is that one common expected program outcome, that households are given ano-strings-attached "hand up" into the home ownership market, is not by itself an effectiveor responsible use of tax money. Chapter Four, therefore, focuses on programs whichrequire some repayment of the assistance, and programs which restrict equity appreciation.These types of programs permit the benefits to apply not only to the first, but also tosubsequent home owners. The chapter examines the issue of the legal strength in Ontarioand possibly elsewhere in Canada of some of the fiscal and legal mechanisms for resalecontrols which have been used in other jurisdictions.Chapter Five is a case study of the City of Toronto and the policy options which address itshousing objectives and housing market conditions. The discussion presents options in termsof the City's policy goals, and in terms of the costs to the City relative to the public benefitswhich may be obtained.Chapter Six presents conclusions about municipal affordable home ownership policy andprogram options, their costs and benefits, and their feasibility and desirability.1.2^The Policy ContextWhy might governments in general and municipalities in particular be concerned aboutcreating policies and programs aimed at improving access to home ownership?1.2.1 Practical Benefits. Home ownership is a cherished goal for Canadian households.There are good practical reasons for this attachment. Ownership provides more control thanrenting over the quality of one's living environment and over housing expenses. Owners cancontrol costs by choosing whether or not to do (or when to do) certain kinds of maintenance,by their behaviour (e.g., energy-saving behaviour), and/or by using their own labour. Homeownership provides greater security of tenure than renting. In some places, most housing,particularly housing for families with children, may only be sufficiently available throughhome ownership.Home ownership usually also has significant financial benefits over renting. Mortgagepayments represent a kind of forced savings plan that provides protection duringunemployment and retirement when the home is finally mortgage-free. Wealth accumulationthrough both earned equity and home value appreciation is the single greatest source ofwealth in Canada. Variations across the provinces in the net worth of householdscorrespond closely to variations in home ownership rates and house values (Steele, in Carter,1990:15).If rents and/or inflation are particularly low, some people question whether or not a homeowner is better off than a renter who invests the housing cost savings. However, a recentstudy by Clayton Research Associates Ltd. (1992) found that with one exception, homeowners in eleven Canadian urban centres, buying in the last thirty years, (initial purchaseyears were fixed at 1961, 1971, 1981, and 1983), were financially better off in 1991 thanrenters who invested the down payment and housing cost savings in GIC's or the stockmarket. The exception was for households that bought in 1981, when mortgage interest rateswere about 18%. In the future, Clayton found that all these households will still besignificantly better off than renters, even in a low-inflation environment, and even if houseprices remain stable. The Clayton study may not be the definitive answer to the questionof whether a household is financially better off owning or renting and investing, but for ahousehold not accustomed to investing, ownership clearly meets many needs, as well as beingan investment vehicle.4Marion Steele points out (in Carter, 1990:12) that low income renter households areparticularly disadvantaged in many areas in which home ownership is most beneficial:1. They are more likely to be poor and in need of financial assistance when older;2. They have little control over many more aspects of their lives;3. They are much more subject to forced moves than other households; and4. They bear higher search costs in scarce rental housing markets.She argues that home ownership assistance programs are therefore appropriate for low-income households, though most Canadian federal government home ownership programshave been aimed at higher income households.Richard Harris, in The Family Home in Working Class Life (1989) supports that argument.He hypothesizes that the opportunity to obtain income through work in the home, (e.g.,daycare, piecework), and to invest labour - "sweat equity" - in the home, has improvedworkers' economic position, and "has probably helped to reduce the inequalities of the classstructure" (p.i).1.2.2 Perceived Benefits of Home Ownership. There are other, more intangible reasons whyhome ownership is such an important goal for many Canadians. In Chapter Four of Doucetand Weaver's book Housing the North American City, (1991), titled "Launching the Will toPossess," the authors explore especially the perceived benefits, socially and individually, ofhome ownership. They try to answer the question of why home ownership is so much moreimportant in Canada, and the United States, than in Europe.Doucet and Weaver found that the answer has its roots in the legacy of feudalism and socialreform. A lot of the migration to North America occurred in a period of, and because of,protests against the concentration of land ownership in Europe and attacks on tenancy and5existing social power structures. Land and home ownership became associated with conceptsof freedom that were advanced in the 1800s. The emerging middle class "had come to seethe freehold plot as part of the North American promise of bounty and liberty" (p. 172).The right to vote was tied to land ownership.Doucet and Weaver found that there was a strong association in the 1800s between reform,the labour movement, and the goal of home ownership. Partly, home ownership for thecommon people resulted in a wider distribution of the right to vote, and therefore a greaterdemocratization of society. It also seemed to have to do with the opportunity in homeownership to return in some measure to "craft-based independence." While increasinglymechanized work places took away workers' sense of individual accomplishment, the chanceto use their own skills to improve their home returned it.Land ownership also bestowed social stature. Social psychologists Robert and Helen Lynd(1956), cited by Doucet and Weaver (1991:181), found that "home ownership is a mark ofindependence, of respectability, of belonging." Another (Constance Perin, n.d.) was morespecific; she described housing tenure as one of the social signs used in categorizing andevaluating people, and home ownership as "a step on the ladder of life" (Doucet andWeaver, 1991:182). Steele referred to arguments that widespread home ownership is "thefoundation for a stable democracy," based on the "belief that the ownership and care ofproperty increases the responsibility and independence of the citizenry, and increases thestake of citizens in their community" (in Carter, 1990:25).These associations mean that tenants are viewed as less-involved citizens, even second-classcitizens. This is evident in the practice of most municipalities, until recently, of informingproperty owners, but not tenants, of zoning change applications which affect their homes.6Municipalities also give property owners greater power by allowing them to vote whereverthey have property, regardless of where they live.When housing policy makers dismiss the idea of home ownership for lower-incomehouseholds, regardless of their reasons, they also effectively dismiss the ability of thesehouseholds to attain the social belonging and stature which is associated in our society withhome ownership. With minor exceptions, it has been federal government policy for manyyears to subsidize only rental or co-op housing for lower-income households. If it costs nomore to subsidize home ownership, these households' tenure choices are circumscribed notnecessarily by their income or by government resources, but by public policy and attitudes.1.2.3 Why do governments concern themselves with home ownership assistance? Whether ornot home ownership is "the foundation for a stable democracy," Canadian (and UnitedStates') governments at all levels have concerned themselves with in some way assistingownership housing. The history and form of this response is briefly described in ChapterTwo. An early and pragmatic reason for governments to support home ownership is itscontribution to the economy: new residential construction has consistently accounted for anaverage of 50-65% of construction activity in Canada (Doucet and Weaver, 1991:201). Theconstruction industry is also a particularly important segment of the economy because it hasa large multiplier effect on the local economy. The construction industry has been a stronglobbyist in the past for government subsidies to ownership housing. New rental housingproduces the same economic benefit, however, and it has not received nearly the samesupport relative to the demand for it.The strength and depth of the attachment in Canada and the U.S. to the goal of homeownership leads one to suspect that governments are responding strongly to the social7expectation of ownership housing. Home ownership assistance programs are always popular,if not expected. Canadians seem to expect as a right that capital gains on the sale ofprincipal residences, and the imputed rent benefits of home ownership, will not be taxed,though such investment gains would be taxed in any other context. In the United States, thetax deductibility of mortgage interest costs is an entrenched benefit now, though policymakers have discovered to their rue that it costs billions of dollars in foregone tax revenue.Though there are good reasons for an individual to prefer home ownership over renting,there appears to be no strong proof of over-arching social benefits justifying governmentassistance for home ownership rather than for rental housing. Thus, government supportfor home ownership may be seen as at least partially arising from strong political self-interest. Home ownership supports generally are considered vote-getters, and governmentsmay lose votes if they do nothing when home ownership becomes less accessible, such asduring periods of high interest rates. Self-interest may also be evident in the fact that homeownership assistance has been targeted mostly to the middle class, even though, as discussedabove, lower income households are particularly disadvantaged as tenants and would benefitmuch more in tangible and intangible ways from ownership assistance. It is commonlythought that a smaller percentage of tenants vote than do home owners.1.2.4 Why should municipalities get involved? There may be other, less self-interestedreasons why a municipal politician in particular should become concerned when there is alarge social and economic gap between renters and owners, such that renters are generallyunable to move into home ownership. Nevertheless, these reasons have much to do withthe social expectation that home ownership should be accessible to most people.Firstly, if the renters having home ownership accessibility problems are people who havegrown up with the expectation that they will be able to own their own home one day,8(usually educated, middle-income households), these people may seek jobs and homes inother centres where home ownership is feasible. Industry may follow these valuable workers.The urban centre thus risks losing people, and eventually jobs and tax base to nearbycommunities with lower-cost housing. The municipality may have to bear many of thefinancial and environmental costs of the extensive transportation systems required forcommuters. The increased property tax burden on the commercial/industrial sectors wouldonly hasten the exodus to communities with lower-cost housing.Secondly, if rental housing becomes a ghetto for low-income households, the private sectorwill be less and less inclined to create new rental housing. On average, the existing rentalhousing stock will grow older and cheaper, making new rental housing even less competitive.In this process, some types of the existing rental stock will become more attractive forgentrification. The remaining rental stock will become depleted, consequently moreexpensive, and often inadequate for the needs of those left in it. The disadvantagesexperienced by renters will be greatly exacerbated. If there are options elsewhere, themunicipality risks losing its lower-income workers as well.Housing preferences and life-cycles of course play a role in the movement of families outof the centre to the suburbs. It is often asserted, for instance, that it is preferable to raisechildren in the suburbs. This can be a self-fulfilling prophecy, however. If planners anddevelopers alike assume this preference, they are unlikely to create opportunities for, ordevelop, new affordable ownership homes and neighbourhood facilities for families in theurban centre. The resultant segregation of families from other types of households wouldmean that neither the suburbs nor the urban centres would be well-designed for people whowish to complete their life-cycles in the same general community. An element of communitycommitment and community-building would be lost in the process.9It is not socially or ecologically affordable to allow unlimited suburban expansion toaccommodate a preference for raising families in the suburbs. Low density suburbs makepeople car-dependent and thus contribute greatly to traffic congestion and air pollution.Huge amounts of land are devoted in roads and parking lots to servicing the needs of a car-dependent population. Good farm land and wilderness habitat disappear under new housingdevelopments and shopping centres. It is also likely to be more expensive to providemunicipal services to a low-density population. An exodus of middle- and low-incomefamilies to the suburbs also would tend to polarize the urban centre population toconcentrations of rich and poor, which would set up social conflicts over issues such asservice provision, conflicts the poor rarely win.It seems that, without a smooth continuum of affordable, adequate housing options thatmeet the needs and expectations of a variety of workers, the urban centre could become thehole in a regional doughnut, with accompanying social, economic and ecological penalties.The severity of the penalties would depend on many factors, including populationdemographic cycles caused by events such as the baby boom and immigration patterns, andeconomic cycles.Theoretically, declining inner cities should be ripe for redevelopment and a reversal of thepopulation and job exodus when land prices fall far enough. Before that comes to pass,however, a huge amount of capital (buildings, infrastructure) may have been wasted, and thesocial impacts may be extremely costly. The interval before redevelopment could be severalgenerations. Such neighbourhoods develop a bad reputation, then social stigma compoundsthe original problem. It appears that lack of housing options has been a factor in thedecline of some American urban centres.10In Canada, the situation of the City of Toronto is a good case to examine. The City ofToronto is the urban centre of Metro Toronto. City of Toronto demographics show someof the characteristics of the beginning of urban core decline: a decreasing residentialpopulation while the population elsewhere in the region expands; and a predominance ofsingle person and lower-income households while suburban family-oriented developmentexpands, indicating that middle-class family households are not inclined to live in the centre.The City of Toronto actively encourages increased housing in the downtown, and that hasbegun to reverse the earlier decline in the city's population. The 1991 census, however,showed another increase in the proportion of tenant households in Toronto, which does notindicate an improved mix of housing types and income groups.Approximately sixty-three percent of City of Toronto residents are renters (Statistics Canada,1992), and average tenant household income in the Toronto Census Metropolitan Area(CMA) is just over half of that of home owners (City of Toronto Planning and DevelopmentDepartment, 1990). In the first half of 1990, only 7.2% of Metro Toronto tenants couldafford to purchase a starter home in the Metro area, according to Canada Mortgage andHousing Corporation's (CMHC) "home ownership affordability index.'" By the last half of1992, this had improved considerably due to lower interest rates and home prices, but stillonly 27% of renters could afford a starter home (CMHC, various dates). Of the 26 citiesCMHC surveys for this indicator, Metro Toronto remains among the three or four with thelowest percentage of tenants who can afford to own a home.There are many municipalities within commuting distance of the City of Toronto in whichthe cost of ownership housing, both in average price and in terms of the dollar cost perThe CMHC affordability index is an estimate of how many tenant households with earned income couldafford to buy their own home in a given market, given tenant incomes, current interest rates and a 10% downpayment, and the average price of a "starter home" in that market.11square foot, is significantly lower. The commute from lower-cost centres to the City isbecoming longer, and the city is plagued by a high level of car-induced pollution. Theproportion of family households is much lower in the City of Toronto than in thesesurrounding areas, signifying a potential loss of young professionals and middle managers tojobs closer to home.This paper focuses on what municipalities can do to assist affordable home ownershipbecause:1. The federal government recently has withdrawn money and programs, at the sametime that provincial governments are most strapped by high costs and debt.2. Many of the possible consequences of a lack of affordable home ownershipopportunities would strongly affect local quality of life and the ability of themunicipality to fulfil its responsibilities.3. Though housing market demand may be regional, in some cases even global innature, housing market supply conditions, e.g., land costs, labour and materials costs,development fees, tend to be quite local in many aspects. Population demographicsand income distribution patterns may also vary quite locally. The appropriate levelfor analysis and program development is therefore local.4. Part of the object of the exercise is to counter the pattern of households moving ever-outward in search of lower-cost family housing, creating urban sprawl. Thereforeagain, the level of analysis of supply and income conditions should be local.Municipalities have a strong social and economic self-interest in ensuring that a range ofadequate, affordable housing choices are available locally.121.3 The Affordability GapIn 1990, CMHC introduced an index to measure home ownership affordability for first timehome buyers in Census Metropolitan Areas, noting that home ownership affordability hadbecome a major issue in Canada (CMHC Market Analysis Centre, August 1990). Ironically,CMHC notes that it is periods of economic expansion, with rising prices and interest rates,that adversely affect home ownership opportunities. This happens because demand forhousing increases rapidly, but the supply of housing cannot adjust as quickly, so house pricesare bid up. Household income does not grow as fast as house prices, and interest rateincreases compound the problem.An examination of this index for twenty-six metropolitan areas across Canada, (Table 1.1),shows that this indicator varies greatly from city to city, though no particular pattern isimmediately obvious. Over the period for which it has been available, 1989-1992, theindicator shows significant improvement in almost all surveyed cities in the number ofrenters who can afford to buy a home. For some cities, this number is very low.The CMHC indicator is useful for market analysts who wish to examine the state of thispotential market segment, to help answer questions like, "how significant is the first timehome buyers' market in this city?" It also allows comparison of the situation acrossCanadian cities. However, it does not indicate the extent of a problem - it is not measurableagainst some established norm or condition, e.g., the proportion of renters who ought to beable to afford to buy a home. In fact, it assumes only certain households ought to beconsidered potential home buyers: it only includes income-earning tenant households. It alsodoes not indicate "how far away" are renters from being able to afford to buy a home.This latter question, "how far away," is an important one for an agency contemplating anaffordable home ownership program, because the answer will indicate which approaches are1 3likely to be effective, and how much they are likely to cost. The analysis done for the Cityof Toronto case study includes an attempt to identify the gap in dollars between what renterscan afford to spend on ownership housing, and what it would cost to deliver modest housingto them, in the Toronto market.This paper refers to this gap as "the affordability gap." The affordability gap is calculatedby subtracting from estimated development costs per unit the price considered affordablefor a given household income level, for a given set of assumptions regarding mortgageinterest rate, down payment, amortization period, property taxes, and maintenance fees(where applicable). This might be called a cost-based approach. Other analyses might havebeen used.Another approach was used in a study completed for the City of Toronto (Malone GivenParsons Ltd., 1991). It examined the impact on private development economics of requiringdevelopers to build and reserve a certain portion of their residential units for sale ataffordable prices to first-time, moderate income households. For a given proportion of"inclusionary units" (which would have to be priced below-market) in an otherwise market-oriented project, the consultant calculated the decrease in the profit as a percent of equityfor the overall development project. This approach would be useful for programs in whicha market-oriented component is involved, as in inclusionary zoning, or in market - below-market cross-subsidized development projects. This approach also is more appropriate toanalysis of individual development projects, rather than to a general analysis of affordability.14Table 1.1Per Cent of Renters Who Can Afford to Buy a HomeCensus Metropolitan Areas Jan-Dec.1989Jan-June1990July-Dec1990Jan-June1991July-Dec1991Jan-June1992July-Dec1992Victoria 12.2 7.8 8.6 9.0 11.0 9.2 7.5Vancouver 13.3 9.0 12.4 17.9 22.0 20.7 20.5Edmonton 36.0 26.1 28.4 35.8 39.6 39.3 40.1Calgary 27.9 20.1 24.7 30.2 34.3 33.8 34.4Saskatoon 36.1 32.8 34.9 42.9 48.5 48.5 49.3Regina 39.4 37.0 41.2 44.1 46.4 45.5 43.7Winnipeg 37.2 33.0 34.8 41.4 43.6 45.3 44.2Thunder Bay 38.5 35.2 40.4 44.0 49.8 49.5 49.8Sudbury 26.9 23.4 26.0 27.5 34.1 35.1 36.3Windsor 45.4 33.9 37.0 47.0 50.1 49.7 49.3London 19.7 14.4 15.3 26.5 30.7 36.7 38.6Kitchener 13.4 7.0 9.7 20.3 25.8 33.5 33.7St. Catharines-Niagara 27.1 16.4 18.2 28.4 33.7 36.1. 35.8Hamilton 15.4 9.8 12.3 19.6 27.4 28.9 29.2Toronto 7.2 10.7 17.7 24.4 27.0 28.0Oshawa 10.5 6.8 10.3 24.1 31.2 34.6 33.9Ottawa 25.2 10.6 12.0 27.8 31.5 33.1 32.2Hull 31.6 43.8 45.5 38.8 41.0 41.0 40.5Montreal 22.1 20.8 22.1 31.7 33.6 35.4 34.5Trois-Rivieres 31.0 29.3 29.9 36.5 39.0 41.2 39.0Sherbrooke 31.4 23.6 28.0 33.0 33.2 36.4 34.8Quebec City 29.3 29.2 29.5 42.3 43.6 43.9 40.8Chicoutimi-Jonquiere 39.7 36.9 40.8 48.0 50.5 50.7 49.9Saint John 32.7 30.3 32.5 41.6 44.3 42.7 44.1Halifax 35.7 26.2 29.8 37.0 42.9 44.6 41.1St. John's 45.5 41.9 40.4 44.4 56.4 53.4 52.2Charlottetown n/a 41.4 41.8 41.5 39.7 39.9 40.0Source: CMHC Home Ownership Affordability Indicator, inCanadian Housing MarketsOttawa: various datesThis paper focuses on the cost of home ownership, accepting as given the existing incomelevels for tenant households. An alternative approach could have been to focus on thedistribution of income and wealth, and to propose solutions to the distribution gap betweenhome owners and tenants. The distribution of income and wealth has significant effectsupon the housing market, and some possible options for ensuring that ownership housingis accessible to most or all households could involve radical restructuring of both the incomedistribution and the housing market. For instance, a wage and salary structure which tendsto keep income at the top end of the scale to only three or four times that at the bottomend of the scale would reduce the ability of the wealthy to severely outbid lower incomehouseholds for land and other capital. This kind of option is beyond the capacity ofmunicipalities to implement. Some of the options I will present here also are difficult formunicipalities to implement, but they likely are more palatable to Canadian politicians andso are more achievable.The cost-based approach (the affordability gap measure) is used here because it indicatesthe public investment which may be required to bridge the gap between an affordable priceand cost to produce housing. It focuses attention on costs, and consequently on ways inwhich costs might be reduced. This approach has advantages and disadvantages.Most housing development costs vary greatly across Canada. Property taxes, for instance,will vary by municipality, as will development charges for new construction. Developmentcosts will also depend on local market land and labour costs, as well as the building form,and targeted market for the project. The assumptions regarding what is "affordable" alsowill vary by locality and other factors. For instance, the City of Toronto assumes thathousing costs should not exceed thirty percent of household income. In other areas,however, ,lower incomes may indicate that a lower Gross Debt Service (GDS) ratio is16appropriate. Alternatively, if the costs of other household essentials like food andtransportation are very low, a higher GDS ratio might be considered acceptable.Given that the "affordability gap" incorporates so many non-standard variables, and ismeasured in dollars, this approach does not provide a comparable measure of homeownership affordability across Canada. It does, however, provide a model for analysinghome ownership affordability in other markets.Home ownership assistance programs have been promoted for many different reasons.Suggested objectives or benefits are scattered throughout the literature and mainstreampress. They are not mutually exclusive, but they fall into the following main categories:1. to help individual households become home owners because ownership is considereda better form of housing tenure for society and the individual;2. to help households move out of the rental market thereby freeing up rental units forother households;3. to stimulate economic activity in an important sector of the economy;4. to give people more choice in housing;5. to provide a form of housing which gives people security of tenure and more controlover their home environment;6. to give more people the opportunity to build equity in, rather than simply spendincome on, their housing.In recent years, planners and environmentalists have begun to add the arguments outlinedearlier: that municipalities must contain a wide range of housing types and prices, or theywill suffer ecological and economic consequences.The affordability gap measurement focuses attention during the development of anassistance program not just on costs, but also on who is going to be served by the program.17The measurement requires definition of the income level and housing needs of thehouseholds the programmers expect to involve. It provides a model for analysing theinteraction of cost and income factors in the local situation. As an aside that will not beaddressed in this paper, it also raises questions like "Why are the costs associated with abasic necessity of life in Canada out of the reach of so many people in Canada?"18Chapter TwoHome Ownership, Affordability, and Assistance:A Brief Review of the Canadian Context and Other JurisdictionsThis Chapter provides a short overview of the history of home ownership access andaffordability in Canada. It reviews the major home ownership assistance goals, programs,and policies, and their effects on affordability. This history reveals a strong emphasis inpublic policy on market housing production in Canada, and little attention to the effects ofmarket forces on distribution.This paper cannot compare Canadian home ownership policies and programs to policies inits closest comparator markets, the United States, Britain, and Australia, without an in-depthanalysis of those markets. This paper does, however, take a brief look at some of the recentmajor home ownership assistance initiatives in these three markets. They inspire somebroader thinking about how to provide housing assistance, though not all examples are usefulin the municipal or Canadian context.2.1 Home Ownership Access and Affordability in CanadaThe majority of Canadian households have always owned their homes, with home ownershipreaching a high of 66% in the early 1920s and 1960s (Hulchanski, 1988:7). Today, 62.8%of households across the country are home owners (Statistics Canada, 1992). As well, theaverage proportion of income paid by households for their housing has remained relativelyconstant since the 1940s. It was approximately 20% for all households (marginally higherfor renters, lower for owners) in a 1938-9 and a 1941 survey. In 1982, home owners with19mortgages spent 24% of their income on housing, those with no mortgage spent 17%, andrenters spent 23% (Streich, in Miron, n.d.:23).The ability of renters to become home owners, however, has changed significantly since the1970s. Patricia Streich says that "Until the 1970s, the major constraint on entry to homeownership was perceived to be family savings for the initial down payment for the first housepurchase" (Streich, in Miron, n.d.:21). In the 1970s, however, changes in governmentregulation of the mortgage market, (described below, under programs and policies), andinstability in the world economy drove up inflation, interest rates, and house prices. As aresult, whereas over half of renters in prime home-buying-years could afford to buy anaverage-priced house in 1971, only 7% could afford to do so in 1981 (Streich, in Miron,n.d.:23). That year was particularly bad for new home owners due to 18% interest rates.The situation has generally improved since, but to nowhere near the earlier levels.2.2^Major Home Ownership Programs and PoliciesThe two most significant types of home ownership programs and policies in Canada are:1. initiatives to make the housing supply market, including construction but mostespecially financing, more efficient and accessible;2. the exemption of home ownership from investment taxes introduced in 1972.Direct subsidies to home owners have been used on an occasional, temporary basis, largelyas a means of boosting the construction industry and the economy generally. Programs havefocused on issues of housing supply, not housing distribution. Some minor exceptions to thatrule are found in some of the provincial government programs.The federal government initially entered the housing scene to provide returning soldiers ofWorld War I with homes to return to, by providing low-cost direct loans. It has continuedto offer or manage a very few direct loans for particular purposes ever since, but soon20shifted most of its focus to regulating and insuring the residential mortgage market. Asinsurer since 1954, the government has been able to reduce the risk to financial institutionsof lending to households, and has thereby increased the availability of mortgage funds. Asinsurer, the government has established the terms by which lenders can lend, including:who may lend (chartered banks were permitted in 1954);the interest rates at which they can lend (these were fixed until 1969);the minimum amortization period (the shift from a minimum of 25 years to 5 yearsshifted the inflation risk from the lender to the borrower);the proportion of purchase price on which the lender could loan (the most recentinnovation was to permit 95% loans with National Housing Act (NHA) insurance);the Gross Debt Service ratio at which NHA insurance will insure, and how much ofthe household income can be considered in that calculation (in the 1950s the GDSwas 25%, and the wife's income could not be considered; now it is 32%, includingboth spouses' incomes).A lot of these changes, and some others, were made incrementally over the years, thoughthe policy remained strongly fixed on the notion of improving the functioning of the market.By making mortgage lending a more competitive investment, the NHA increased the flowof funds to mortgage lending. The price of access to mortgage funds, however, was higherand much less stable interest rates, beginning in the 1970s. From that point, it wasincreasingly the case that not only were both spouses' incomes considered, but they also wererequired to carry the mortgage.The federal government has also attempted to improve the efficiency of the housing supplymarket through research into better building techniques and standards. One of the largesthousing problems after World War II was the dilapidated state of much of the housing stock.CMHC's research and building code development has vastly improved this situation, though21at the price of increased housing costs. Again, the supply-oriented approach, in the absenceof consideration of affordability or distributive issues, has made housing less affordable.The largest public dollar benefit provided to home owners, however, may be the exemptionof the sale of a home from capital gains taxes. Capital gains taxes on a variety of capitalassets were introduced in 1972; principal residences were specifically exempted. In 1979, thebenefit was estimated to be worth 3 billion, or about 46% of total federal expenditures onhousing. When the non-taxation of imputed rent is added, these two tax expendituresamounted to 78% of total 1979 federal expenditures on housing (Dowler, 1983:58).However the value of these is calculated, or even whether or not they are considered taxexpenditures (both points are disputed: Dowler, 1983:56-59), they clearly provide a strongincentive to invest in home ownership rather than to rent or invest in some other capitalassets. The tax bias tends to increase the demand for home ownership and the downpayment "move-up" buyers can afford, and therefore will drive up the price in a marketwhere the supply of housing is constrained (for instance by lack of developable land). Thisfederal government policy thus makes home ownership less affordable for those wishing toenter an under-supplied market like that of Toronto.The Registered Home Ownership Savings Program (RHOSP) was another significant federaleffort to assist home ownership. This was another tax expenditure program: a tax breakrather than a direct outlay of funds. It operated between 1974 and 1985, and allowedprospective home owners to save for a down payment in a tax-free savings plan (describedin more detail in Appendix A, #2 2). It cost the federal government about $100 million peryear in foregone revenues (Dowler, 1983:56-75).Dowler points out that this program was aimed at "young, first time homeowners withmodest incomes" and was intended to increase the supply of housing and to defer purchasesuntil inflationary pressures on the market had eased. In fact, high inflation rates at the timereduced savings',value and encouraged people to buy sooner. As well, loopholes in theprogram made it a good retirement savings plan for older, well-off households, until thesewere closed in 1977-78. Low income households were unable to use the program becausethey had no income left to save after living expenses. Middle income households were theprincipal users, as intended, but the program was not as useful as expected due to inflation.It seems doubtful the program contributed much if anything to making home ownershipmore affordable.In 1973, CMHC introduced the Assisted Home Ownership Plan (AHOP), which loweredinterest rates to 8% for the first five years of a mortgage. This was the first program toreach households below the middle income range. One half of AHOP borrowers were inthe lower third income group in 1975 (Steele, in Carter, 1990:20). The program counted onrising income which would enable purchasers to bear an increasing payment schedule, buthigh inflation rates, especially in the cost of energy for home heating, defeated thatexpectation.A grant was introduced in 1975 to ensure that purchasers under the program were payingno more than 30% of their income on housing. Despite the grant, there were high default2 Appendix A is a description of a sample of home ownership assistance programs, mostlyin Canada and the United States. The programs are listed by geographical area, and within thatby oldest first. The appendix is intended to be a sampler, not a comprehensive compendium.23rates on AHOP homes, and the program was terminated in 1978. There were high defaultrates generally at the time, due to the volatile economy, and the problem was greatest inOntario, but the federal government has never since seen fit to introduce a home ownershipassistance program for lower-income households.During the 1970s and early 80s, the federal government did introduce a smattering of grantprograms to assist with down payments, renovations, and energy conservation measures,whose purpose was to kick-start the construction industry in economic down-turns or helpexisting home owners keep their homes in tough times. None, however, made homeownership more accessible: home ownership rates dropped from 66% in the early 1960s to60% in the early 1970s, and have remained between 60 and 63% since (Hulchanski, 1988:7).Some of the provinces, however, have had home ownership assistance programs aimed atlower-income households, especially in rural areas. They have been direct lenders of lastresort, provided property tax rebates geared to income, and provided direct grants andsubsidies for down payments (Canadian Council on Social Development, 1980). Forexample, Ontario's Home Ownership Savings Plan offers a special concession to singleparents. New Brunswick offers a 5% down payment and mortgage assistance program whichrecognizes sweat equity, and is limited to households with an income between $15,000 and$30,000. In its Home Ownership Made Easy (HOME) program (1967-78), Ontario offeredat-cost land leases on government-owned land for affordable privately-developed homes,later selling the land at below-market value, for households below a specified income level.These and other programs are described in Appendix A (#7 - #17). Some of theseexamples illustrate elements possible in a municipal home ownership program. Theseelements will be discussed later in the paper.2.3^Major Initiatives in Other Jurisdictions2.3.1 Britain. Britain has sold off over 1.5 million units of public housing at discountedprices to sitting tenants under the 1980 Thatcher "Right to Buy" legislation. The onlylimitation on resale of the units was that some of the discount had to be repaid if the unitwas resold before (initially) five years, later three years. Research on 200 tenants who havesince resold their units indicates that they made significant gains on the sale, and that theytraded up in the housing market. The rental housing that sold tended to be the best of thepublic housing stock (Williams and Twine, 1993). The consequences of this transfer ofpublic capital to private hands are still being felt and debated in Britain. The literature onhousing reflects this event: I found four or five new books on the shelves in a brief search,all focused on home ownership, considering and reconsidering its merits, and those of theConservative government sell-off (e.g., Doling and Stafford, 1989; Karn, Kemeny andWilliams, 1986; Drabble, 1990).This home ownership initiative is not an appropriate example for the Canadian or Torontocontext, however. The relationship between the public rental sector and the ownershipsector and the characteristics of the people served by these sectors are much different in thetwo countries. Whereas Britain had a very large public rental stock that served a widespectrum of income groups, Canada has a very small public rental sector, and it isincreasingly targeted to the lowest income groups. What to do with the existing stock is notan issue here, as it was in Britain. The issue here is how to provide more choice, securityof tenure, at least cost, primarily with new stock.2.3.2 United States. Massachusetts researcher David Angel (in Housing Studies, 1992:243-254) describes housing affordability problems in the United States, especially in the NorthEast and West, that are very similar to those in many major centres in Canada. Ownershipand rental households had become more polarized in the 1970s, with lower-incomehouseholds becoming more concentrated in rental housing. In the Boston area during the251980s, average or median house price and rent increases outstripped increases in averageincome, and the imbalance remained even after the housing boom stabilized. Low-costrental stock was lost to demolition and conversion, and federal government funds forsubsidized housing were cut to a quarter of their levels the decade before.Angel notes that housing affordability problems reached beyond poverty households and"touched moderate income groups and the business community (high housing costs made itmore difficult to recruit workers from low cost locations elsewhere)" (in Housing Studies,1992:246). This provided broad local support for increased intervention by State and localgovernments. Angel describes the response of the Massachusetts legislature: increasedhousing expenditures that built on an existing commitment to affordable housing programs,through a wide variety of mechanisms. Massachusetts was aided in the 1980s by theavailability of increased tax revenues generated by strong economic growth.Local governments across the country were forced to respond to the serious problemscaused by the federal government spending cuts. They responded through a wide varietyof mechanisms, though many were more financially constrained than in Massachusetts.Some examples are described in Allison Millward's paper (1991), " Affordable DowntownHousing: Innovative U.S. Municipal Initiatives and a Case Study of Seattle." Hulchanski(1989) refers to U.S. initiatives as examples for Vancouver to consider in "Low RentHousing in Vancouver's Central Area: Policy and Program Options." Some of the initiativesinclude:special bond issues for housing development funds, including for rehabilitation ofaged low-rent stock;subsidized interest rates for developers making a portion of their projects low rentor affordable to certain income groups, or for various forms of community-based non-profit housing development;26subsidized interest rates for low and middle income home buyers;inclusionary zoning and other development rights-related exactions.Individual examples of some of these initiatives are described in Appendix A.Just as in the U.S., Canadian provincial and municipal governments are being forced toexamine their own resources and policies to determine how they can replace the federalgovernment presence in housing. In Toronto it is clear that even the Ontario government'srelatively large scale social housing program cannot meet the city's, or the region's, need foraffordable housing. Municipalities experiencing housing affordability problems should lookat U.S. examples.As Millward (1991) notes about the U.S. initiatives, however, "financing of low-incomeprojects is usually achieved with customized and creative financial packages that are difficultto replicate..." (p.i). Canadian municipalities will not find a model they can transplant, butrather a smorgasbord of ideas that they will be able to select from after a careful analysisof the local situation. The Toronto case study presented in Chapter Five is intended tomodel just such an analysis.2.3.3 Australia. The Australian housing market also has some similarities to that inCanada. Home ownership rates are high (about 68%, 1981 census), and public rentalhousing constitutes only a small portion of the stock (about 5%). Tenure is class-divided:private rental housing (about 20%) is strongly dominated by lower income households.Home ownership is highly valued (Paris, 1987:86-91).Home ownership assistance programs in Australia have included many of the samemechanisms as in Canada: home savings grants and tax deductions, occasional interest raterelief, and non-taxation of imputed rent and capital gains. Private rental housing received2 7comparatively little attention, and as in Canada, tax provisions favourable to rental housingwere reduced or eliminated in the 1970s.One of Australia's states uses a home ownership assistance program that deserves carefulconsideration in Canada. A program based on the same model is also used in New Zealand.The model is based on the principles that:1. home ownership assistance should be available to low as well as middle incomegroups by allowing households to purchase only a portion of the equity in theirhomes;2. it should be repaid to the extent to which the household can afford it: and3.^it should reduce the borrowing costs in the early years when incomes are lower, andincrease it in later years when it is less of a burden.The mechanism is a kind of individual Index-Linked Mortgage: the interest rate charged isthe real (net of inflation/inflation expectations) interest rate, and both the principal and thepayments are adjusted each year to reflect actual inflation. Initially at least, payments areset at a percentage of household income, usually 25%. The model is discussed in moredetail in Chapter Three, and is listed in Appendix A (#19, #21).The Australian/New Zealand model probably requires subsidized financing at a greater scaleand depth than Canadian municipalities have the resources to handle. Municipalities couldnevertheless propose the model for consideration by the higher levels of government.There are clearly a wide variety of possible approaches to home ownership assistance. Onlysome of these may be feasible options for municipalities to undertake. Some municipalitiesmay have the tax base to undertake larger scale, more deeply subsidized programs than28others. Among the 27 program examples listed in Appendix A, only 6 of them wereundertaken by municipalities.29Chapter ThreeVehicles for Home Ownership AssistanceThis chapter examines specific vehicles for home ownership assistance, their mechanismsand common applications, and comments on how well they contribute to the goal ofaffordable housing. It categorizes the wide range of home ownership assistance programoptions according to:1. the role of the proponent, which reflects the commitment of the proponent to makingthe housing more affordable to lower income households;2. whether the assistance goes directly to the beneficiary or to the housing unit, whichreflects the proponent's interest in creating new housing stock; and3.^the expected program outcome, which reflects the proponent's interest in securing astock of permanently affordable housing.Almost any home ownership assistance program may promote some or all of the objectivesdescribed in Chapter One. Home ownership assistance programs, however, take manydifferent forms. The financial resources of the government or other agency involved accountfor some of this variability. Another important factor is the approach the assisting agencydeems appropriate, due to their philosophy on providing assistance. There are a numberof ways to categorize these approaches.The first way to categorize home ownership assistance programs is in terms of the role takenby the assisting agency, or proponent. The proponent may play the role of a grantor,providing a direct cash subsidy to the beneficiary. The proponent may also play the role oflender, and provide beneficial loan terms to the prospective owner. The proponent as30insurer or guarantor helps beneficiaries obtain market financing where they otherwise wouldbe considered too high-risk for conventional loans. The proponent as trustee makesavailable public or common resources, often land, on conditions which ensure benefits to thetargeted households. Governments also act as regulators, and in that capacity can affect theprice of new housing. The proponent's role tends to dictate the breadth and depth of theassistance provided, and the type of outcome produced by the program.A second way to categorize programs is in terms of where the assistance is directed: to thepurchaser, as with home owner grants or loans; or to the units, to reduce the cost of theunits, as with development fee exemptions or below-market land sales or leases. The formertype of program is appropriate if the proponent is indifferent to whether the program helpsadd to the affordable housing stock or simply provides access to existing stock. The lattertype usually adds to the stock or helps retain existing stock through rehabilitation.A third way to categorize programs is by their different outcomes:1. Targeted households are given a "hand up" into the home ownership market, with no(repayment) strings attached;2. The household gets a "hand up" into the market, but repays the assistance when itis able to do so, enabling subsequent households to benefit from the same funds;3. The household gets a limited form of access to home ownership, which may be all itcan ever afford, or which may eventually give it the means to enter the open market.Assistance is provided on the condition that the equity the owners can realize whenthey sell the home is controlled, so that the unit itself remains affordable for anotherlow to moderate income household.Program Options. The programs described in the literature reviewed for this paper reflectvarious permutations and combinations of the program categories described above. The31following section presents a generalized set of options based on those programs. Specificinformation on each program reviewed is provided in Appendix A. Note that references forthe descriptions are provided in the Appendix rather than here, because programcharacteristics have been generalized in these descriptions and in some instances combinedacross similar programs.3.1 Proponent as Grantor (Appendix A, #1, #2, #3, #6, #9, #16, #18)Home ownership grants are directed to the purchaser, with no repayment strings attached.It commonly provides a grant to reduce the prospective home owner's down payment, andis usually restricted to first-time home buyers. It may or may not limit eligible householdsby their income, and/or limit the price of the home eligible for purchase. It may also berestricted to use for the purchase of newly-built homes, as was the 1982-83 Canadian HomeOwnership Stimulation Plan. (Any household purchasing a newly built home was eligible;first time home buyers purchasing a resale home were also eligible.) The objective of thiskind of program frequently is to stimulate the housing industry, as much as to provideassistance to the prospective home owner. This is generally a shallow form of assistance thatallows people to enter the market sooner than they might have otherwise.Other mechanisms to provide no-strings-attached grants directly to home owners include taxdeductible savings plans, and refunds on land transaction-related taxes. Grants may also beused to subsidize mortgage interest payments.3.2 Proponent as Lender (Appendix A, #1, #5, #8, #10, #14, #15, #19, #20, #21, #23)Home ownership assistance loan programs are directed to the purchaser, and repaymentmay or may not be required. These programs commonly involve the use of a secondmortgage, which helps the purchaser reduce or eliminate the necessity for a down payment.The government proponent generally takes a deferred payment mortgage from the32purchaser, often at reduced interest rates. Sometimes the mortgage is forgivable after theowner has occupied the home for a certain period, in which case the object of the mortgageis to provide a grant to reduce the cost of the home and to prevent the beneficiary fromquickly reselling the home to turn a windfall profit. Sometimes the loan is supplementedby a grant program which ensures that loan payments do not exceed a certain portion of thehousehold income.Lending programs are flexible to new or resale housing. They can provide deep subsidies,depending on local demand and supply conditions in the market, and the resources of theproponent, because interest rates and mortgage terms are significant housing cost factors.3.2A One variation on this type of program is a kind of rent-to-own scheme, in which atenant pays all costs on the unit, and has an option to buy at any time, exercisable byproducing a reasonable down payment. Part of the tenant's equity may include theappreciation in the value of the property since it was first purchased for the program. Otherprograms have allowed purchasers to contribute "sweat equity" in the home as part of theirdown payment, for example, by making improvements to the property.3.2B Another variation, a shared equity/appreciation mortgage, is offered commercially insome places. Investors provide a portion of the purchase price of the home (e.g., 10%), inexchange for a second mortgage for which there are no regular payments. Instead, theinvestors get the same percentage (i.e., 10%) of the appreciated price of the home after fiveyears or on the resale of the home. If the home is not sold before five years, the sharedequity/appreciation mortgage may be paid out by refinancing with a conventional mortgage.The owner may alternatively have saved enough to pay it out in cash.33Shared equity/appreciation mortgages may also be used to control speculation in discountpriced homes produced under a government program, and are discussed in more detail inthe chapter on keeping affordable homes affordable.3.2C Other lending programs have offered households a non-conventional mortgagestructure, similar to the Index Linked Mortgages (ILM) which were offered to Canadian co-operative housing projects. An ILM provides for a mortgage with a fixed real interest ratefor the term of the mortgage. To this is added an interest premium for inflation which isadjusted annually. Payments are adjusted accordingly, and the amortization period remainsthe same.A variation of this is a mortgage in which a fixed real interest rate is established for the termof the mortgage. Payments are set at a fixed percentage of household income. Each year,the remaining principal and the payments are increased by the Consumer Price Index. Theamortization period of the loan is adjusted accordingly. In some cases, household incomeis so low and the amortization period consequently so long that the loan will effectivelynever be repaid. The government as lender therefore retains a share of the equity in thehome which may be realized when the home is sold.This is the program referred to earlier, used in the State of Victoria, Australia, and in NewZealand. An analysis of their programs (Kendig and Paris, 1987) resulted in observationsthat these arrangements appear to appeal to two different groups of people:1. first time home owners with limited incomes for whom the fixed percentage ofincome and larger loan are attractive; and2. households in a mid-life change (e.g., divorce, death, long-term unemployment) whichnecessitates re-housing and loan arrangements adjusted to the new household income.34The down payment, at 10%, does not appear to be the difficulty for these groups,only high conventional mortgage payments are a problem.This kind of non-conventional loan is an improvement over programs in which loans simplyare offered at a reduced rate of interest. The total subsidy is not as high, and there will beincreased returns to the lender, though initial cash flow is lower than for a conventionalmortgage. Such programs assume that house prices and incomes are likely to increase atabout the same rate as inflation. However, this is not always the case, and can lead todifficulties. Calculations for the Victoria scheme show that under certain conditions, ifproperty prices increase by less than 70% of the general inflation rate, real debt becomesmore than 100% of the property value (Kendig and Paris, 1987).The calculations also show that equity build-up may be quite slow under some conditions.The implication is that this scheme will be unattractive to middle and upper income groups.who expect considerable capital gains from their properties. It will be more attractive tothose who have little alternative and who are satisfied with a guaranteed constant housingcost and secure occupancy.As Kendig and Paris (1987) point out, this kind of program provides help at the point whereit is most useful, and allows eligibility criteria to be a little looser. A single program can flexto address a broader range of needs, as those who cannot pay back the whole loan need not;those who can, do; those who need more may get it, if the likelihood of being able to payback is good. Government resources are not going into assisting in the accumulation ofwealth, just in helping at a crucial point. Home owners who run into financial difficultywould also be well served by this type of mortgage arrangement.35Kendig and Paris (1987) point to another clear benefit of the non-conventional mortgage:it redistributes costs over the household's life cycle, to shift the greater costs to the pointwhere they are better afforded. It also shares the risks and returns of owning betweenindividuals and a public partner, and maximizes tenure choice. The repayments to thepublic partner can be recycled into future housing assistance. Units for which the loans willnever be repaid remain part of the stock of public housing which the government can offerto needy households.^3.3^Proponent as Insurer or Guarantor (Appendix A, #4)Mortgage insurance provides a guarantee to the lender that the mortgage will be repaid infull if the borrower defaults. It is generally paid for by the borrower. There are two reasonswhy the availability of home mortgage insurance is a benefit to home buyers. Some homepurchasers may not be able to get conventional financing because they or the property areconsidered high risk. In Canada, mortgage legislation restricts home mortgages to 75% ofthe purchase price, unless the mortgage is insured, in which case the mortgage can cover90% of the purchase price (95% under a time-limited program approved in 1992 by thefederal government). The government provides indirect assistance to prospective homeowners by making mortgage insurance available to all who qualify, and by structuring theinsurance premium so that it is added to the mortgage principal, instead of paid as a lumpsum up front. Mortgage insurance therefore helps home buyers purchase a home with asmaller down payment than would normally be required. In terms of making homeownership more affordable, this is a very shallow assistance program.^3.4^Proponent as Regulator (Appendix A, #13)Municipalities may use their regulatory role in residential development in a wide variety ofways to reduce unit costs. They may:^1.^reduce minimum lot size;362. provide exemptions from required building or site amenities;3. permit building in higher density forms such as attached-house forms and medium-or high-rise buildings;4.^reduce the time for or type of development review required, (referred to asstreamlining or fast-tracking).These forms of assistance have little or no direct cost for the municipality, and help to makethe units intrinsically more affordable. Such an intrinsically affordable home is more likelyto remain at the low end of the price range because it is built to a lesser standard, withfewer amenities.These forms of assistance are much more difficult, however, to target to specific types ofhouseholds. By themselves they do not ensure that the cost reductions get passed throughto the purchasers, nor keep the units affordable to the targeted households when the unitsare resold. No home produced at lower costs will necessarily remain affordable to theincome group to which it was targeted, especially if the market is under inflationary pressurefrom increased demand, short supply, or other factors. Regulatory reform to assist homeownership must have conditions attached if the assistance is to benefit households in aparticular income group.In addition, some people are concerned about limiting public participation in the approvalprocess. Others fear that a shorter approval process may compromise the quality of thebuildings (because of a lack of proper inspections) or the quality of the local environmentbecause a proper environmental assessment of the new development may not be carried out.Another non-specific regulatory assist to home ownership is to permit as-of-right secondarysuites. The right to include revenue-producing uses of the property, even commercial or37professional uses, could make a home intrinsically more affordable. It will usually increasethe market value of the property and therefore initial acquisition costs. However, theseallowances should reduce carrying costs to the owner, by virtue of the owner's being able toshare them.3.5 Proponent as Trustee - I (Appendix A, #7, #11)Government agencies may play the role of trustee for publicly-held land or public benefitsand use them to reduce the cost of homes for targeted households. Non-profit agencies mayalso hold land which they consider a trust to be used to help house needy households. Theassistance provided is directed to the housing unit, and may or may not involve repaymentor resale controls.Governments at all levels in Canada have introduced programs in which such assistance wasprovided with minimal repayment or resale controls. In such cases, the government providesland to developers at below-market prices or leases, or makes regulatory concessions for thedeveloper, in exchange for their building modest units which will be sold at below-marketprices. Governments have, but rarely, built the units directly. Targeted households haveincluded first-time buyers, renters, households resident or working in the municipality, andmoderate income households.The beneficiaries have generally been required to occupy the home for a certain time, oftenfive years, and resale of the home may be controlled for up to five years. The tool used toenforce such requirements is usually a second mortgage which only becomes due if theowner tries to resell the property before five years have passed. The second mortgage isinitially taken from the buyer by the developer, for the price differential between the marketprice and the below-market selling price, and then assigned by the developer to thegovernment. This mortgage is often forgivable after the five years, or often, may be38purchased at less than face value. Such programs have also used an option-to-purchaseagreement to control resale for a limited time. The option agreement is a condition of thesale, and gives the government the first option to buy at a pre-determined price, should thehome owner wish to put the home on the market within a given period of time.The objectives of this type of program seem to be to provide a wider choice of modest newhousing in the municipality, and to assist first-time buyers with the approximate equivalentof a down payment. The eventual boon to the beneficiary may be quite significant, but thebreadth of the subsidy is limited by the fact that the subsidy is rarely repaid and the unit iseventually released to the open market.3.6^Proponent as Trustee - II (Appendix A, #12, #17, #22, #24, #25, #26, #27)Non-profit agencies will more often use the land or other resources they hold in trust in sucha manner as to ensure that the housing created remains affordable to their intendedbeneficiaries through successive owner-occupants. Governments have used this approachmore often for rental housing than for ownership housing.This type of program is a kind of land trust. There are many possible arrangements, but inan international survey, reviewers found that land trusts had several basic characteristics, orprinciples:1. Land, once acquired, is rarely resold, only leased. Therefore any subsidies investedin this property are retained and recycled for the benefit of future generations.2. The land is held for the common good, not for capital gain, to remove it from thespeculative market and hold it relatively immune from inflationary pressures.3.^Land trusts try to acquire the land at the lowest possible cost, including donations,but most will buy in the normal market if necessary. Some municipalities may extract39land or housing units for land trusts from private developers as a condition ofdevelopment.4. With the exception of the British housing trusts, which operate more paternally, landtrusts invest members/users with at least local decision-making powers.5. Land trusts generally give direct land use rights, including gain from the product ofthe land, to the user/lessee, and retain the right to rent, control, and transfer theproperty. Sometimes these latter rights are split between an owner and a trustee.Sometimes direct use rights can be transferred to heirs, or mortgaged.In essence, a land trust is a land-holding agency, private or public, with a mandateentrenched in its constitution or letters of incorporation to hold land and other property inperpetuity for a benevolent purpose, in this case, for housing low to moderate incomehouseholds. The directors of the land trust will usually come from the geographiccommunity they serve, from its member residents, and from representatives of importantinterest groups in that community. In the case of government land trusts, some membersof the board of directors may be local politicians. In the case of equity co-ops, which aretrusts funded by the members, mostly members (which may be residents and memberswaiting to become residents) will form the Board of Directors.There are many different ways of structuring the arrangements between the land trust andthe residents of the housing. Most of the arrangements entail a long term land lease withconditions attached to control who occupies the units, increases in the land and/or unit rent,and the price at which the unit and land lease can be resold. The land trust may participatein any capital gain realized upon resale, and use the gains to reinvest in more housing.Alternatively, the total payment for the land lease may be comprised of a flexiblecombination of monthly payments and a share of capital gains realized on resale. The trustmay recognize "sweat equity" when determining the resale value returned to the resident.40The land trust may also have as a part of the agreement a first option to buy the land leaseand unit at a predetermined price when the owner wants to sell. Resale may also berestricted to a waiting list of qualified purchasers.This model may apply to both new and existing housing, and its subsidy may be quite deep.Because of the many possible variations within this model, it is quite flexible to differentsituations. In Canada, this model is weakened by the fact that land trusts are not recognizedby federal and provincial tax laws as charities. It would be very useful to secure a changein these laws (Institute for Community Economics, 1991).Common resale control mechanisms used by land trusts are described in more detail inChapter Four, "Mechanisms to Maintain Affordability."When policy-makers decide to undertake a home ownership assistance program, they shouldcarefully consider their desired outcomes and conditions in the local market for thehouseholds they are trying to target. Though this would seem to be stating the obvious, itis particularly true if one of the goals is to make home ownership more affordable tohouseholds further down the income spectrum. Not all assistance programs are effective atfurthering this goal.41Chapter FourMechanisms to Maintain AffordabilityMany past programs initiated by federal and provincial governments in Canada helped alimited number of households attain home ownership and stimulated the residentialconstruction sector of the economy, but did not create any permanently affordable ownershiphousing.This chapter deals in greater depth with the expected program outcome. It is assumed herethat given the depth of subsidy required for a genuine affordable home ownership program,it is not an effective or responsible use of tax money to provide a no-strings-attached "handup" into the home ownership market. This chapter focuses on programs which help assurea more permanent supply of affordable housing.Programs which restrict equity appreciation meet this goal best, if the aim is to maintain astock of homes which remain affordable. This approach provides most of the benefits ofhome ownership, except the ability to realize appreciation in the value of the property notattributable to the home owner's improvements.Programs which involve repayment of the benefits may also contribute to this goal. If theprogram assistance is paid back, it can be used again to help other households. Unlessproperly structured though, the repayment may not be adequate to assist the same numberor type of households, due to inflation of housing costs, including interest rates. Repaidfunds may also be easily diverted away if political will is not firmly behind the program.42The legal and fiscal mechanisms which may be used are not always effective or legallyfeasible in some jurisdictions. The mechanisms which best protect program goals in theexisting legal environment will dictate many program features. Municipalities may need toseek powers they do not currently have from their provincial legislatures. Therefore the restof this section deals with mechanisms to implement these approaches to home ownershipassistance3 .4.1 Repayment MechanismsTwo mortgage mechanisms are used to ensure that a home ownership assistance subsidy isrepaid: second mortgages, and a variation, the shared equity/appreciation mortgage.4.1.1 Second Mortgages. A second mortgage may be used to recapture a program subsidyin the following way. A home with a market value of $200,000 is sold for only $150,000: themarket price less the subsidy, usually on the land. This $50,000 subsidy is registered on titleas a second mortgage against the property which becomes due (with or without interest)upon resale.In a stable market, purchasers cannot quickly resell the property to collect the differencebetween the market value and the subsidized purchase price, as the second mortgagebecomes due on resale. However, in a market with rapid home price appreciation, thehome owner may be able to sell the property, pay off the second mortgage, and still profit.In this case, the revenue from the second mortgage will not be enough to subsidize anotherhousehold.3The legal matters raised in the following discussion are based on the assessment of sonic of thesemechanisms by Bruce Lewis, of Lewis and Collyer, (in N. Bony Lyon, 1993) and on legal views provided to theMinistry of Housing, and given to the City of Toronto Housing Department for information.43In short, second mortgages can provide a reusable benefit only as long as the subsidizedhomes appreciate by less than the subsidy plus any interest charged. Despite this significantweakness, second mortgages were used in the 1967-78 Ontario Home Ownership Made Easy(HOME) program, and more recently in the Newmarket Affordable Housing Program.4.1.2 Shared Equity/Appreciation Mortgages. A commercial shared equity/appreciationmortgage has been marketed which provides, (say) 10% of the purchase price of the home,in return for the same percentage of the appreciated value of the home. In government-assisted home ownership programs, shared equity/appreciation mortgages may be used tomitigate the effect of inflation and rapid home price appreciation, and to ensure that thesubsidy which is repaid is adequate to assist a second and subsequent first time buyers.To accomplish this, the mortgage terms require the borrower to pay the holder of themortgage all or most of the appreciation above a certain inflation factor, upon resale orafter a certain period of time. The reason for attaching these terms to the home ownershipassistance is that incomes often increase less than home prices. The government's share ofthe appreciation on the home of the initial buyer when they resell should cover the cost tosubsidize the next household in a similar home. The program will then be able to subsidizeanother household in the same income category in which the initial buyer was when theypurchased. Ideally therefore, the share of the appreciation must be equal to the share ofthe home price represented by the original subsidy, plus the gap between the increase inincomes and the increase in house prices, since the first purchase. For example, if theoriginal subsidy amounted to 25% of the market price of the home, and home prices haveincreased 30% while incomes have increased only 15%, the shared equity/appreciationmortgage should return to the program 25% of the resale value (adjusted for inflation), plusa premium to help the next beneficiary make up the difference between the increase inincomes and the increase in home prices.44This may not be considered so ideal by the initial purchaser, who on resale is able to leavewith their initial equity, but may not be able to compete against other households who havebeen able to obtain the full home appreciation on resale. The program could respond tothis by reducing the lender's share of the appreciation, the longer the purchaser holds theproperty.Shared equity/appreciation mortgages are not well understood in Ontario, and their use iscomplicated by numerous legal issues (outlined below) which have not been tested directlyin court in this context.1) Legal assessments provided to the Ministry of Housing and the City of Torontoindicate that principles in mortgage law may apply which prohibit "clogging the equityof redemption" and "clogging the right to redeem." The "equity of redemption"comes into play if/when the creditor (mortgagee) takes action to claim full paymentof the mortgage, for example through foreclosure or selling the property, due to adefault on the terms of the mortgage. It is the right of the debtor (mortgagor), ifthey produce payment in full of the principal still owing and the interest to date, toget the property title clear of the mortgage. A shared equity/appreciation mortgagemay contravene this principle if the only way to pay out the mortgage is to sell theproperty. This could occur if the combined mortgages on the property amounted tomore than the mortgageable value of the property, so that the owner could not getfinancing to buy out the shared equity/appreciation mortgage.2) The shared equity/appreciation mortgage in the Ontario context may also be subjectto the legislation regarding deferred payment mortgages, i.e., a mortgage where nopayments of principal or interest are required for a period of time. The legislationrequires that the creditor in such a mortgage must permit the debtor to pay off the45mortgage after the end of five years if they wish. This would not affect the City'sfinancial ability to reuse the subsidies, but it may result in higher administrative costsif the mortgages are turning over every five years. A rising market would encouragehome owners in the program to pay out the second mortgage by refinancing, andtherefore may induce them to put themselves in a high risk financial situation.3) A mortgagee (creditor) cannot charge an illegal rate of interest, which in the CriminalCode is 60% or more per annum. Interest is deemed to include any charges andexpenses attached to the payment of the mortgage principal and interest. TheOntario Unconscionable Transactions Relief Act also condemns high interest rates ina more general way. To avoid this issue, the mortgage may include an appropriatecap on the return to the City. There also may be other ways of avoiding these issues.4) To be enforceable, a mortgage must clearly define the amount which will be owedwhen the mortgage becomes due and payable. The legal assessments suggest thereshould be a mechanism to determine fair market value, if that is part of thecalculation, and to ensure an arms-length sale.5) The legal assessments suggest that in the mortgage agreement, the creditor (the City)should avoid any appearance that through the shared equity/appreciation agreement,it is entering into a partnership with the home owner. Otherwise, the creditor mayfind itself liable for a home owner's financial obligations for the unit, and find itselfat the bottom of the priority list of creditors in the event of the home owner'sbankruptcy.4.2^Controlled Equity Appreciation Mechanisms (Freehold and Strata Title Stock)464.2.1 Option to Purchase Agreements. This mechanism requires only that if the owner wishesto re-sell the unit, the owner must first offer it to, in this context, the City and/or anotherdesignated agency, at a defined price. The option must have a specific term, i.e., once theproperty is offered, the City or other designated agencies must exercise the option within areasonable length of time (90 days is a typical length), or the option lapses. It must set outa formula for calculating the resale price. The option is registered on title and remainsdormant until required. The option can be drafted to include all resales (not just the first)within a given period.Legal considerations regarding this mechanism include the Ontario Perpetuities Act, and thepolicy prohibiting registering a "restraint on alienation" on title, described in more detailunder the next section. The Perpetuities Act may restrict the option agreement to a term of21 years. If the understanding outlined below of the "restraint on alienation" policy iscorrect, this prohibition should not be a consideration. The legal assessments provided tothe Ministry of Housing and the City of Toronto, however, suggested this issue is not clear.There are also pragmatic issues to consider regarding the implementation of public policy.The option-holders (here meaning the municipality or its designated agencies) have nocontractual obligation to exercise the option, and experience indicates two primary reasonsthey frequently will choose not to. Firstly, the option holder must have on hand a fund andadministrative resources with which to exercise available options, and to hold and resell theunit to qualifying households. Secondly, if political approval is required to exercise anoption, there may not be sufficient time to acquire this and conduct the transaction withinthe option period.In the City of Toronto's St. Lawrence Neighbourhood and Frankel-Lambert housing projects,townhouses were offered for sale at below-market prices, with an option-to-purchase47agreement to control resale for the first five years. Because the City did not set up a fundto buy back the units, the City did not exercise its options when they were offered, so thatthe units were sold into the market even before the five-year controls expired. Initialpurchasers gained a significant windfall profit on these units.The Option to Purchase Agreement is a Common Law agreement. There are others whichserve similar purposes, and have similar weaknesses, such as right of first refusals, simplecontracts, and restrictive covenants. Bruce Lewis discusses them in more detail in hisAppendix in the N. Barry Lyon report (1993). He strongly recommends against relying onsuch instruments for a municipal program, due to the uncertainty involved in the legal issuesmentioned here.4.2.2 Affordable Housing Agreements. The New Jersey Council On Affordable Housing(COAH, 1989) has provided municipalities in the State with a mandatory model to controlre-sale of affordable units produced through municipal inclusionary zoning exactions. It isone of few models found in the literature reviewed which appear to provide for fullownership of the property involved, and long term price controls. The model involves an"affordable housing agreement" (AHA) between the municipality and the subsidized homepurchaser, which is registered on the property title to inform any prospective purchaser ofthe terms. As long as the agreement is a legally binding contract, the home cannot be resoldexcept on the controlled terms of the agreement. It binds initial and subsequent purchasers.In the New Jersey model, the terms of the agreement include provisions to re-sell the unitat a defined affordable price only to the municipality or other designated housing agency,or to households on an approved, qualified list. After holding the property for 20 years, thehome owner has the option of selling the unit at market value, and repaying to themunicipality 95% of the difference between the controlled price and the sale price.48The New Jersey COAH suggests the resale price should be calculated as the original priceinflated by the percent increase in the median income for the housing region, but leavesmunicipalities some discretion in this matter.In the event the home owner goes bankrupt, the re-sale controls are void, but themunicipality or designated agencies have first options to buy the unit at the definedaffordable price. Failing that, the seller is required to pay to the municipality any revenuein excess of the defined affordable price. The affordable housing agreement prohibits theowner from encumbering the property with debt in excess of the defined affordable price.There are several legal issues to consider or clarify regarding the "affordable housingagreement" mechanism.1) The agreement is a contract, and as such, it must involve the exchange of a"consideration." This means only that the municipality must give some value inexchange for the promise it exacts from the purchaser. The agreement probablyshould therefore include a description of the value it is offering (provision for homesoffered at below-market prices to those who could not otherwise afford them) inexchange for the purchaser's agreement to abide by the resale controls.2) The New Jersey model requires the agreement to run for 20 years, and to permit themunicipality the option of renewing the agreement for another 20 years, such that theagreement may apply in perpetuity. In Ontario, the Perpeittitie.y Act may prevent sucharrangements. This Act allows an option holder a maximum of 21 years to exercisean option to acquire an interest in land.493)^The Ontario Land Titles Act permits the Registrar to refuse to register an agreementon title if the Registrar considers it a "restraint on alienation." A restraint onalienation is a contract which prevents someone from selling their property at all, orwhich places a restriction which is "morally reprehensible" on the group of people towhom the owner can sell. An example of the latter is a contract which prevents anowner from selling to Jews, or Blacks, or some other discriminated-against group. Itis unlikely that a limitation on sale to the types of purchasers envisioned for anaffordable housing program would be considered discriminatory in the same way.4.3^Controlled Equity Appreciation Mechanisms (Land Leasehold Stock)The mechanisms described above may be valid means to control resale prices of affordableunits which are wholly owned (whether freehold or by strata title) by the purchaser. Othermeans to control resale prices of affordable units may be available when they are attachedto units for which only partial ownership rights have been sold.Property ownership rights can be categorized into several distinct sets of rights, or interests,in property. These rights may be subdivided and combined in a huge variety ofarrangements.1) Direct use rights: to occupy the property, to build on it, to have access to or acrossit, to raise crops or animals on it, to harvest wild food on it, to mine minerals underground, to use water crossing or in the property, and almost any other imaginableuse. Several people or parties may have rights to different uses of the same property.2) Rights to indirect economic gain, such as to rent, royalty, or tolls for any of the aboveuses.3) Rights to control or place conditions or restraints on the use of the property.4) Rights to transfer specific rights or all rights in the property to another person orparty, such as through a lease, mortgage, sale, gift, or will.505)^Residual rights such as the disposition of a property when the property owner hasdied without descendants or heirs, rights to seize to enforce a social norm or law, andthe right held by governments to expropriate when in overriding need.The resale control options discussed below are those which make use of arrangementslimiting the property rights transferred to the purchaser in an affordable home ownershipprogram. For the purpose of providing opportunities for affordable home ownership, onevery useful division of property rights lies between the sets of applicable or available rightsregarding the land and those regarding the "improvements," e.g., buildings, house, etc.,attached to it.4.3.1 Individual Lease Agreements. Long term leases for the land and sometimes the houseor building may include conditions on the use, rent, and resale of the leased property oreven on the part of the property which is owned outright by the household leasing the restof the property.A land lease may contain terms and conditions regarding whether or not, and to whom thehousing unit(s) on it can be rented, and at what rent, and regarding who the unit(s) can besold to, and at what price. For instance, the Vancouver Land Corporation leases land fromthe City of Vancouver under an agreement which dictates that rental units must be built onthe land, that they must be non-luxury apartments, that they must rent at the low end of themarket, that rent increases must not exceed the rate of inflation and finally, that the buildingownership will revert to the City at the end of the 80 year lease.In another example, the University of California at Irvine holds land leases on homes theysell to staff and faculty. The leases limit resale to University staff and faculty, or failing thatto the University itself. They restrict owners' rights to assign the property in a will to their51children. As part of the land rent, the lease limits the resale price of the house to theoriginal price plus a building construction cost inflator, and in addition, claims a portion ofthose gains when realized on resale.The City of Toronto leases land to many social housing providers with many terms andconditions attached to ensure the land is used primarily for the provision of non-profithousing to low and moderate income households. Existing agreements extend for at least35 years.A municipality could use this tool where it owns the land involved in the affordableownership housing development. There are many ways in which a lease could be structuredto accomplish a municipality's goals. A land lease arrangement in Ontario, however, cannotbe used where the units involved are part of a condominium project, as condominiumlegislation in Ontario does not permit condominium development on leased land. TheProvince has been considering changes to the legislation to permit condominiumdevelopment on leased land (Vykki Silzer, various discussions, 1992).4.3.2 Controlled Equity Co-operatives. Controlled equity co-ops may be known as sharedequity, guaranteed equity, equity co-ops and resident-funded co-ops. They all share thecommon feature of each resident purchasing an equal share in the project, which share givesthem a say in the management of the project, its land trust, and its common areas, and givesthem occupancy rights in a particular unit. In addition, they retain some advantages ofownership because they are able to sell the share and recoup their accumulated equity inthe project.The equity purchase agreement in an affordable ownership program, however, may includerestrictions on who may occupy the unit, on who may buy the share and at what price, and52may claim for the program a portion of the capital gains realized on resale of the share inreturn for making the share available at below-market prices. Controlled equity agreementsthus may secure revenues to a housing fund, or may secure a stock of units at affordableprices.The Metro Guaranteed Equity Housing (Malvern) Corporation project uses this model tomaintain a stock of affordable units, in part by combining it with a lease for the landbetween the equity corporation and the Metro Toronto Housing Corporation Ltd.4.4^AssessmentThe available mechanisms to keep affordable ownership housing affordable are, in short:Repayment:- Second MortgageShared Equity/AppreciationControlled Equity - Freehold and Strata Title- Option to PurchaseAffordable Housing AgreementsControlled Equity - Land Leasehold- Individual LeaseControlled Equity Co-ops.Lewis (in N. Barry Lyon, 1993) assesses the available resale controls in terms of:1. mortgageability;2. enforceability, especially:- legal enforceability and degree of uncertainty about it;- practical enforceability;- enforceability of maintenance and use controls.He observes that the major weakness of the controlled equity co-op option is that it isdifficult if not impossible to get mortgages from most financial institutions for individual unitsin an equity co-op. Most equity co-ops are financed through bulk mortgages (the concept53pre-dates, and for most people was outmoded by condominiums). Bulk mortgages leave themembers vulnerable to members who renege on their portion of mortgage obligations,because the remaining members must cover it. Lewis suggests that municipalities may tryto discuss with some institutions individual mortgages with municipal guarantees.Lewis warns strongly against use of Common Law mechanisms such as the Option toPurchase to control equity appreciation. Though it is possible they would be successful,there are too many conflicting decisions and untested legal principles involved to risk usingthem in a municipal program. Shared equity/appreciation mortgages are also a CommonLaw mechanism, and though Lewis does not comment in detail on them, it is clear they tooare a weak mechanism. However, a program using a shared equity/appreciation mortgagewould have lower expectations concerning maintaining affordability, so the weakness is lessimportant.Leases and statutory AHAs are probably equally reliable, according to Lewis, bothpractically and legally. Two important factors affect their practical enforceability. The firstis that resales should take place through an intermediary agency, so that the buyer and sellerdo not have an opportunity to meet and agree to "under the table" terms of sale. Thesecond factor is the clarity of the contracts themselves. The Court will protect consumerswhere it believes that the contractual conditions they agreed to were so poorlycommunicated the consumer may not have fully understood them. An affordable homeownership program must set forth the conditions controlling use and resale, etc., in plainlanguage, and be sure that the buyer has had proper legal advice.Maintenance controls may be difficult to implement for controlled equity arrangements.Without the incentive of having to sell the unit in the market, there is a risk that ownerscould let their units deteriorate. Arms-length inspections at the time of resale, or at regular54intervals, and depreciation estimates are possible mechanisms which could be written intothe agreements.Use controls may also be difficult. Lewis suggests that the municipality may want to beinvolved in day-to-day management of a property to have access to information which wouldindicate that someone using their unit as a rental property investment, so the availableremedies could be taken. Self-managing equity co-operatives may also exercise a similarcontrol.Overall, AHAs and lease-based controlled equity co-ops are clearly the best program optionsfor maintaining a permanent stock of affordable ownership homes.55Chapter FiveCity of Toronto Case StudyThis chapter provides a review of the policy context for this enquiry into possible affordablehome ownership initiatives by the City of Toronto. It identifies three basic home ownershipassistance options, and a variety of tools or means which could make it feasible to implementthese options. It assesses those options in terms of their costs and who could benefit fromthem, and makes recommendations specific to the City of Toronto.Background. The City of Toronto, with a population of about 635,000, is the urban core ofMetropolitan Toronto, population 2.3 million, and of the Greater Toronto Area (GTA),population 4.2 million. The City of Toronto's expected share of the GTA populationincrease projected for the next twenty years is about 100,000 people. While this is no morethan the former population peak in Toronto, households are considerably smaller than inthe past, so more housing is needed to accommodate this population level.The GTA is the commuter shed of Metro Toronto, and includes Metro and four surroundingregional municipalities. Though the City of Toronto has only 15% of the GTA population,it has almost 30% of the jobs in the GTA, and 44% of the jobs in Metro (statistics fromMetropolitan Toronto Planning Department, 1992b). This situation generates a large rateof long distance home-and-work commuting. To reduce commuting, and to accommodatethe expected population growth, the City needs to increase the amount of housing in theurban centre.56There is virtually no undeveloped land in the City and additional housing demand must bemet through industrial land and other infill redevelopment. This is also true forMetropolitan Toronto (Municipality of Metropolitan Toronto, 1992a:4). Therefore the priceof housing in the City is high, (especially new housing), though average household incomeis lower than in the rest of the region (City of Toronto Planning and DevelopmentDepartment, 1990). The lower income levels are due at least in part to the relatively highpercentage of single person and single parent households in the City, who are attracted bythe availability of jobs and the accessibility of services.Given the cost of land in Toronto, it is not surprising that those who can afford homeownership are generally well-off, and renters experience the majority of housing problems.As mentioned earlier, renters have just over half the average income of home ownerhouseholds in Toronto, and constitute 63% of the City's households.The City of Toronto has been actively involved in housing development for low to moderateincome households since it began building Regent Park North in 1948. The City's non-profithousing corporation, Cityhome, was established in 1974, with the mandate to serve notnecessarily the neediest, but rather the working poor, to thereby keep them in the City. Forthis reason, it is Cityhome's policy to accept applicants on a first-come-first-served basis.This policy has been modified somewhat lately to meet Provincial housing programrequirements, but the goal of serving the working poor remains largely the same. Therationale for a first-come-first-served policy now also serves another purpose: Cityhome fillsa gap left by other agencies which select tenants on a need-based system. The working poorare usually last on those agencies' lists.Cityhome manages a portfolio of about 7,000 units, all rental, consisting of apartments inhigh and mid-rise buildings, converted single family dwellings, and rooming houses. The City57has also facilitated the development of many more units of social housing through variousinitiatives. The City's land bank for social housing, acquired through developer exactionsand direct purchase, has been made available to other non-profit organizations, sometimesat a reduced price so that the units could be built within the limits of the provincial socialhousing Maximum Unit Price.The City also is, and has been involved in large scale redevelopment projects on industrialland, as in the St. Lawrence Neighbourhood and Frankel-Lambert Neighbourhood. Thoughthe massive Ataratiri development east of St. Lawrence Neighbourhood has been aborted,the City is still involved in the redevelopment of the Railway Lands east of Union Station,the Massey Lands west of the downtown financial district, and the Sears Warehouse landsand several nearby parcels in the east downtown. The City's role in these projects rangesfrom development manager to direct developer to developer partner to developmentcontroller (i.e., negotiating densities, land use, public facilities, and the allocation of land forsocial housing, with the private developer).The City has rarely been involved in home ownership assistance, except through smallrehabilitation subsidies to low-income home owners. Two of the City's major redevelopmentprojects, St. Lawrence and Frankel-Lambert, did produce some ownership (townhouse) unitsdeveloped and sold by the City at below-market prices. The units were popular, and theirowners made a large capital gain on them. Though some controls were placed on resale fora period of five years to avoid windfall profits, these controls were ineffective, and werebroken in less than the five years (second mortgages: see discussion in Chapter Four on theweaknesses of this mechanism).5.1^The Policy Context58This review of affordable home ownership program options for the City takes place in thecontext of many recent general policy proposals, statements, and directives regarding theprovision of affordable housing. The dramatic increase in Toronto house prices in the late1980s brought the issue of affordable home ownership onto the City's policy agenda. Thefirst major report expressing concern over the lack of opportunities for potential first-timehome buyers in Toronto was The Endangered Dream: Report of the First Time Home BuyersTask Force, a joint report issued in February 1989 by the City of Toronto in co-operationwith the Toronto Real Estate Board and the Ontario Ministry of Housing. In July, 1989, theOntario government established its Policy Statement on Land Use Planning for Housing. TheCity established its definition of affordable housing in response to the provincial policystatement in July 1990. In July 1991, the City released its draft official plan, the Cityplan '91Proposals Report, outlining its housing goals for the following ten years.The focus of the Report of the First Time Home Buyers Task Force (RFTHBTF) was to lowerthe cost of housing itself (rather than providing direct subsidies to home buyers). The majorrecommendations included suggestions that:• affordable home ownership be an explicit policy goal of the provincial governmentand of municipalities• the provincial government require municipalities to establish official plans and by-lawswhich would make affordable housing more feasibleappropriate surplus government lands of all levels of government be made availablefor housing• housing targeted for first time home buyers be available only to those buyers andoccupied by them for a minimum period of three years.Policy initiatives such as those mentioned above, taken by the Province and the City sincethe release of the RFTHBTF, have begun to address some of these points.59The Ontario Policy Statement on Land Use Planning for Housing (1989) provides a directiveto municipalities to facilitate the provision of affordable housing in proportion to thedemonstrated need in the municipality. It does not clearly require municipalities to ensurethat the affordable housing is produced and is provided to those for whom it is deemedaffordable. It appears only to direct municipalities to ensure the opportunity to produceaffordable housing. It provides a definition of affordable housing: rental or ownershiphousing which does not cost more than 30% of gross income, for households whose incomeis in the lowest 60% of the distribution for all household incomes in the housing region. Thedefinition also encompasses social housing produced under various non-profit and co-ophousing programs of the federal and provincial governments.For many municipalities, compliance with this directive could perhaps adequately addressthe need for affordable housing. Because there is a large gap in the Toronto CMA betweenthe incomes of tenant households and average household incomes, and between the averageincomes of singles and of families, the upper limit of what is affordable according to theProvincial definition is above the affordability limit of almost 80% of tenant households. Inthe City of Toronto, therefore, it seems unlikely that the City could provide the opportunityto build affordable housing, and be reasonably certain it would be taken up by those in need,without the City intervening directly.The City therefore has developed its own definition of affordable housing, and is examiningways to ensure that such housing gets produced and provided to those for whom it isintended. The City's definition of affordable housing is housing which does not cost morethan 25% of gross income for rental housing, or 30% of gross income for ownership housing,for households whose income is in the lowest 60% of the distribution for tenant householdsof different sizes and types in the housing region (Toronto CMA). The Provincial definition60uses the distribution for all households combined. To meet the City's definition, this housingalso must be provided primarily for occupancy by such households.The City's new Official Plan (to be adopted summer 1993) incorporates this definition ofaffordable housing. It also sets an affordable housing goal: that half of the new dwellingunits built by 2001 should be affordable housing. In major new residential developmentprojects, the City will require that at least 25% of the new housing is affordable housing.In addition, it requires that at least one-quarter of new housing on land re-designated forhousing should be suitable for families with young children. That is, it should have at leasttwo bedrooms, and services and facilities appropriate to children's needs should be near athand.As in the provincial definition, affordable housing includes social housing produced undervarious non-profit and co-op housing federal and provincial programs. However, it is clearfrom the financial pressure on all governments, and from the recent history of social housingunit allocations in Toronto, that social housing development will not enable the City to meetits affordable housing goals. (Rob Cressman estimates allocations for 1993-1996 will totalabout 1000 per year to all providers in the City of Toronto - Housing Department discussion,fall 1992.) Therefore the City must look at other means of meeting its goals.To meet its affordable housings goals, the City Planning and Development Departmentcontemplated establishing an "inclusionary zoning" exaction which would require privatedevelopers to include a minimum percentage of affordable units in new buildings, or paycash or land in lieu of the units to the City. Because private developers are producing fewif any rental buildings, the exaction would produce only ownership units in private projects.The City has the option of using cash and land in lieu for ownership or social rental housing.61(This proposal has been "shelved" for the present because of its possible deterrent effect onnew development during the recession.)The research summarized in this paper was begun in the City Housing and Planning andDevelopment Departments in an effort to help the City decide how to meet its affordablehousing goals. The City also commissioned several studies by consultants. One study(Malone Given Parsons, 1991) examined inclusionary zoning and its potential impacts onresidential developers. Another study (N. Barry Lyon Consultants Limited, with Lewis andCollyer, Barristers and Solicitors, 1993) assessed the legal feasibility of various approachesto limiting resale prices/unit price appreciation, and researched the market reaction to unitswith such controls among potential purchasers. Yet another (CB Commercial, 1993)assessed the financial feasibility of a limited equity home ownership project for an availableCityhome site. One important finding of all three studies is that a significant gap existsbetween what potential, targeted purchasers can afford, and the cost of building new unitsin Toronto.5.2^The Affordability GapSince 1985, the cost of home ownership, relative to household income, has increaseddramatically in Metropolitan Toronto. Average household income increased only 6% peryear between 1985 and 1990 (Vykki Silzer, City of Toronto Planning and DevelopmentDepartment estimates, 1991), while house prices increased an average of 27% per year inthe same period (Vykki Silzer, from Toronto Real Estate Board Multiple Listing Servicedata, 1991). This situation could have two effects: home owners could be having troublesupporting their debt load, as happened in the 1970s and early '80s when interest rates atmortgage renewal escalated sharply; and prices could be preventing potential new homeowners from purchasing.625.2.1 Who Needs Help? Average income figures in Toronto are pulled down by the fact thattenant households comprise 63% of the households, and that average tenant householdincome is only 56% of average home owner household income. Therefore the gap betweenaverage income and that required to support home ownership is largely suffered by tenanthouseholds.This conclusion is supported by data indicating that existing home owners generally canafford their housing costs. Census data show that in 1981, 81% of home owner householdsin the City of Toronto, and in 1986, 83% of home owner households, paid less than 30% oftheir income on housing. Some home owners can freely choose to pay more than 30% oftheir income on housing without seriously affecting their lifestyle, so the home owners withaffordability problems are probably fewer than indicated by the above figures. The rapidhouse price increases of the past five years, therefore, have specifically limited non-homeowning households from entering the home ownership market.CMHC's home ownership affordability indicator calculates how many tenants have theincome required to carry a 90% mortgage, taxes and heating costs on an average-pricestarter home, assuming a maximum gross debt service ratio of 32%. In Toronto, that incomelevel was about $58,000 in 1992. In nearby cities, to which Toronto risks losing its middleclass, that income level was approximately: in Hamilton, $46,600; in Oshawa, $48,000; in St.Catherines-Niagara, $37,800; in Kitchener, $44,500; and in London, $40,000.The high cost of home ownership also contributes to the tight rental market and high rentsin Toronto which prevailed until the recent condo apartment glut. According to CMHC'shome ownership affordability index, 28% of tenants in the Toronto CMA are able to affordhome ownership (July-Dec, 1992; see Table 1.1). That is a significant improvement from63the 1989 figure of 6.7%. However, Toronto still does not compare well with other Canadiancities. Only Victoria and Vancouver are in a worse position; Hamilton's is similar.5.2.2 How big is the gap? Table 5.1 indicates the incomes of different types of tenanthouseholds at the Toronto CMA 30th, 50th, and 60th income percentiles for all households,and the corresponding affordable home price for those income percentiles (given theassumptions indicated). Table 5.2 shows mean and median sales prices for condo andfreehold homes, 1989 through 1992, in the City of Toronto. Affordable prices64Table 5.1Affordable Unit PricesTenant Households, City of TorontoIncomeDecileIncome(est. 1992)AffordableUnit Price*80th $53,702 $142,81670th $43,357 $109,01060th $35,865 $84,52650th $29,519 $63,78940th $23,751 $44,93830th $17,966 $26,033Couple, with or without children50th $44,953 $114,22560th $51,083 $134,258Single Person, or Single Parent50th $23 , 595 $44,42860th $28,834 $61,549*Assumptions:^8.5% interest over 25 years with a 10% down payment$150/mo. property tax, and $100/mo. maintenance fees.Source:^Income data from City of Toronto Planning and Dev't. Dept.estimated from 1986 StatsCan census data, adjusted by TorontoCMA all item CPI, December, 1992 (130.5% on 1986 base).bS-Table 5.2Residential Sales In the City of TorontoShowing Mean and Median Sale Price, 1989 - 1992N MEAN MEDIAN1989Condo ApartmentCondo Row HouseHome5711285,917$309,886$274,374$335,648$270,000$227,000$267,4001990Condo ApartmentCondo Row HouseHome655974,593$256,996$224,840$293,615$200,000$175,000$238,0001991Condo ApartmentCondo Row HouseHome1,0782086,994$213,036$206,031$260,808$174,000$155,000$216,0001992Condo ApartmentCondo Row HouseHome1,1711506,441$185,231$202,082$257,406$155,000$155,000$208,0001989-1992Condo ApartmentCondo Row HouseHome3,47558323,945$227,866$223,150$284,679$181,000$170,000$230,000Source:^ City of Toronto Planning and Dev't. Dept.Teela Sales Filesfor various types of tenant households are in most cases much lower than prices in the lastfour years. Only households of couples at the 60th percentile, and households generally atthe 80th percentile, might be able to afford even the greatly reduced 1992 prices.The three consultants' studies of inclusionary zoning and affordable ownership housing thatthe City commissioned produced three estimates of development costs for modest condo-style units. The consultants' assumptions vary, and they estimated the costs at differenttimes, under different market conditions, but the message remains the same: the vastmajority of tenant households probably cannot afford even at-cost new housing in Toronto.Table 5.3 shows the dollar value gap between the three consultants' cost estimates and theaffordable price at the 60th percentile of the income distribution for various tenanthouseholds in 1992.Note that the Malone Given Parsons study estimated costs in 1990, and assumed the unitswould be included in a market condo development, which condition would restrict the abilityof the developer to reduce costs through design modifications. Costs indicated do notinclude developer's profit.The N. Barry Lyon study estimated costs using 1991 prices, and assumed the wholedevelopment would be a modest affordable home ownership project. The CB Commercialstudy used estimated costs for a Cityhome development in 1992 on an actual available site.67Malone Given Parsons dev't cost^land cost 1$198,151  L^$60,000^N. Barry Lyon^dev't cost^land cost$154,000CB Commercialdev't cost^land cost$161,571$20,000 $31,786Table 5.3Development Costs900 Square Foot, 2 Bedroom ApartmentAffordable PriceAt 60th PercentilePrice • Gap $69,474Gap$77,045All Tenants$113 , 625$84,526Couples$63,893 $19,742 $27,313$134,258Singles/Single Parents$92,451 $100,022$61,549 L^$136 , 602"Couples" category includes couples with and without childrenSources:^Malone given Parsons, 1991N. Barry Lyon, 1993CB Commercial, 1993Table 5.1, Heather Urquhart, 19935.3 Options for the City of TorontoThis section reviews program options and means of implementing them which respect theCity's policy that affordable housing should serve the lowest 60% of tenants, and shouldinvolve resale price controls to ensure that the housing remains affordable. It also presentsa slightly broader range of options which do not quite meet the City's policy goals: optionsinvolving repayment mechanisms, and/or homes priced at the low end of the market. Thissection will review the potential program costs to the City, and who the housing could serve,and compare these with social housing costs for similar income groups.The options presented here are limited to those the City could reasonably pursue underexisting conditions and policies, or with provincial policy changes currently under discussion.Longer term solutions will be discussed in the "Conclusions" chapter.5.3.1 The City's Role. Chapter Three outlined five possible roles proponents have playedin home ownership assistance programs. This section comments on their applicability forthe City of Toronto.The role of grantor is unlikely for the City due to budget constraints, given the size of thegap to be bridged, unless the grant involved is the waiving of smaller amounts, such asdevelopment charges.The role of lender appears unlikely as any more than an ancillary aspect of a project, againdue to the gap involved, and to the additional risk of even greater expense if/when interestrates increase. The Australia/New Zealand, Index Linked Mortgage-like model (AppendixA, #5, #19, #21) does have the potential to bridge the gap, but the scale is moreappropriate to the resources of a provincial or federal government program. The rent-to-own type of program, like that in Montreal (Appendix A, #15), only assists with the down69payment. As will be shown later, this is insufficient to bridge the gap in Toronto, but maybe sufficient in another municipality.The federal government has already done much as a mortgage insurer to facilitate homeownership by allowing 95% mortgages. The City could only add guarantees for anunconventional mortgage arrangement ancillary to its own project.As development regulator, the City's usual role, the City could somewhat reduce but noteliminate the gap between what is affordable and its cost.As trustee of public resources and benefits, the City has the best opportunity to implementan effective home ownership assistance program for the tenant households targeted by itsaffordable housing definition. The City's potential public resources are its developmentagency (Cityhome) and the existing social housing land hank, with the ability to add to itthrough:rezoning exactions for redevelopment of industrial land,exactions in return for extra density (density bonusing),residential to commercial density conversion exactions, andthe potential to implement an inclusionary zoning exaction on new single-siteresidential developments.Most of the exactions however, are not effective tools at this time because both thecommercial and residential markets are very weak. City Council has also recently adopteda resolution not to allow most density bonuses, so as to maintain limits on "built form."70In the short term, then, the City has its existing land bank, and whatever lands for affordablehousing it can negotiate for in the Railway Lands, and one or two other large industrial siteswhose owners expect to redevelop soon.Within the role of trustee, the examples in Appendix A provide three basic options, and avariety of tools or means to implement them. The three basic options are:1. a controlled equity project,2. a shared equity/appreciation project, and3.^an at-cost, low-end-of-market project with resale controls.The tools or means to implement these options are discussed in detail below, under theoption to which they apply best.5.3.2 Option One: Controlled Equity. A controlled equity project targeted to low and middleincome tenant households is the preferred option for the City. The controlled equity optionwas modelled in the CB Commercial study that examined the feasibility of an affordablehome ownership project on a Cityhome site. The spreadsheet model allowed the consultantto try various approaches to reduce the purchase price at the least cost to the City, includingthrough a below-market land lease, reduced construction costs, mortgages from the City atreduced rates, and a combination of these approaches. The initial affordability gap, plus thelong-term costs and risks to the City of controlled resales to the targeted income group werecompared for these variations. Other variations on this spreadsheet provided further dataused in the assessment of Option One below.5.3.2.1^Consultant's results. No approach the CB Commercial consultant tested wassignificantly better, in the long run, than simply selling the units at a reduced price. Nosingle variable realistically could be reduced sufficiently to eliminate the gap. If the City71obtained land for nothing, there was still a gap between the affordable price and theremaining cost. Reduced construction costs in themselves could not eliminate theaffordability gap - "hard" costs would have to be $21.45 per square foot, compared to anestimated $78.15 for the project in question. Offering an interest rate subsidy was moreexpensive in the long run than simply selling at a reduced price, due to the effects of interestrate differentials over time.In fact, a major cost factor in the model is the requirement that the units be bought backat a guaranteed appreciation rate (the model used 2/3 of the Consumer Price Index) andresold to households at the 60th percentile. Given that the starting point for the project isduring a low point in the cycle of inflation and interest rates, the model assumed increasingrates in the coming ten years. Interest rates generally outpace increases in income, so thatthe price affordable to households in the next ten years is likely to be lower, due to interestrate increases, than the guaranteed buy-back price. This loss is a significant contributor tothe long-term cost to the City of an affordable home ownership project.5.3.2.2^Further analysis. The CB Commercial study did not examine all possibilities,however.^When the consultant produced such discouraging results, City HousingDepartment staff suggested relaxing some of the variables previously held fixed, such as theGross Debt Service (GDS) ratio and the down payment, to see what effect they had.This section comprises that further analysis. The analysis involved varying several factors,some in combination, and using the resulting affordability gap and net present value (NPV)of the net cash flow over ten years to compare the results. Tables 5.4, 5.5, 5.6, 5.7, and 5.8present the results. Note that the affordability gap measures the initial differential in yearone between affordable price and estimated cost (the analysis does not indicate how the cost72is reduced). The net present value figure is a measure of the City's potential long termcosts, including risks associated with inflation and interest rate changes.5.3.2.3^GDS ratio. The analysis shows that if the City expected buyers to assume ahigher Gross Debt Service (GDS) ratio than 30 percent, the gap and the NPV of the projectcould be reduced significantly. The impact of that debt burden on the purchasers, however,is not clear, and could be very onerous. The effects of the various GDS ratios on estimatedhousehold disposable income are shown in Table 5.9. The tax calculations used do notinclude any tax deductions or credits, such as for children, so the table shows a smallerdisposable income than might actually be available.One assessment of the impact of higher GDS ratios is possible by comparing after-sheltermonthly disposable income as calculated in Table 5.9 with monthly non-shelter expensescalculated for the minimum-income budget guide prepared by the Toronto Social PlanningCouncil (SPC). The budget guide shown in Table 5.10 is possibly out-of-date, as it73$100 $82,638 $9,182 $91,820 $69,751$75 $85,742 $9,527 $95,270 $66,302$50 $88,848 $9,872 $98,720 $62,852($85,907)($83,144)($80,556)Table 5.4Changes in the Affordability Gap and NPV of Project Cash FlowRelative to the Gross Debt Service RatioRatio25%Max. Afford.Mort. Pymt.$63,691DownPayment$7,077Max. Afford.Price$70,767Afford. Gap^Cash Flow NPVper unit per unit$90,804^($102,066)30% $82,638 $9,182 $91,820 $69,751^($85,907)32% $90,217 $10,024 $100,241 $61,330^($79,443)33% $94,007 $10,445 $104,452 $57,120^($76,211)36% $105,375 $11,708 $117,084 $44,488^($66,516)40% $120,533 $13,393 $133,926 $27,646^($53,588)50% $158,428 $17,603 $176,032 ($14,460)^($21,270)Table 5.5Changes in the Affordability Gap and NPV of Project Cash FlowRelative to the Down PaymentDown Payment10% $9,182 $91,820 $69,75115% $14,583 $97,221 $64,35020% $20,660 $103,298 $58,27425% $27,546 $110,638 $51,387($85,907)($85,456)($84,992)($84,512)Table 5.6Changes in the Affordability Gap and NPV of Project Cash FlowRelative to Maintenance Fees per Month (including sweat contrbutions)Maintenance FeesTable 5.7Changes in the Affordability Gap and NPV of Project Cash FlowRelative to Sundry City Costs Land Transfer Tax = 0Administration = 0Contingency Reserve = 0All of the Above = 0* Base case, assuming income of approximately $36,600.Source: CB Commercial, 1993, and Heather Urquhart, 1993($84,837)($80,414)($82,245 )($75,682) Table 5.8Changes in the Affordability Gap and NPV of Project Cash FlowRelative to: Land and Construction CostsLand Costs per unitConstruction $0 $10,000 $15,000 $20,000 $25,000 $31,786Costs per square footGap $30 ($21,271) ($11,271) ($6,271) ($1,271) $3,729 $10,515NPV ($2,651) ($11,742) ($16,288) ($20,833) ($25,379) ($31,548)Gap $40 ($8,969) $1,031 $6,031 $11,031 $16,031 $22,817NPV ($13,940) ($23,032) ($27,577) ($32,123) ($36,668) 837)Gap $50 $3,333 $13,333 $18,333 $23,333 $28,333 $35,119NPV ($25,230) ($34,321) ($38,867) ($43,412) ($47,957) ($54,126)Gap $60 $15,636 $25,635 $30,635 $35,635 $40,635 $47,421NPV ($36,519) ($45,610) ($50,156) ($54,701) ($59,247) ($65,416)Gap $70 $27,938 $37,938 $42,938 $47,938 $52,938 $59,723NPV ($47,808) ($56,900) ($61,445) ($65,991) ($70,536) ($76,705)Gap $78.15 $37,966 69751NPV ($57,011) ^ ($85,907)Assuming income of $36,600 and affordable price of $95,270* Base CaseSource: CB Commercial, 1993, and Heather Urquhart, 1993Table 5.9City of Toronto Tenant Household Disposable IncomeAll TenantsIncome^IncomeDecile^(1992 est.)HousingCosts(30%)RemainingMonthlyIncome*HousingCosts(32%)RemainingMonthlyIncome*HousingCosts(33%)RemainingMonthlyIncome*HousingCosts(36%)RemainingMonthlyIncome*HousingCosts(40%)RemainingMonthlyIncome*HousingCosts(50%)RemainingMonthlyIncome*80th $53,702 $1,343 $1,781 $1,432 $1,691 $1,477 $1,647 $1,611 $1,512 $1,790 $1,333 $2,238 $88670th $43,357 $1,084 $1,534 $1,156 $1,462 $1,192 $1,425 $1,301 $1,317 $1,445 $1,173 $1,807 $81160th $35,865 $897 $1,355 $956 $1,295 $986 $1,265 $1,076 $1,176 $1,196 $1,056 $1,494 $75750th $29,519 $738 $1,203 $787 $1,154 $812 $1,130 $886 $1,056 $984 $957 $1,230 $71140th $23,751 $594 $996 $633 $956 $653 $937 $713 $877 $792 $798 $990 $60030th $17,966 $449 $789 $479 $759 $494 $744 $539 $699 $599 $639 $749 $489children 1I Couple, with or without50th $44,953 $1,124 $1,572 $1,199 $1,497 $1,236 $1,460 $1,349 $1,347 $1,493 $1,197 $1,87360th $51,083 $1,277 $1,718 $1,362 $1,633 $1,405 $1,591 $1,532 $1,463 $1,703 $1,293 $2,128$8231$867[-Single Person, or Single Parent50th $23,595 $590 $990 $629 $951 $649 $931 $708 $872 $787 $794 $983 $597160th $28,834 $721 $1,178 $769 $1,130 $793 $1,106 $865 $1,034 $961 $938 $1,201 $6971Source: Income data from City of Toronto Planning and Development Department estimated from 1986 StatsCan data,adjusted by Toronto CMA all items CPI, December 1992 (130.5% over 1986)Remaining Monthly Income refers to after-tax, after-housing-costs income. Basic income taxes only are calculated, with no deductions or credits.This may therefore understate remaining monthly income, especially for families with children.Table 5.10Toronto Social Planning Council Selected Budget Guides (1992 Prices)Type of HouseholdExpenditure ItemSingle Single parentTwo childrenCoupleTwo childrenRent $426 $599 $712Food $221 $404 $674Clothing $67 $122 $211Personal Care $20 $46 $68Household Maintenance $11 $26 $31Household Furnishings $58 $91 $101Social Outings/Movies* $25 $42 $57Sports/Recreation/Toys* $11 $20 $35Alcohol and Tobacco* $28 $28 $57Telephone $19 $19 $19Public Transportation $58 $79 $103Newspapers/Magazines $17 $21 $21Occasional Babysitting $0 $101 $0Vacation $0 $22 $22Special School Needs $0 $7 $17Insurance $0 $7 $7Contingencies $28 $31 $31Monthly Total $989 $1,666 $2,165Annual Total $11,872 $19,992 $25,983Monthly Total net of rent $563 $1,067 $1,454Rent as a % of Total Expenditure 43% 36% 33%* The amounts for these items have been reduced by the Social Planning Councilto 50% of the actual budget guide figures in recognition of their discretionary nature.Source: Adaptation by David P. Ross of the Toronto Social Planning Council's budgetguide "Living on the Margin," 1986, as he used it in "Benefit Adequacy in Ontario," 1987.Costs have been updated to December 1992 using the C P I and the rent review guideline.77represents a 1986 budget inflated by CPI to 1992 prices. As a ball-park indicator, however,it shows that:For a single person at the 50th or 60th percentile ($23,600 - $28,800), a GDS ratioas high as 50% still should leave a disposable income sufficient to cover the minimumnon-shelter budget suggested by the Toronto SPC.For a couple with children at the 50th or 50th percentile, ($45,000 - $51,000; child taxcredits not considered), a GDS ratio of 33% should leave income sufficient for theSPC monthly non-shelter budget of $1,454.A single parent, however, would have to be at the 60th percentile, ($28,800) and havea maximum GDS ratio of 30%, to ensure that there was sufficient income to coverthe SPC monthly non-shelter budget for the parent and two children ($1,067).At the 30th and 40th percentiles for all tenant households, ($18,000 - $25,000),however, only single person households are likely to be able to afford even a 30%GDS. (They could actually afford a higher ratio.) All other households at thatincome range probably would have insufficient income left over for other basic needs.As a basis for deciding what GDS ratio is affordable, this comparison is flawed. It does notconsider, for instance, the long term stress on the household of living that "close to the line."It does not consider whether or not people at the given income levels are willing to pay theprice of living near poverty level to own their home. One reason people prefer homeownership is that its costs usually go down relative to income, given income increases andfixed mortgage term interest rates. Do households at these low income levels experiencethe income increases that most present home owners count on? The above comparison doesnot address these questions.There is little if any literature which examines the issue of what shelter cost to income ratiosare actually affordable at given income levels, and by what criterion (Steele, telephoneconversation, March 1993). The accepted ratio has increased over the years, and the income78considered has expanded as well to include both spouses' income. The accepted ratios, now30% - 32%, are those established by lending institutions. Many are now experimenting withratios of 33% - 36% (Lesley Watson, pers. comm. January 1993). Given the lack of researchinto this issue, it seems advisable to proceed with caution, if at all, with any program whichassumes a GDS ratio higher than 30%, especially for families with children.5.3.2.4 Down payment, maintenance fees. If the City expects buyers to have a largerdown payment than 10 percent, the affordability gap would come down significantly, but theNPV for the City would hardly be affected at all (Table 5.5). The reverse is true ifmaintenance fees could be reduced by expecting residents to do most of the maintenancework on common areas (Table 5.6). (A "sweat contribution" to maintenance not onlyreduces maintenance costs, but also means the purchaser can afford a larger loan.)5.3.2.5 City administration and other costs. There are costs to the City of administeringsuch a project that are unrelated to the development costs and prices of the units, such asthe Provincial Land Transfer Tax, general administration, and a "plug" cost for theunexpected, the "contingency reserve." If any of these costs were zero, they individuallywould not greatly reduce the project's negative NPV. Taken collectively, however, thenegative NPV could be reduced by $10,000 per unit (Table 5.7).5.3.2.6 Land and construction costs. The most significant reductions in theaffordability gap and NPV for the modelled project, however, are found in reducing land andconstruction costs - the largest "up front" costs of the project. Table 5.8 shows how variouscombinations of land and construction costs affect the gap and NPV, for a given incomelevel of $36,000 (about the 60th percentile level for all tenant households). Some cost valueson this table are clearly wishful thinking, in practical terms. The next section will discussmeans by which the affordability gap might feasibly be bridged.79^5.3.2.7^Potential means for feasible savings. The sections just above described theeffects of changing certain variables in a supply-demand spreadsheet for an affordable homeownership project. The sections immediately following describe how some of those changesmight be made feasible in actual practice. There is no guarantee that any of theseapproaches will make an affordable home ownership program possible; they are simply ideaswhich are potentially most effective.^5.3.2.8^Land costs. Land costs attributable to a City home ownership program orproject may be reduced in the following two ways. Firstly, the City occasionally does acquire"free" land through development bonuses, and may have some in the land bank. Secondly,in the present development environment, the City should consider examining the land costsit would expect to have returned by the project in terms of the opportunity cost of theproject, rather than in terms of the purchase price and carrying costs. The best price theCity is likely to get for any land in its land bank is the expected land component of theProvincial MUP, or $25,000 per unit. This is probably the maximum opportunity cost of ahome ownership project. This may even exaggerate the opportunity cost, if social housingallocations are unlikely to be available soon for the land.^5.3.2.9^Construction costs. The cost estimates used by CB Commercial for thefeasibility study are based on concrete construction, and design and standards compatiblewith an adjacent development. The consultant suggested that if the City had an opportunityto build a wood-frame low-rise project, actual construction costs could be significantlyreduced. This possibility depends, however, on the availability of free or low-cost land, asotherwise the land costs per unit for a low-rise building would be too high.Cityhome is used to developing social housing to its own and the Ministry of Housingstandards, standards intended to minimize the long term maintenance, repair, and80replacement costs for which it is responsible. Ownership housing for households justentering the market could reasonably be built to lesser standards in some areas, such asfinishes. First time home buyers do not expect to get the best, and as home owners ratherthan renters, have the opportunity to up-grade features of the unit as they wish and are ableto over time. Cityhome should consult with a variety of outside sources such as other non-profit developers and private developers, on possible cost reductions through appropriatelower standards for both new-built units and conversions/renovations.5.3.2.10 Maintenance and other operating costs. An equity co-op ownership structurecan carry out most of its own administration, thereby reducing administration costs for theCity. An equity co-op structure will also facilitate members' sweat contribution tomaintenance of common areas, thereby reducing maintenance costs. The Province couldalso be persuaded to waive the Land Transfer Tax for the resale of the unit back to the City,while the next purchaser absorbs, as usual, the transfer tax for the resale by the City. TheCity therefore could avoid most administration costs, or at least marginal costs may bereduced to zero -- meaning no additional staff are needed. The negative NP.V can therebybe reduced by about $10,000.5.3.2.11 Controlled equity co-ops versus individual affordable housing agreements. Notethat, as discussed earlier, controlled equity home ownership can be controlled using twodifferent mechanisms, a statutory "affordable housing agreement," and a land leaseagreement. City staff have discussed with Ministry of Housing staff the possibility of gettingthe necessary authority to enter into affordable housing agreements. This mechanism is veryeffective for a condominium ownership structure. A condominium ownership structure,however, does not lend itself to facilitating sweat equity contributions to common areamaintenance and to self-administration. These advantages are limited to the equity co-opstructure.815.3.2.12 Cross-subsidized development projects. One means to offset initial land andconstruction costs is to cross-subsidize affordable home ownership units with the profits onmarket ownership units developed by Cityhome. This approach was used for a mixedownership and rental project built by Montgomery County Maryland (Appendix A, #27).This option would require a considerable change in direction by Cityhome, and would makeCityhome compete in the private sector ownership housing market, with all the attendantrisks. This option is not currently viable, because the market for new ownership housing isdepressed; new market units likely would be hard to sell, and the prices obtained would beinsufficient to subsidize below-market units. This could change, though, within the next fewyears.5.3.2.13 Rental-building conversions/acquisition-rehabilitation. Another way to reduceconstruction costs is to convert an existing rental building to a controlled equity co-op.Renovation costs are almost invariably lower than construction costs for new buildings.Given the recession, the age of some of the apartment stock in Toronto, and thedissatisfaction of many landlords with the Ontario rent control legislation, it seems likelythere would be rental buildings available, should the City make an offer.There is a lot of apartment stock in Toronto reaching an age at which it requiresconsiderable capital investment to bring it up to and maintain it at present standards. TheCity of Toronto High-rise Apartment Conservation Study, (Hemson, 1992) found that it is likelythat some of these buildings will not be able to generate sufficient revenue under the RentControl Act to offset the expected costs of conserving the buildings in habitable shape forthe foreseeable future. The Rental Housing Protection Act (RHPA) makes it very difficult,if not impossible, to convert or demolish such buildings for any other use. These factors alsomake it likely that landlords with older buildings and low rents would be very interested inan opportunity to sell.82Cityhome would, of course, face the same requirements as a private landlord in anapplication under the RHPA to convert a building to a non-rental use. The proposal couldpermit any sitting tenant to buy, and could keep the units affordable to tenants in the sameincome group. Under those conditions, City Council, which has the authority under theRHPA to allow or disallow applications, might deem that the project provides the necessarytenant protection, and/or does not represent a loss to the affordable rental stock in the City.The City's conversion policy is under reconsideration now, due to the current relatively highrental vacancy rate, (Vykki Silzer, various discussions, 1992 and 1993) and this too couldcreate more favourable conditions for a conversion-driven home ownership program.This approach could generate some political flak for the City, because the City has quitestringently applied the RHPA to control private landlords' converting their buildings, andthe City has been a vocal proponent of the Rent Control laws which landlords consider arepreventing them from up-grading their buildings for a reasonable return on their investment.The City could be perceived as changing the rules for its own benefit. One way to avoid thisconflict might be to permit private landlords or developers to convert buildings to controlledequity co-ops targeted to tenant households at or below the 60th percentile, with the Cityholding an affordable housing agreement with the individual purchasers as a condition ofallowing the conversion. If private landlords could find a way to make a profit doing this,the change in policy could be considered fair to them.5.3.2.14 An alternative controlled equity program. Consultant Peter Zimmerman hasrecently developed for consideration another controlled equity ownership model for theToronto non-profit housing group, Homes First Society. This model also assumes that anequity co-operative corporation leases the land and manages the housing, and that residentscontribute their own labour to the maintenance of the common property. However, it83organizes the financial relationship between the landholder, the co-op, and the residentsdifferently. Table 5.11 presents a summary spreadsheet for this model.84INPUTS, VARIABLES / ASSUMPTIONS: on a Per Unit BasisLand ValueGround RentBuilding Cost (Net of Sweat)AmortisationGross Household IncomeGross Household IncomeGross Household IncomeConsumer Price IndexNon- Housing IndexHousing IndexCompositeProperty TaxesProperty Taxes - Annual IncreUtilitiesUtilities - Annual IncreaseMaintenance (Net of Sweat)Maintenance - Annual IncreseInterest Rate 10,0004.00%88,992351,5372,0322,5264.00%6.00%5.00%$2008.00%$80CPI$80CPI9.50%of Land Valueyearsper month (30 percentile)per month (40 percentile)per month (50 percentile)per monthper monthper monthANNUAL CASH FLOWYearREVENUE 1 2 3 4 5 6 7 8 9 10 25 Total NPVHousing charges @ 30% of Ir 9,093 9,457 9,835 10,229 10,638 11,063 11,506 11,966 12,445 12,943 23,309 378,699 109,886OPERATING EXPENSESTaxes 2,400 2,592 2,799 3,023 3,265 3,526 3,808 4,113 4,442 4,798 15,219 175,454 42,683Utilities 960 1,008 1,058 1,111 1,167 1,225 1,286 1,351 1,418 1,489 3,096 45,818 12,709Maintenance 960 1,008 1,058 1,111 1,167 1,225 1,286 1,351 1,418 1,489 3,096 45,818 12,709TOTAL EXPENSES 4,320 4,608 4,916 5,246 5,599 5,977 6,381 6,815 7,279 7,776 21,411 267,090 68,101NET OPERATING EXPENSES 4,773 4,849 4,919 4,983 5,039 5,087 5,124 5,151 5,166 5,166 1,898 111,608 41,785Ground Rent 536 536 536 536 536 536 536 536 536 536 536 13,394 4,656Bldg Mortgage P & I 8,822 8,822 8,822 8,822 8,822 8,822 8,822 8,822 8,822 8,822 8,822 220,561 76,666NET CASH FLOW (4,585) (4,509) (4,439) (4,375) (4,319) (4,272) (4,234) (4,207) (4,192) (4,192)2 (7,460) (122,347) (39,536,Table 5.11Zimmerman Model for Homes First SocietySource: Peter Zimmerman, Toronto, 1993Zimmerman's model assumes:a below-market land lease rate (4%);a possible sweat equity contribution to the project development, instead of a cashdown payment, worth about $5000 per unit;blanket payments by the co-op of mortgage payments, utilities, common areamaintenance expenses (net of residents' labour), and property taxes;an all-inclusive housing charge that is geared to residents' incomes.The model is very like the non-profit co-op housing model, except that the residentsaccumulate a (limited) amount of liquefiable equity from their housing charges. Zimmermanproposes that the amount of equity they acquire should be directly related to the proportionof the per-unit housing cost their housing charges cover.This model is aimed at households with incomes in about the 40th percentile of the tenanthousehold income distribution, generally within the income range served by rent-geared-to-income social housing. It does not aim to break even financially. It is tentatively proposedas an alternative to the existing model that the Provincial government could support becausethe long term costs are lower. Part of the reason the costs are lower is that the modelproposes that residents pay more than the 25% of gross household income that socialhousing requires, possibly as much as 33% of household income.This model does require a significant policy change by the provincial government, and so isreally a longer-term option. However, the Ministry of Housing is already aware of thisproposal, and has indicated some interest. It is possible that a pilot project proposal couldbe approved quite quickly, once the case has been made that it is a lower-cost andaffordable approach.86Many of the possible means of implementing Option One that have been described abovealso apply to Options Two and Three. They are not raised again in the discussion of theseoptions which follows.5.3.3 Option Two: A Shared Equity/Appreciation Program. As noted in Chapter Four, sharedequity/appreciation mortgages allow the sale of the housing into the open market andrequire that the City receive its share of the market appreciation. They do not keep theunits affordable over the long term and so do not exactly meet the City's definition ofaffordable housing. Since they do return funds to the City which would allow it to developnew affordable housing, a shared equity/appreciation affordable home ownership programmay nevertheless be worth considering, especially in a program which recognizes a sweatequity contribution.5.3.3.1 Sweat equity and the shared equity/appreciation mortgage. The opportunity forthe buyer to contribute sweat equity reduces the up-front construction costs and the cashdown payment required on the unit. Under a shared equity/appreciation mortgage, thesweat equity contribution must be quality controlled, so that the property is not actuallydevalued by poor work. As well, to calculate the City's share of the appreciation, the sweatequity contribution has to be accurately valued. These conditions could make a sweat equityprogram awkward to incorporate into any kind of resale price-controlled arrangement.These problems could be alleviated by working with a group which has experience withsweat equity home-building projects, such as "Habitat for Humanity," or "FrontierFoundation." Cityhome should seek advice from these groups and possibly from otherdevelopers about projects using sweat equity or involving unfinished units.87The sweat equity approach is limited, however, by the fact that only the first buyer canbenefit by being able to make a sweat equity contribution. Subsequent buyers could increasethe value of the property, but they could never again reduce the base cost of the unitthrough sweat equity. Therefore, subsequent buyers would have to be able to produce alarger down payment and/or carry a larger mortgage than was expected of the initial buyer,making the unit less affordable to them. Habitat for Humanity gets around this by havingsubsequent buyers contribute sweat equity to another project. For Cityhome this solutionwould require an on-going commitment it cannot now make to sweat equity projects.Under Option One above, (controlled equity, resale through the City) it could be impossibleto resell the unit to someone within the targeted income group without an additional largesubsidy by the City, equivalent to the appreciated sweat equity contribution of the first buyer.A shared equity/appreciation program avoids this problem entirely by selling into the market.5.3.3.2 Shared equity/appreciation programs. There are various ways to structure ashared equity/appreciation program, including some with land leases. One interesting andvery flexible approach is that designed by the University of California at Irvine, describedin Appendix A, #25. They provided for a sliding proportional sharing of the resaleappreciation, depending on what land lease rate the household had paid while it owned theunit. The land lease rate purchasers paid was allowed to range between zero and fourpercent. The University also limited the maximum resale price of the unit by a constructioncost factor, making this a hybrid shared equity/appreciation - controlled equity project. TheUniversity was aiming to keep the housing affordable to a much higher income group thanthe City is targeting, (university faculty and staff), and so had more leeway in how high pricescould be allowed to go. However, this as well as other ways to structure sharedequity/appreciation would have to be modelled carefully if the shared equity/appreciationoption, with or without sweat equity, was chosen.885.3.4 Option Three: At-Cost, Low-end-of-market Ownership Housing. The City may also wishto consider the model already developed by Metro Toronto Housing DevelopmentCorporation: the at-cost controlled equity co-operative. The project developed by Metro atMalvern Road in Scarborough (described in Appendix A, #12) offers units at a price whichinvolves no subsidy. Metro controls the resale of the units through the land lease to theequity housing corporation, and expects that due to the price controls, the units willeventually become affordable to households with lower and lower incomes.The Malvern project is targeted to house-rich, cash-poor seniors who can use the equity intheir present homes to buy the units with no mortgage. Therefore, for these buyers, changesin interest rates do not affect the affordability of the units. A City-developed projecttargeted to first-time buyers, however, would be affected by interest rate increases. Ifinterest rates rise as expected over the next five to ten years, price controls may not besufficient to make the units successively more affordable. This option has a limitedopportunity to meet the City's goals.5.4 Summary and RecommendationsIt is important to recognize that an affordable home ownership initiative greatly differs fromthe City's current activities in housing, and has significantly different financial implications.The City's involvement in social housing is almost entirely recompensed by the operatingsubsidies provided by the Province's social housing program. There is no such compensationavailable yet for ownership projects. Given the City's affordable housing definition, and thelikely cost of producing ownership units, it is clear the housing would have to be sold belowcost; how much below depends on which income groups the City/Cityhome wish to targetwith this form of housing. There is also added financial risk in this form of housing, becausethe City is fronting all the development costs, and because ownership housing is more subjectto market risks than social rental housing.89The assumption here is that the City would only undertake a home ownership initiative atthe lowest possible cost to the City. Therefore the options are limited in the extent to whichthey can subsidize lower income households. The discussion below reviews, for the threeoptions, the costs to the City according to the spreadsheet model developed by CBCommercial, and who is likely to benefit by each kind of initiative. There are then somefinal comments about the feasibility of an affordable ownership initiative in the 1993 market.5.4.1 Option One: Costs and Beneficiaries. 5.4.1.1.^Costs. Controlled equity project costsand beneficiaries are displayed in Table 5.12, given the two possible land90Table 5.12Option One: Controlled Equity -- Costs and BeneficiariesEquity Co—op with associatedreduced costs:Per unitPrice*Income(approximate) AffordablePriceAffordabilityGap**Net Present Valueof Cash Flowsa. Land prices at opportunity cost(max. $25,000), and construction $132,500 $45,000 — $124,200 — $8,300 — ($27,198) —costs at @ $60 per square foot $50,000 $141,400 ($8,900) ($13,683)b. Land "free", and constructioncosts at @ $60 per square foot$107,500 $36,600 $95,300 $12,200 ($27,129)based on spreadsheet prepared by CB Commercial — assumes 2—bedroom apartment of approximately900 — 1000 square feet** Per unit price — affordable priceSource: Heather Urquhart, 1993cost scenarios (opportunity costs only, or free), assuming construction costs can be reducedby whatever means to $60 per square foot or less, and assuming the administration andmaintenance costs can be reduced as discussed through an equity co-op structure.For a household with an income of $45,000, the unit would cost about $8,300 more than thehousehold could afford; for a household with an income of $50,000, the unit would costabout $8,900 less than the household could afford. If sales could be managed in this manner,sales at the respective affordable prices to a mix of households in this range could result ina zero net affordability gap. The NPV of the net cash flow for the City would still benegative in both cases.The NPV of the property taxes that will be paid over the years by an affordable homeownership development are not included in the NPV of the net cash flow for the projectmodelled in the CB Commercial spreadsheet and indicated in Table 5.12. The NPV of thesetaxes is $13,452 to the positive for the City. (This figure is the same for a project under anyoption, of course.) These taxes pay for on-going costs of municipal government, and socannot be entirely netted off affordable home ownership initiative costs, but they representrevenues the City otherwise may not have had from this land.5.4.1.2 Who would be served? It is interesting to compare the income levels indicatedin Table 5.12 to the maximum income levels of households already being served by Cityhomeand social housing generally, shown in Table 5.13. The Table 5.12 figures definitely fallwithin one or more categories of households Cityhome has a mandate to serve, dependingon household size and type.92Household Size^Core Need (1)^Shallow Non—Core (2)^Households at(#  of bedrooms) Income Threshold Subsidized Households^Market Rent (3)1 $26,000 $33,600 $42,0002 $32,000 $40,800 $51,0003 $38,500 $48,000 $60,0004 $47,000 $52,800 $66,000Table 5.13Households Now Being Served By CityhomeMaximum Income LevelsSources: (1) Ontario Ministry of Housing Newsletter, August 19, 1992(2) Households not in core need but for whom market rent is still more than 25% of income.Assumes market rents of:$700 for 1—bedroom$850 for 2—bedroom$1000 for 3—bedroom$1100 for 4—bedroom(3)^Cityhome policy is: Market rent households in Cityhome should ordinarily not pay less than 20% of income as rent.Assumes rents as above.5.4.1.2.1 The low-cost land scenario. The income range $45,000 to $50,000 representsapproximately the 50th to 60th income percentile for couples with or without children(tenant households- see Table 5.1). A household without children in this income range islikely to be well-served by the private rental market, and, as indicated by Table 5.13, maybe eligible for market units in social housing as well. A household with children may findit difficult to obtain an adequate apartment in the private rental sector for a price they canafford, due to both budget constraints and bias against children in the private rental sector.They would definitely be eligible for market units in social housing, and might even beeligible for shallow subsidy, depending on the size and configuration of the family. This isprecisely the type of household, however, that conventional wisdom says will begin lookingfor home ownership opportunities outside the urban centre if they cannot find them in it.This group also may simply prefer housing outside the urban centre, regardless of itsavailability downtown. More specific market research within this group is needed to explorethese issues of preference and availability.An income of $50,000 is a little less than the combined income of two single person or singleparent households at the 50th to 60th income percentiles (see Table 5.1). These householdsare considered in core need by CMHC's definition (1992 figures). Shared housing isconsidered a temporary measure, but has become a more common approach to homeownership in recent years. Whether one household rents from the other, or both shareownership, the income effect is nearly the same: they collectively can afford to support alarger mortgage than singly. Unit design likely would have to he different to make thisoption attractive, e.g., one-and-a-half or two bathrooms, possibly larger bedrooms andsmaller common space, and possibly three-, even four-bedroom units. It may not be possibleto produce such units within the total per unit price constraint of $132,000, but this optionseems worth investigating because it reaches much lower income households.945.4.1.2.2 The 'free land" scenario. An income of $36,600 is approximately the 60thpercentile for all tenant households considered together (see Table 5.1). For a householdwith children, requiring a two or three bedroom apartment, this income falls within or nearthe CMHC core need threshold. Again, the challenge for an affordable home ownershipinitiative is to produce two or three-bedroom units at or near the affordable price forhouseholds at this income level with children. A single person with this income, requiringa one bedroom unit, might qualify for shallow non-core subsidy in some of Cityhome'shousing. A "free land" scenario should make it more feasible to produce one-bedroom unitat or near the affordable price for singles at this income level.5.4.2 Option Two: Costs and Beneficiaries. 5.4.2.1 Costs. Shared equity/appreciationscenarios are exactly the same as for the controlled equity co-op approach, but the NPV ofthe net cash flow to the City could be zero, positive, or possibly even negative, if housingprices go down, because resale of the units is subject to the open market. The affordabilitygap for the initial purchaser remains the same. This option has long term costs for the Cityonly if housing prices go down, but it also has much fewer long term benefits for the City -it does not create an enduring stock of affordable housing. As mentioned earlier, however,it is a useful approach where sweat equity contributions are involved, because of thedifficulty in attaining the same cost savings for subsequent buyers as initial buyers providedfor themselves.5.4.2.2 Beneficiaries. The shared equity/appreciation option may serve exactly thesame households as those identified in option one. It may be politic to consider a sharedequity/appreciation arrangement for the higher income households identified. Where thepurchasing household is relatively well-served in the market, in the sense that it can affordadequate market housing, though not market home ownership, there may be strong pressureto avoid devoting resources to this household in favour of devoting resources to lower95income, needier households. Politicians and the public may view a subsidy to a householdin the $50,000 income range, for instance, as inappropriate. A shared equity/appreciationarrangement allows the City to assist this household into home ownership, which it mightotherwise never be able to attain in Toronto, without making a permanent, non-liquefiablecapital investment.Chapter One described why some municipalities should concern themselves with ensuringthere are affordable home ownership opportunities for middle income households within ornear the urban centre. Municipalities with high home ownership costs risk losing animportant segment of their work force and tax base because middle income households,especially those with children, expect to be able to own a home and will often go elsewhereto do so. Therefore there are sound reasons why a municipality might direct resources tohome ownership for middle income households. However, this argument may be hard tosell without further study of family housing preferences and City of Toronto demographictrends.5.4.3 Option Three: Costs and Beneficiaries. Low-end-of-market, at-cost ownership housingdevelopments generally can meet the Province of Ontario's goals as stated in the PolicyStatement on Land Use Planning for Housing. They are unlikely to address the needs of mostfirst-time home-buyers - tenant households - in the City of Toronto. Though this is thelowest-cost affordable home ownership initiative option for the City, it would serve onlyhouseholds in the upper 40% of the income distribution, a low-priority constituency.5.4.4 Timing and Marketing of a Controlled Equity Home Ownership Project. "Habitat forHumanity" sells its homes in Canada and the United States at cost, and requires that atresale, they be resold back to Habitat for the same, with no inflation factor, no appreciation(Bob Simpson, telephone conversation, March 1993). Homes First Society has opened96discussions with several community groups about a controlled equity home ownershipscheme, and has received a very enthusiastic response (Kevin Barrett, group discussion,March 1993). The N. Barry Lyon (1993) market study of affordable ownership housing withresale and equity controls attached showed us that tenant households in Toronto withincomes between about $30,000 - $45,000 are interested in this form of ownership housing,if it is genuinely affordable, and if it is priced below the private market. It appears thatthere is at least a niche demand market for this general form of housing tenure.Before initiating a project of this nature, however, a municipality must examine the supplyof lower-priced homes on the market. In the City of Toronto in 1992, the median price forcondominium apartments and row houses was $155,000, meaning half the units sold for lessthan $155,000. The number of such units sold was 1321, half of which is 660 units (seeTable 5.2).The affordable price for households with an income of $50,000 is $141,000. It seems likelythis household could find a unit on the open market at that price. What is not known fromthe Teela Sales File data is whether this unit would be a bachelor, one-bedroom, or two ormore bedroom unit. It seems likely the units priced below $155,000 are smaller units. If itis a bachelor or one-bedroom unit, it will not serve the needs of a household with a child.Nor will it serve the needs of two households sharing. The N. Barry Lyon market study(1993) also found that the households surveyed were primarily interested in two or morebedroom units.Finally, then, Cityhome has to calculate what size of unit it can offer for the prices indicatedin the recommended options above, what kinds of households will be interested in thoseunits, and whether or not those households can get that kind of unit on the open market ator near their affordable price. It is entirely possible that in the present market, with its "fire-97sale" prices and decreasing interest rates, Cityhome cannot offer anything in demand atsubstantially below market price.98Chapter SixConclusionsAs the level of government closest to people, municipalities are left face-to-face with thefailures of the housing market and the lack or failure of senior-level government housingprograms. Those failures take the form of homeless people on the streets, more demandon municipal social services and on food banks, and of people leaving the municipality whocannot get the housing they want. The federal government has practically withdrawn fromsocial housing since the mid-1980s, and most of its home ownership programs do not addresshome ownership affordability. The Ontario government is the only provincial governmentto step into the gap, and it is now under serious financial pressure. Municipalities, therefore,are often looking for ways in which they can help ameliorate their local housing problems,though they have a much more limited tax base upon which to draw.The real estate market boom of the late 1980s, combined with high interest rates, madehome ownership inaccessible to most potential first time buyers in many urban centres. Assome municipalities began to contemplate the possible costs of high home prices, attentionturned to ways they could make home ownership more affordable in the urban centre. TheCity of Toronto was one of the cities most affected in this way by the boom. As well, theCity needed alternatives to the Provincial social housing program to help meet its needsgenerally for affordable housing.The question this paper attempts to answer then, is "what kinds of home ownershipassistance programs could municipalities undertake to meet their housing policy objectives?"99The question in these tight fiscal times also encompasses, "How can municipalities undertakesuch a program at minimum cost, or get 'the biggest bang for their buck"?"6.1 OptionsThe Toronto case study (Chapter Five) focused mostly on the controlled equity option,because that option most closely meets the City's affordable housing objectives. The othertwo options are second-best or worse, because they do not contribute to a permanent stockof affordable housing. The Toronto case study also focused on relatively short-term options,as a starting point for the more detailed analysis which will be needed to proceed with aproject in the near term. There are related, longer term options.6.1.1 Inclusionary Zoning/Bonusing. The City of Toronto, and other municipalities, shouldseek authority if necessary to implement exactions such as inclusionary zoning, densitybonusing, and bonusing for redesignating industrial land. These are not always appropriateor effective measures, such as in the Toronto market conditions of 1990-93. Once theauthority has been obtained from the provincial government, however, the option is availableto use these tools as and when the municipality sees fit.6.1.2 Independent Land Trust. Another long term option is not a specifically municipalinitiative. Municipalities may be involved only in a facilitative capacity. A land trustpreferably including a savings and loan institution for affordable housing development wouldaddress the fact that some people are not, and likely never will be able to compete in theopen market for land and money to meet their largest, essential, capital need.A land trust should be a charitable institution, so that it could seek and accept donations ofland and money for land. Any non-profit housing corporation is a kind of land trust,including Cityhome, but a land trust with charitable status could not have the close100relationship with its municipality that Cityhome does. As mentioned earlier, such a landtrust would require changes in federal and provincial tax laws to make it most effective inCanada.There are several models for savings and loan institutions for affordable housingdevelopment. The Swedish and other Scandinavian housing co-operatives have developedsuch institutions on a large scale, as described in Appendix A, #22. The Muslim communityin Canada has established an interest-free system of assisting people into home ownershipthat nevertheless accrues a return on their money for those who save for home ownershipwith the institution (Kashmeri, in NOW, September 17-23, 1992). This system is nottargeted especially to lower-income households (its purpose is to provide a means formembers of the faith to comply with their doctrine against usury), however, it provides analternative model worth examining. Habitat for Humanity maintains a revolving interest-freeloan fund for purchasers of the housing it develops, sustained in part by donations.There may be other ways to generate low-cost or no-cost loan funds through the privatesector or with relatively small concessions required of the government bodies which regulatefinancial institutions. A useful next step could be to convene a meeting of experts in thisfield and ask them to brainstorm some suggestions.The potential municipal affordable home ownership initiatives reviewed in this paper havebeen winnowed down to and listed below as three basic options, along with many tools tohelp implement them, which could make ownership housing more affordable to lowerincome households. These are most particularly suitable for municipalities where there isa large gap between what most tenant households can afford, and what the market can offerin adequate ownership housing. Other, less demanding models are found in the appendix101and discussed in Chapter Three. Some of these may serve in municipalities where the gapis not so large.Legal Mechanismsland lease with equity co-opaffordable housing agreement with individualownerland trust and savings institutionControlled Equity^Land Cost Reduction Toolsexactions for redesignating industrial landShared Equity/Appreciation^bonuses for extra density or for converting densityfrom residential to commercialAt-Cost Development inclusionary zoning on new residentialdevelopmentsland donationsland loss write-downsland in lieu of taxes dueConstruction or Total Cost Reduction Toolswood frame construction (low-rise)conversion/acquisition-rehabilitationcross-subsidy by market unit developmentssweat equityalternative model for provincial subsidy6.2 Who Would Benefit?The options outlined for the City of Toronto were shown as serving individual tenanthouseholds with incomes between approximately $36,000 and $50,000, and shared tenanthouseholds at about $25,000 per household. Shared households are a risky target group;they are usually unstable -- the households tend to end up splitting (Maureen Fair, groupdiscussion March 1993). They likely are not a feasible target group unless the householdsare already established as shared or there is some other reason to be fairly sure a particularshared household will be successful. Therefore the majority of households the City might102target under these scenarios are in the mid-to-upper range of tenant households below the60th percentile of the income distribution.As mentioned earlier, it is now possible to buy housing for "fire-sale" prices affordable tohouseholds in the $36,000 - $50,000 range in Toronto. It may not be possible, however, tobuy a unit at an affordable price of adequate size for a couple or family with children.Affordable ownership housing targeted to families with children may specifically help addressthe problem of young families leaving the city for new suburban developments.On the other hand, if such households can obtain family housing with more space andprivate amenities for a price they can afford in the suburbs, they may still be unwilling totrade this off for less space closer to work and services in the urban centre, assuming themunicipality could offer family-oriented affordable housing. None of the available researchappears to address this question. This is an area requiring further market research.Municipalities may also have to actively encourage such households to locate closer to thecentre, by ensuring the family-oriented services and facilities are there, and by promoting itsbenefits and pointing out the problems associated with urban sprawl.For other municipalities, however, the situation may be different. The combination ofhousing costs and income levels for those who want to enter the home ownership marketmay create larger or smaller affordability gaps. Municipalities may have the resourcesrelative to the affordability gap in their local market to reach households with lower incomes.As presented in this paper, none of the options is designed to target specific income groups,only to reduce costs as far as possible while keeping municipal goals in mind. Unlike socialhousing programs, there is no replicable program model here suitable to meeting thehousing targets of any region. There are only tools and processes of analysis to work with.1036.3^Planning ImplicationsThe only replicable model this paper can offer other municipalities is the case study analysisprovided here for the City of Toronto of the demand and supply sides of the housing marketfor middle-to-low income households. The draft Official Plans recently produced by boththe City of Toronto and the Municipality of Metropolitan Toronto ("Cityplan '91," and "TheLiveable Metropolis") based their housing policies on gross estimates of population andhousing need. The case study entailed a much more detailed analysis of the (estimated)existing population and housing need and supply. This planning process is outlined below.6.3.1 Step one: Demand side analysis. The analysis used in the case study identifieshouseholds of different sizes and types by income group. It answers the following questions(though the available data may permit only approximate answers):Home owners: is there an affordability problem for existing home owners? (Thispaper does not address this issue, because it focuses on people who wish to enter themarket, but this could be a problem area for rural and elderly home owners,especially when interest rates are rising.)Tenants: what are incomes at key levels (25th, 50th, 30th, 60th percentiles) in thedistribution forall tenant householdssingle person householdssingle parentscouples with and without children,and for households of different sizes, requiring 1 bedroom, 2 bedrooms, 3 or morebedrooms.The income figures used in the Toronto case study are estimates which involvedconsiderable manipulation of the basic 1986 data available from Statistics Canada.104A special run of census data to get tenant income figures for various sizes and typesof households is needed to be accurate. Reasonable estimates are useful, however,because the analysis and conclusions are not dependent on exact data.Housing costs and the non-housing budget: How much disposable income does ahousehold at a particular income level have left over if housing costs 25%, 30%, ormore of monthly income'? How does this compare to the realistic cost of living in themunicipality, for different types and sizes of households?The City of Toronto also commissioned a market survey to find out if there is any interestin a controlled equity form of housing among middle income tenants. A market survey isa useful element of demand analysis. This survey identified not only interest, but also whatpeople expected in home ownership, and how much they thought they could pay for it,including how much of a down payment they thought they could produce. Another survey,completed for Peel Region near Toronto, asked people what elements of the home theywould trade off to be able to afford to own (Region of Peel Housing Department, 1992).The Regional Municipality of Ottawa-Carleton (Brethour Research Associates Limited,1992) commissioned a market study of potential housing projects using developmentstandards for cheaper but smaller homes.6.3.2 Step two: Supply-side analysis. The supply-side analysis consists of a series . ofquantitative and qualitative questions about the part of the housing market which servesmiddle-to-low income households.How well-served by the housing market are tenant (or more generally, potential firsttime home buyer) households of different sizes, types, and incomes? Do they havea choice of affordable, adequate, and secure forms of housing? What are the longterm prospects for the market serving them'?105A variety of factors and pieces of information contribute to this analysis: CMHC dataon the number of units of rental housing by size and price; CMHC and local realestate board data on numbers of units for sale by type and price, on vacancy ratesand on months of inventory for sale. Security of tenure may be assessed by suchfactors as the degree of protection under landlord and tenant laws, controls ondemolition and conversion of the stock, age and condition of the stock, otherpressures on the stock, and by the dominant type of stock. Secondary units in singlefamily dwellings and rented condo units are less secure than permanent rental stock.Is there a large gap between the median income levels of home owners and tenants?Is there a large jump in average housing costs for tenants to move from renting toowning? Do tenants have difficulty saving a down payment because rents are highrelative to incomes? There are many different barriers to entering the homeownership market, and one solution will not address them all.Which of the main contributors to housing costs (land, construction costs, and interestrates) can the municipality affect at least cost to itself'? Here the municipality has tobe careful to examine the long term costs, not just the immediate costs. If it onlyneeds to subsidize the interest rate by a percentage point now, to bridge the gapbetween cost and affordable housing, later in the program when interest rates rise,one percentage point will not suffice. A tax or development charge break toaffordable housing could cost dearly if the municipality ends up shouldering theservicing costs of the project.A computer model/spreadsheet like that developed by CB Commercial for aCityhome site is needed to do this analysis. It should incorporate the demand sideof the equation. Because it includes a calculation of the net present value of cash106flows, the spreadsheet allows the analyst to compare the long term costs of variousapproaches to making the housing more affordable. It helps identify where it is mosteffective for the producer to concentrate efforts to make the housing moreaffordable.Of course, the computer model does not show whether or not it is feasible to reducecosts in a particular area. This requires consultation with developers experienced inproducing low-cost housing. Developers in different segments of the housing marketexperience different costs because of the expectations associated with various typesof housing. It is therefore advisable to consult as widely as possible.This process of analysing the demand and supply sides of the housing market for middle-to-low income households is based on three main principles:a home ownership program should address the needs of households not well-servedby the market;it should involve a long term return of the program benefits to the municipality, orpreferably a turn-over of benefits to new households;it should be accomplished at minimum cost for a given set of goals.One aspect of this analysis requires much further research and consideration: the issue ofwhat housing costs are actually affordable for various household sizes and types at eachincome level. Low-income tenant households in Toronto sometimes pay 50% - 75% of theirincome in rent. What often happens, however, is that this level of expense is not sustainablein the long term, and when the pressure becomes too much, the household moves out andleaves a large debt in unpaid rent with the landlord (Bill Bosworth, formerly of Homes FirstSociety, group discussion March 1993). Banks have been using 25% - 32% as a standardsustainable housing debt load, and a total debt load of about 40% - 45%. The important107factor appears to be how much income is left over after housing expenses, rather than thepercent of income paid for housing. How much that disposable income need be, to sustainthe long-term commitment of home ownership, however, is an unanswered question.6.4 General Observations: the Municipal RoleJudging from the sample of home ownership assistance schemes described in Appendix A,programs offering small, short term grants or other forms of assistance bridge only a smallgap, and therefore usually only help people who will become home owners anyway. Suchprograms just help them do it earlier. This approach could serve an economic goal, but doesnothing for an affordable housing goal.Permanent, significant subsidy programs, on the other hand, are probably beyond mostmunicipalities' resources. According to Table 5.12, for instance, if the City of Torontoproduced just 100 units per year targeted to households with an income of about $36,000,it would cost the City $1,200,000 per 100 units to bridge the initial gap, and $2,700,000 per100 units in the long run, assuming a controlled equity co-op structure. This estimatealready assumes the land used is acquired at no cost to the City.Such programs at the municipal level also would draw on property taxes, a regressive taxbase, therefore not an appropriate basis for redistributing wealth. The proper "home" forhousing subsidy programs for lower-income households is a senior level of governmentdrawing on a progressive and extensive tax base. Municipalities probably only have thefinancial resources to facilitate lower-cost housing through municipal development controlpowers, and to pilot new approaches to the provision of affordable housing throughdemonstration projects.108The municipal level may not be able to fund the necessary programs, but it is the best oneat which to analyze the housing situation and to develop cost-effective and appropriateprograms to address local needs and goals. The local level is best firstly because one objectof the exercise, as discussed in Chapter One, is to address intra-regional imbalances betweenresident populations and jobs and community services. This of course implies that a regionalanalysis and strategy is also required. The analysis needs to be disaggregated to the locallevel, however, to obtain a profile of the population that needs to be served so as to addressthe imbalances. In addition, as the case study demonstrated, the affordability gap andconsequently subsidy program costs are most sensitive to local land and development costs,as well as to the income levels and household types the program should target.While the case study analysis may appear to be very Toronto-oriented, the process usedshould be able to address situations different from that in Toronto. For instance, theimbalance in the community may be found in having a preponderance of seniors' households,or of young, well-off family households, such that the tax base is weakened, or thecommunity facilities needs of other types of households carry little weight because of theirminority position, or there are few workers for the service industry jobs in the community.The need may be for rental rather than ownership housing. With some adaptation of thequestions to ask, the level and process of analysis should remain applicable.This paper has raised three reasons to examine affordable ownership housing programoptions:1. to address intra-regional imbalances that contribute to urban sprawl and itsconcomitant problems;2. to address the unmet need for affordable housing in the absence of adequate seniorgovernment programs;1093.^to extend the tangible and intangible benefits of home ownership to people in a lowerincome range than previous home ownership assistance programs have served.The first reason is most clearly a municipal concern, the latter two are municipal concernsin that they are an acknowledgement that the failures of senior governments have localimpacts. Yet the municipal government role is hampered by financial limitations even morethan senior governments. Municipalities should take the initiative to examine and developaffordable home ownership programs, but should not be expected to carry the full burdenof their costs. Ideally, they should pilot and prove out cost effective local approaches toproducing affordable housing to meet local needs, but senior levels of government shouldcontribute most of the subsidy cost.At senior government levels, however, the current financial pressures are strongly against thelevel of investment in social rental and ownership housing required to meet the need. TheCity of Toronto, for instance, had an existing "backlog" of some 68,600 households in housingneed in 1986, according to one estimate (Intelligence Network International, 1990).Community initiatives based on the land trust model, including financing institutions, maybe able to draw on additional community resources available through charity.Community land trusts are also very creative and effective vehicles for communitydevelopment. Most importantly, they provide non-market institutions through which peoplecan obtain access to the resources needed to meet their need for housing, for those whocannot get that access in the open market. Municipalities should help create and workhand-in-hand with these institutions to help meet their housing goals.In the past, the major forms of home ownership assistance have been in improvements tothe market, e.g., mortgage markets, mortgage insurance, etc., shallow subsidies to help110purchasers over relatively minor barriers, and boosts to the construction industry. The typeof home ownership assistance I am recommending here, however, is non-market, some mighteven say anti-market: it seeks to remove some land and housing from the open market andto introduce financial instruments which are not market-driven. There are very large gainsto be made in the land and money markets from non-housing forms of investment. 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A large number of purchasers under this program defaultedon their mortgages, and caused large losses in the mortgage insurance program. Toreduce this problem in the second incarnation of the program, further grants wereavailable to purchasers to ensure that they were paying no more than 30 per cent oftheir income on shelter. AHOP assisted 95,000 households across Canada.#2^The Registered Home Ownership Savings Plan (federal and provincial)Under the federal government's Registered Home Ownership Savings Plan (RHOSP),from 1975 to 1985 any adult taxpayer could shelter up to $1,000 per year fromincome taxation through a contribution to an RHOSP fund. The fund could containup to $10,000 and be kept open for up to twenty years.If the fund was used to purchase a home by a first time home buyer then the fundsremained tax exempt. If the fund was used for any other purpose then the moneywas taxable when it was withdrawn. There were no limitations on the income levelsof persons with RHOSP funds, nor were there any limitations on the price of thehouse which could be purchased.120Since 1988, Ontario has offered similar support through the Ontario HomeOwnership Savings Plan. Though anyone can open an OHOSP if they have neverowned a home anywhere, individuals with incomes up to $40,000, and couples withincomes up to $80,000 receive tax credits on their contributions for the first fiveyears. There is a variable ceiling on the contributions eligible for tax credits. Singleparents get the tax credit for individuals, but they halve their actual income to findout how much tax credit they qualify for, thereby getting a larger tax credit. Interestreceived on the Plan remains taxable. The program is time-limited; the Plan mustbe purchased by the end of 1993 and the funds used by the end of 1999.#3^The Canadian Home Ownership Stimulation PlanIn 1982-83 the federal government's Canadian Home Ownership Stimulation Plan(CHOSP) gave a $3,000 grant to every household purchasing a newly built home.The grant was also available to any first time home buyer purchasing a resale home.There were no limitations on the income of the persons receiving assistance nor werethere any limitations on the price of the house being purchased.#4 The CMHC Mortgage Loan Insurance ProgramThe federal government, through CMHC, offers insurance which increases themortgageable portion of the value of the home to 90 per cent of the purchase price.This high ratio loan reduces the down payment the purchaser needs.The home buyer is charged a mortgage insurance premium for this service, as follows.For a CMHC insured mortgage of up to 65 per cent of the home's value, a premiumequivalent to 0.5 per cent of the mortgage money advanced is charged. Thisincreases on a sliding scale, so that a mortgage worth up to 90 per cent of the valueof the home requires a premium payment equal to 2.5 per cent of the mortgagemoney advanced. The insurance premium itself can he added to the mortgage.The effectiveness of CMHC's high ratio mortgage insurance program is tempered byToronto's high (above $200,000) average home prices. CMHC will only allow the 90121per cent mortgage on the first $180,000 of the purchase price of the property. Anyamount above $180,000 will only qualify for a CMHC mortgage covering 80 per centof the value. A proposal is under consideration to provide insurance for a 95%mortgage, presumably with similar limitations.#5^Index Linked MortgagesNon-profit housing co-ops in Canada are already using Index Linked Mortgages, amortgage pioneered by CMHC, and there are suggestions that this arrangement couldbe used by individuals. This form of mortgage establishes a fixed real rate of interest,and adds an interest premium for inflation which is adjusted annually. Payments areadjusted accordingly. It has the effect of keeping initial payments low and graduallyincreasing, usually as household income increases.#6^The Canadian Real Estate Association's (CREA) proposal for an RRSP-assisteddown payment programCREA is still developing this proposal to expand the permitted use of retirementfunds so as to help young first-time buyers save both for retirement and for the downpayment on a home. Though details still have to he worked out, the basic idea isthat the prospective purchaser's Registered Retirement Savings Plan funds are usedto make an equity investment of, say, 10% in the home. A parallel is a self-directedRRSP, for which the owner invests in various interest-bearing bonds, etc. In thiscase, the RRSP funds are invested in a home which will generally appreciate andproduce a return to the RRSP's 10% investment. The Plan is repaid for itsinvestment if/when the home is sold, or the owner refinances to pay back the Plan.Upon retirement, the RRSP is supposed to begin paying out anyway. The CREAproposal suggests that a reverse mortgage mechanism would be used then to settleaccounts.This plan does not reduce the cost of the home, but it does make maximum use ofthe prospective purchaser's ability to save a down payment. It does not create a tax122expenditure like a Registered Home Ownership Savings Plan; it uses money alreadysaved or savable under an existing deferred tax savings plan.Ontario#7 Ontario's Home Ownership Made Easy ProgramThe provincial government's Home Ownership Made Easy (HOME) program ranfrom 1967 to 1978 and involved leasing and then selling government owned land tohome buyers at below market value. The government provided the land serviced andleased it at cost. Private sector builders built and sold the homes. The program wentthrough two major changes of policy.The government controlled the original price of the home, and eventually also limitedthe income of families eligible to purchase. Resale prices were also at first controlledfor five years, though the controls were later dropped. The family could purchase theland after five years, initially at its original servicing cost, later at current marketrates, and finally with an agreement combining these two prices.#8^Interest Free Second Mortgages - OntarioIn 1982, the Ontario government offered an interest free second mortgage for 15years to tenants who had not owned property in the preceding 12 months. Themortgage was for 10% of the purchase price of a home, to a maximum of $5000. Norepayments were required for the first ten years of the mortgage; the mortgage wasto be paid off in the last 5 years of the mortgage term. The mortgage became dueand payable on resale or lease of the property. A maximum price for the home wasestablished, and only certain types of homes were eligible. The stated objects of theprogram were to encourage employment in the construction industry and to free uprental accommodation.#9^The Ontario Land Transfer Tax Rebate123In 1989 the province of Ontario began to refund the entire amount of Land Transfertax owing on a home costing $150,000 or less to home buyers who participate in theOntario Home Ownership Savings Program. The refund is gradually reduced as theprice increases, until it is entirely eliminated for homes at $200,000 and over.Only non-family households earning $40,000 a year or less and family householdsearning $80,000 a year or less are eligible for this tax benefit.#10 Shared Appreciation MortgagesThe shared appreciation mortgage is a less benevolent form of down paymentassistance which has been used in the USA with some success. In this situation athird party investor pays all or a portion of the down payment for a house in returnfor a percentage of the capital gain realized when the house is resold.A development company in the Region of Halton, The Glasco Group DevelopmentCorporation, developed a shared appreciation mortgage called Home OwnershipParticipation Equity (HOPE) in 1991. In this arrangement a second mortgage of 10per cent of the purchase price of the property is provided by the developer. Thiswould allow purchasers to move in with no down payment, if they can get CMHCinsurance for a mortgage on 90% of the purchase price. The developer then earns10 per cent of the appreciation in the value of the property over the next five years.#11 Newmarket Affordable Housing ProgramThree hundred townhouse units were provided in 1990 by developers in new housingsubdivisions at prices well below market for those units. The Town of Newmarketnegotiated the units and prices with developers, using incentives involving densityincreases, housing form, and tenure. Land use amendments negotiated with thedevelopers were processed quickly, and the commitment was incorporated in theSubdivision agreement. The municipality did not have any legislative means to forcedevelopers to provide the units, as the program predated the Provincial Housing124Policy Statement. The Town says it has also used this approach to developers to helpestablish 3 rental co-ops and several new high-rise rental apartment buildings.The Town retains control over who qualifies to purchase, and over windfall on resale.Resale controls involve a forgivable second mortgage given to the developer andassigned to the Town. The purchaser signs a purchase agreement for the full marketprice of the unit. The second mortgage is for the difference between that price andthe negotiated below-market price. The Town agrees to forgive the mortgage overfive years, as long as the unit is not sold or leased. The mortgage is open forprepayment at any time.#12 Metro Guaranteed Equity Housing (Malvern) CorporationMetro Toronto Housing Development Corp's (MTHDC) project at Malvern Centre(at Sheppard Ave. and Markham Road) is aimed at a specific market: home owningseniors on fixed incomes. It provides them with the option to sell their homes, anduse part of the proceeds to invest in the housing project, where they get a "right tooccupy." The rest of the proceeds may be invested in an annuity to provide themwith an additional source of income. The project goals are to provide a more securelifestyle and some community support services to seniors, and to free up modesthomes for younger households. Since the only increases in unit prices are related tothe CPI, rather than to housing market inflation, the units are expected to becomemore affordable over time, so that even lower income seniors should be able toparticipate in the future.The project is built on Metro-owned lands leased to a trust corporation - the MetroGuaranteed Equity Housing (Malvern) Corporation, which effectively "owns" theproject, and holds these interests on behalf of the purchasers or unit holders. It actsas the vendor. Purchasers pay a fixed land rent as part of their agreement. The landlease is for a "fairly nominal" amount, and MTHDC is doing the developmentcontracting on a non-profit basis. The guaranteed equity corporation expects to usean ILM or GPM to finance the project. There is no government cash subsidy, onlyopportunity cost. Residents pay maintenance fees. taxes and utilities. Projectamenities include a recreation room, outdoor sitting area, and storage lockers, but nopool, sauna, or tennis courts, which are expensive to operate.Metro controls the occupancy and resale of the project units through income testingapplicants, and through the purchase agreement. Owners can lease their units underlimited conditions and rents. Borrowing on the security of the occupancy rights ispermitted. Owners can retrieve their equity by selling the occupancy rights at theiroriginal investment plus interest, at six months' notice. They are guaranteed theoriginal price plus 2/3 three-year rolling average of CPI, after 3 years. They can onlysell their rights back to the MTHDC. Metro Council guarantees the buy-backprovisions.#13 Initiatives in Building Standards and Practices, Streamlining and Fast-TrackingIn Australia and the United States, "joint ventures" of federal and state governmentsand the private housing industry have initiated demonstration projects to identifyinnovations in planning and development standards and in building practices anddesign which reduce the cost of housing.The Government of Ontario Land Use Planning for Housing Policy Statementincludes an injunction to municipalities to streamline the approval process forresidential development applications, to limit the carrying costs of developers.Implementation of this policy only assists home ownership if the reduction in costsis passed on to the purchaser. There is no guarantee suggested in the policy toensure this.There has been support for zoning reforms in some municipalities in Ontario whichreduce the price of the average newly built house by reducing its size. This isaccomplished through reducing the size of a lot required for a single family house andby changing zoning to allow higher density housing such as semi-detached homes,townhouses and high-rise condominiums.The City of Toronto "Mainstrèets" program contemplates reducing the cost ofresidential redevelopment over main-street stores by creating block-by-block zoning126which would define as-of-right design and land-use standards. This kind of zoningwould permit redevelopment to occur with a minimum of development process costs.Though the development being contemplated is rental housing, the same principleshould be applicable to ownership housing.Other Provinces#14 New Brunswick Down Payment Assistance ProgramThis program is restricted to households with a total income between $15,000 and$30,000 who would be first time home owners or who are living in a substandarddwelling. The applicant must be able to qualify for a regular mortgage and be ableto provide a 5% down payment or the equivalent in land or labour. The programprovides a loan for the balance of the cost of the house. The purchaser does nothave to make payments on this loan for the first five years. The mortgage interestrate will be that available in the market when the purchaser begins repayment. Ifwhen the purchaser is supposed to begin payments on the government loan, thecombined regular mortgage payments and government mortgage payments total morethan 30% of their income, further government assistance is available. A maximumhouse cost is specified which is different for people of different income levels and forurban areas. An additional loan is available to modify a house for a disabled person.#15 City of Montreal Ownership Option Pilot ProjectAnother approach to down payment assistance is the City of Montreal's OwnershipOption Pilot Project. This program links up middle income tenants with a non-profithousing organization. The non-profit group purchases a home for the tenants to livein and the tenants pay all costs (mortgage, taxes, utilities, and maintenance)associated with the home. The tenants can exercise the option to purchase the homewithin three years if they achieve a 15 per cent equity position through a combinationof cash down payment and equity appreciation in the value of the property since thetime of purchase.127This program reduces the down payment required by crediting the tenants with theappreciation of the home over the three years allowed for them to accumulate thedown payment. It allows them to live in a home they can call their own while theyaccumulate the equity, and the opportunity to add to the appreciation in the propertyvalue by contributing sweat equity and materials for renovations.#16 Saskatchewan Home Owners' Protection Plan/Mortgage Protection PlanSaskatchewan has offered a program to reduce the interest rate on the first $50,000of a mortgage since 1982, first as the Home Owners' Protection Plan, and then as theMortgage Protection Plan. It offers a direct subsidy to all home owners whicheffectively reduces their interest rate, and therefore the income level required to buya house of a given cost. In 1989 the subsidy amounted to approximately $100 permonth for all home owner mortgages over $50,000.#17 VLC Properties Limited, City of Vancouver, 1989While this is a rental property project, some of the arrangements in this enterprisemay well be transferable to home ownership projects.VLC Properties Limited is a for-profit development firm, 8% owned by the Citythrough its firm Vancouver Civic Development Corporation, and was largelycapitalized through union pension funds (74%), to create new affordable rentalhousing, and to earn a reasonable long term rate of return for the shareholders.The company will build on City-owned land, with an 80 year lease agreement. Thecompany agrees to keep the units rental for the term of the lease, and to limit annualrent increases to the CPI, or the CPI plus 2% when the unit is vacated. Tenantapplicants having first priority are those who have been evicted due to demolition orcondominium conversion of their apartment. VLC projects will be given the samepriority in the development approval process as is given social housing projects.128The City land lease agreements provide for payments to the City only in years inwhich VLC Properties has a positive cash flow. In the short term, the City willforego payments, but it is expected that in the long term, due to inflation-linked rentincreases, the lease payments will result in a reasonable rate of return to the City.VLC Properties also qualifies for a mortgage subsidy under the BC government'sRental Supply Program, which reduces the mortgage interest rate to approximately8% for 5 years. VLC also expects to receive some rent supplement unit allocations.Other Countries:#18 Australia First Home Owners Scheme (FHOS):This program provided a grant of max. $7000, available to families with income lessthan $20,000 per year (Australian, 1983). Option of using the grant as an interestsubsidy over the first 5 years, or taking a maximum lump sum $2500 at first, and therest as an interest subsidy over five years. A program analysis found that take-up bymiddle class (4th-7th deciles) was greater than that by low-income groups (1st-3rddeciles), and that the middle class would be likely to become home owners anyway.#19 State of Victoria, Australia - Capital Index LoanThis comprehensive home ownership financing scheme is a variation of the Index-Linked Mortgage: a real interest rate is established for the full loan term (3% in1988), and the outstanding principal is adjusted by the Consumer Price Index at theend of each year. The difference is that the monthly mortgage payments are set at25% of gross household income, and escalate by the CPI at the end of each year.The amortization period for the loan is therefore adjusted each year to reflect theincreased principal and payments. The lender is the State of Victoria Ministry ofHousing; other states have initiated similar schemes.#20 New Zealand's Homestart Program129New Zealand introduced "Homestart" in 1986. This program makes available 5 yearloans of $6000-$10,000 at 3% interest to first-time buyers. No repayment is requiredfor the first 5 years. At the end of 5 years, the 3% interest is added to the principle,and the loan becomes payable or is converted into a regular market loan. Themaximum loan is available to applicants with incomes up to $28,000; reduced loansare available to those with incomes from $28,000 to $36,000. Purchasers must beable to contribute a minimum 5% down payment.#21 New Zealand "Equity Sharing Loans"This scheme is very similar to that in Victoria. It is operated through the governmenthousing corporation, and offers the same loan terms. A minimum down payment of10% is required, part of which can be raised through the Homestart scheme(described above). Purchasers are guaranteed their original percentage of equity inthe home when it is resold.#22 HSB (a housing co-operative association), SwedenThis organization generally does not deal with home ownership, but it does use aninteresting financing method. Member investment forms a part of their financing,and the national organization includes a savings fund through which residentmembers, and those on the waiting list, can save for their down payments. Membersmust make a down payment of at least 2% of the cost of the co-op unit, plus anyremaining need after other financing is raised. Members are required to save (foranything, not just housing) a certain amount each year in the fund, and must also buya share in the organization. Members get extra interest on their savings when theyuse it for a co-op down payment or to buy a co-op cottage.#23 Graduated Payment MortgagesThis form of mortgage has a similar effect to that of the ILM: initial payments arelow, even below the monthly interest, and rise gradually as household income rises.130The unpaid interest is added to the principal. As payments rise, they begin to payoff the principal and compensate for the earlier shortfall. This mortgage is currentlyused in the United States.#24 Community Land Co-operative of Cincinnati, Ohio:This co-op provides "near" home ownership by leasing land and/or housing to tenantsfor indefinite terms. Leases may be passed on to the tenant's heirs, as long as theypay the rent and abide by the terms of the lease. The co-op started up withdonations from charities and a loan from a community development revolving loanfund. It acquires land and housing from the private sector, but tries whereverpossible to avoid competing on the open market by looking for donations.#25 University Hills, Irvine California (1987)This project of 1000 units was designed by the University of California to meet theneed for affordable homes for ownership by faculty and staff, so that the Universitycould attract and keep high-quality people.The University formed a non-profit housing development corporation to undertakethe development and management of the project. The University enjoys a couple ofadvantages in keeping the cost of the units low: the land was purchased in 1965; andbecause it is university land, it is not subject to local zoning or building coderegulations.The lower priced units were sold for 40% less than market because they were aimedat lower-paid staff and faculty who would have the most difficulty in the area market.Premium units were sold at 20% below market, as these were aimed at high-salariedemployees who could better afford the market. The land was not included in the unitprice because the owners pay a land rent to the University. The land rent is variableand is part of the resale controls arrangement.l.31The University established resale and occupancy controls to maintain the housing ataffordable levels and to ensure it continued to meet university needs. The maximumresale price is the initial cost paid by the home owner, inflated by a construction costindex. Capital improvements costs are added, though uninflated. The home ownerand the University share the profit in the resale. The split is a function of how muchof the land rent the home owner has paid during occupancy. The home owner canpay nothing, 2%, or 4% of the value of the lot (which value is recalculated every fiveyears to reflect the consumer price index and University salaries), annually. TheUniversity gets a larger portion of the house resale profit if the home owner has paida smaller portion of the land rent.The University developed a priority system of categories of staff and faculty todetermine who got to purchase the housing. Within categories, priority is given tonew employees over existing ones, to meet the goal of recruiting faculty, and tocurrent employees who do not own homes or who are underhoused. The Universityhas first and fifth option to buy, and three categories of employees at the universityhave 2nd, 3rd and 4th option to buy. Only after the University has refused the fifthoption can the house be offered to the general public. Retired faculty may stay, andwidows or widowers of University faculty are never forced to sell, but other heirsmust sell, and faculty who leave the university must sell.#26 Montgomery County, MarylandMontgomery County has had an inclusionary zoning ordinance for 15 years. Theordinance requires developers of 50 or more units to provide 15% of the units atmoderate prices. A land transfer option is available. Developers are permitted adensity bonus of 22% in exchange, to avoid court challenges that the regulation is acontravention of constitutional property rights. The exaction has produced 8000 lowand moderate income units. The developments are in townhouses and houses thatmaintain the appearance of a single family unit.Resale price controls are attached to the moderate-priced units for 10 years. After10 years, any appreciation in value on resale is divided between the owner and thecounty.132Only 60% of the units are sold straight to eligible income families. The remaining40% are sold to the county's housing authority. The housing authority turns over 6%of the units to selected non-profit organizations, and keeps the remainder to overlaywith other subsidies to rent to low income families.#27 Timberlawn Crescent, Montgomery County, MarylandThis is a mixed income rental project of the county's Housing OpportunitiesCommission. It is relevant to this home ownership program review because it is anexample of a cross-subsidized project created through an inclusionary zoning by-law.The market units subsidize the non-market units. The inclusionary zoning bylawwould have created 85 government assisted units within a larger development, but thedeveloper went bankrupt, and the land-in-lieu alternative was exercised instead.The land that was transferred to the county now holds a community centre and 83units, 50% at full market rents, 50% for low to moderate income households withincomes up to 75% of the county median. A minimum income level was establishedfor the market units, to ensure the households could afford full rents. It wouldappear that the county ended up with only half as many assisted units under thisarrangement as it would have if the developer had been able to follow through onits commitments. On the other hand, the assisted units do not receive anygovernment assistance, but are subsidized internally.133

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