Housing affordability has become the number one economic and social issue of our times. It has been a key focus of the recent federal election and is certainly a top agenda item on every city council across the lower mainland region and indeed, probably across the whole country, save for a few exceptions.
Despite its widespread use, however, the term affordability is very loosely defined, and each stakeholder takes a different point of view into what it means and as a result, offers a varying set of solutions. The fact is the term “affordability” when it comes to housing must have a broad and encompassing definition based on the locale, the make-up of the community, demographics, socio-economic factors and of course type of housing available or desired. If we want any chance of tackling an issue as complex as this with a modicum of success, we must first clearly define it in its proper context.
What is affordability?
The challenge today is that affordability in the eyes of many politicians and policymakers is narrowly defined as it pertains to the most vulnerable and lower echelons of the income spectrum. The truth is that while this specific cohort is certainly one that is afflicted by the housing affordability crisis, the issue is far larger and has spread to more middle-income portions of the community as well.
While government programs are and have been in place for low-income families for some time, there have not been many policies or attempts to address the affordability issue on housing for a much larger portion of the population that do not necessarily fit into the narrow-boxed definitions of “low-income”.
There is a lack of suitable and affordable housing options for this large cohort of the population that are fundamental to a thriving and successful economic output of a given community. They are the engineers, teachers, educators, nurses and other professionals who are not low-income and yet still struggle to find and purchase a place that anchors them to their respective communities.
Rent-to-own (RTO)
City planners across Canada and BC and architects are all looking for ways to produce lower-cost, more versatile housing options for the missing middle with some success. However, policy initiatives and creative marketing strategies have been largely left untapped.
One such program that has received widespread support in communities is the concept of rent-to-own or RTO. The program allows a prospective purchaser to enter into a sales contract with the developer on an agreed market price, and be allowed to live in the unit for a period of time, typically 12-24 months, by renting the unit before closing. All the rent paid in this period would be accumulated and saved up towards a down-payment at the end of the rental period.
To put rent-to-own in perspective, a family with a household income of $75,000/year will spend roughly $24,000/year or nearly a third of their income on rent. The same family will require at least $60,000 of down-payment to purchase a suitable first-time condo. If this family saved on average $10,000 a year – not an easy proposition – it would take them 6 years to save up enough down-payment to enter the market. The rent-to-own will reduce that time frame from 6 years, effectively down to about 2.5 years. The accumulative effect of the program is akin to purchasing the rent-to-own at 8-10% discounted values if we consider an average interest rate of about 4%-5% a year.
How are rent-to-own programs beneficial?
Rent-to-own programs effectively solve one of the biggest impediments to homeownership for many middle-income families who are faced with the daunting challenge of having to balance between the needs of their children, the extraordinarily high cost of living in the big cities and saving up to buy a property.
For every renter who opts into a rent-to-own unit, a rental unit that he/she used to occupy will become available, and as a result, the rent-to-own program will inadvertently have a proportionally positive impact on the rental supply as well.
Housing affordability is a multi-variable and complex issue that requires creative, innovative and open-minded policy-making by our City Officials, Planners, and policymakers to appropriately address. It is only through flexible, open and collaborative partnerships between governments and developers that creative solutions can come to the fore to help facilitate innovation in the sector and help address the affordability issue over time.
Rent-to-own explained
For better understanding of the idea behind rent-to-own programs and how they work, in the below video one of the Aultrust Principals explains the different aspects of the program.
