Tag Archives: affordable housing

A Different Kind of Home-Buyer

My husband and I are house-hunting in one of the most expensive housing markets in North America – Vancouver. We moved here two and a half years ago from London, UK – where my husband grew up and where I had been living for the preceding 12 years.

The first 18 months or so in Vancouver we spent many of our weekends walking around neighbourhoods – exploring, acclimatizing, and learning about our new city. We have been on our house search, on and off, for a year. More recently we’ve started to widen our search to neighbouring suburbs and cities, Port Moody and New Westminster in particular, and have talked to local real estate agents. What they’ve advised us is insightful about the residential real estate market and the attitude of the “average buyer”. I’m paraphrasing, but here are some of things agents as well as friends are saying about the suburbs:

  • “New Westminster has poor amenities. It’s not close to stores like Costco, Walmart and retail parks. That’s bad for resale value.”
  • “If I were to choose between Port Moody and New Westminster, I’d choose Port Moody. It stands a better chance of growth in values. It’s a development hot spot and it’s going to get the new Skytrain line.”
  • “New Westminster’s problem is that it’s not Vancouver and it’s not Surrey. Cross the bridge and you get a significant drop in price in Surrey so people would rather buy in Surrey than in New West.”
  • “I’ve been in New Westminster for over thirty years. New Westminster is about community. For example, my eldest son’s oldest friends are people he met when he was three years old.”
  • “Port Moody has a strong artist community.”
  • “Port Moody isn’t planning to develop quickly. It’s being thoughtful about development and isn’t going to be crowded with a lot of high-rise towers.”
  • “Homes in Port Moody cost more (than homes in Coquitlam) because it’s closer to the water. There are places for people to park their boats.”

A Different Way of Looking at Home-Buying

To be honest, all of the real estate agents’ talk of resale value and potential rises in prices puts me off Port Moody and other similar areas. My husband and I didn’t move to Vancouver to make a buck on the housing market. We moved here because we wanted to build a life, enjoy the lifestyle, and make our livelihoods here (the three “Ls”, I call it). I like events and festivals that celebrate art, music, and food rather than shopping malls where the art, music, and food is mass-produced and mass consumed. I like neighbourhoods that feel safe enough to walk through at night from the Skytrain station or bus stop to my front door rather than neighbourhoods divided by busy roads and motorways that are unwelcoming to pedestrians. I like walking through, running through and picnicking in parks and amongst nature over walking through or next to parking lots. My husband and I prefer farmers’ markets, vintage stores, and locally-owned shops over retail parks and big box stores.  I want good schools and community amenities over condos and construction sites.

If we buy a home somewhere in Metro Vancouver, we hope our house value doesn’t go down and we might be better off in the long-run if its value doesn’t go up. Rising house prices keep out the artists, teachers, key workers and other great people who could be great neighbours if only they could afford to live there. I’d be perfectly happy if my house price went up by the same percentage I’m paying in mortgage interest – if I ever sold my house, I will have essentially lived there for free. Even if my house price stayed the same as when I bought it, I’m perfectly happy paying something for my housing costs (essentially the interest cost on my mortgage, plus maintenance costs, property taxes, and the opportunity cost of the money locked up in the house) because I’m getting use value out of living in my house in the first (a place to call our own, safe and secure shelter, our little patch that can be decorated any which way we want).

Call me old-fashioned, but I’d like to live in a neighbourhood where there is culture and community. It’s not how much cash I can sell my house for sometime in the future, but the other “Cs” that will be the deciding factors in our house hunt.

The New Economics of Affordable Homes

The New Economics Foundation released a new publication today about housing – how to build 1m new affordable homes.  Here’s highlights from the nef website:

1.  Measures to reduce the cost of land.

  • 80% capital gains tax on all land sales over £80,000 per acre.
  • Planning permission for large residential developments would only be given to social housing developers.

I agree that the high cost of land is a major contributing factor to the unaffordability of housing.  I suggested taking land cost out of the equation in an earlier post about house prices.  The economics around land in the UK is broken.  There is little volatility in land values – the belief is that they generally only go in one direction – up.  One could argue that the demand exceeds supply thereby pushing values upwards, but where is the demand coming from?  The boom had been fuelled by foreign investors – either directly or in the form of investment in UK property companies and funds.  The demand comes from a few, increasingly segregating those who own from those who rent.  nef is very astute at public policy that can change behaviours and attitudes and this gets to the heart of it.  Make investment in property for gains from capital appreciation inefficient and costly thereby stemming this constant expectation and driving of property price increases.  Make investment in property about providing housing, meeting basic needs rather than returns-driven.

2.  Measures to reduce the cost of capital.

  • Introduce a new bond scheme, linked to the retail price index. Housing associations pay 6% p.a. on bank loans: a bond scheme could lower this to 3.5% creating massive savings for social housing landlords.

I’m cautious about cheap credit.  These needs to be paired with good advice and education about managing debt.  So long as people remember that bank loans should be repaid over time (no more interest-only mortgages which were prompted by an idea that house prices could only go up).

3.  Measures to increase the revenue generated by social landlords.

  • Higher rents in new developments.
  • Drive down operating costs, for example by increasing tenant self-management.

Transparent business and revenue models and ensuring that the cost of housing does not include unreasonable profits to the few would be helpful.  Trust models which require the reinvestment of profits from housing into new developments would also help build more.

I also think shrinking the gap between average incomes and average house prices requires not only a focus on the cost of housing, but also on education, skills development, training, and employment opportunities.   The healthy participation of people in the economy helps keep a sustainable cycle of livelihood and lifestyle going.

The Mathematics of House Prices

I was talking and thinking about affordability of housing a couple of days ago and that same day saw a series of interactions on Twitter which included this one. I thought I’d play around with the mathematics of a simple example of housing.

Let’s hypothesise that the average affordable one-bedroom home price should be a maximum of £150 per square foot of living space. Assuming an average, reasonably-sized one-bedroom home comprises 600 square feet of total living space, the price of this home would be £90,000. In 2009, the UK average weekly pay was £489 or around £25,000 per annum. Assuming a homeowner could save up enough for a 10% deposit and pay the stamp duty and transaction costs (conveyancing, survey), they would need a mortgage of at least £81,000. This loan represents 3.2x the average salary and assuming a total interest rate of 6%, a 25-year mortgage, the monthly payments would be one third of the homeowner’s net monthly salary. Based on prudent borrowing principles and affordability, this is just about manageable and housing costs should certainly not cost more than one third of someone’s net salary.

The last time the price of an average flat was less than £90,000 was in August 2000.

More recently, the average flat or maisonette (using data over the last 12 months) has been priced at £153,000 or £255 psf. House prices are increasing again since the low in March 2009 when the average cost was £141,000. The last time the average house price was at this level was March 2004. For those who are able to buy their homes, they continue to buy and house prices are on the rise again.

In London it is even more accentuated with average salaries around £33,000 and average flat prices around £295,000 – that’s 9 times the average salary. And assuming a 600 square foot flat, a cost of £492 psf, more than 3 times the hypothesised affordable flat.

So, what’s behind these house prices? The rule of thumb on residential developments is one third land cost, one third development cost, one third profit. If such a ratio were to be maintained, each of these elements must be reduced by a third which requires a complete re-basing of land values, materials, labour, and remuneration.

Having spoken to architects about the average development cost, this ranges between £150 psf to £200 psf (not including professional fees and financing costs). The price of the hypothesised affordable house is in one way based on the development cost alone. To bring the price of buying a house back to affordable levels, one way which would have the greatest impact would be to remove the cost of the land and the profit element from the purchase price paid by a home-buyer. Community land trusts, housing elements of development trusts, co-operative housing, and other not-for-private-profit housing initiatives aim to achieve this. Land values are locked in, owned in perpetuity by a trust.

Let’s stretch the imagination. Imagine a place where the price of all land did not increase over time. Where capital appreciation in the value of property came only from improving property or possibly changes in its use. Is this possible? What would the economics of such a place look like? A community land trust would fit right at home in such a place.

(The data for average salaries was taken from the Office of National Statistics and average home prices are for maisonettes and flats taken from the House Price Index tool on the Land Registry website. There is a margin of error due to the use of averages and incomplete information, but such margin of error is not so big as to counter the pattern and trends of house prices and average earnings.)

Related Links:

  1. One way to maximise the use of empty homes
  2. Community land trusts and affordable housing

Community Land Trusts and Affordable Housing

I have been wondering how to provide affordable sustainable housing for some time now. The cost of housing can be broken down into the land or site cost, the build cost, and the developers’ profit. It is also influenced by the supply and demand for housing in a particular area as well as the cost and availability of mortgages.

I thought about ways to control the land or site cost which typically required finding distressed sale situations or buying awkward sites at auction, which comes caveated with its own risks and uncertainties. I contemplated managing the development costs, subscribing to the adage of good design doesn’t have to be expensive. Interest rates are low at the moment, but a significant investment of equity is required and that doesn’t get a developer over the hurdle of managing risks and convincing lenders to part with their cash in a depressed property market. Besides, interest rates will not stay low forever and cannot be relied upon as a sustainable solution to affordable development.

This led me to think about the factors affecting buyers that require housing to be affordable. A friend who was a teacher was able to purchase a one-bedroom flat four years ago with a significant government key-workers’ grant, based on certain criteria. 20% of the purchase cost of the flat was funded by this grant. My friend provided her own savings to pay for the stamp duty and legal costs and she was able to get a mortgage for the remaining 80% of the cost. From what I recall, if she ever sold her flat, she would have to repay the grant plus a proportion of the net profit from sale back to the government.

It was on this basis that I was trying to develop a similar home-building concept, based on some form of profit-sharing if the properties were subsequently sold. The sale of a new, affordable property can be limited to a first-time or low-income buyer, but if the property was subsequently sold on the open market there is the inevitability that the property will no longer be affordable. Without the imposition of socially-minded restrictions, the provision of affordable housing is subject to abuse and manipulation, with profits lost in the open market rather than ploughed back into building more affordable properties.

And then there is the Community Land Trust (“CLT”), a construct that has been applied in the US, whereby ownership of publicly-owned land, which is an opportunity for re-development, is transferred to a trust, which then owns it on behalf of the community. The objective would be to keep the community’s interests in mind and build affordable housing on the land, available for sale via a leasehold structure to qualifying persons that would otherwise find it financially prohibitive to purchase homes. Properties can be sold back to the CLT for a value, based on a formula that is intended to give the home-owners a reasonable return on their equity investment, but also ensures affordability for future buyers. The critical feature is the governance and leadership of the CLT. In its original conception, the CLT would be governed in equal proportions by three representative groups – the leaseholders/ occupiers, residents from the neighbouring community, the public-at-large (not-for-profit housing providers, funders, public officials, others concerned person representing the public interest). Three features of the CLT are critical and curious:

  1. The transfer of land to the CLT is made at a fair and affordable price – this could mean existing use value, sub-market value, or the ultimate in affordability – £1.
  2. The long-term management, leadership, and governance of the CLT maintains the intentions and values of creating an affordable, sustainable community.
  3. Restrictions placed on the future selling prices of homes change the dynamics and economy of real estate on the site.

Without these three features, sustainable affordability fails. At the sight of this, the capitalists might be throwing their hands up in the air. The attitudes that fuelled the property frenzy up to 2006/07 are challenged and confronted full-on. The easy money found in a rising property market is no longer. It was lazy and unproductive and, if anything, it was destructive. Many blame the banks for loose mortgage lending principles. But underlying it was an attitude that wealth could be created and accumulated through buying property and flipping it. Property was exchanging hands at lightning speeds, without any evidence of improvements – not in the businesses that it housed, not in the communities in which it was situated, not in the buildings themselves. Increases in capital value were speculative and not founded on true value creation or accretion.

The whole ethos of a CLT challenges the attitude of relying on a rising property market for wealth accumulation. If a CLT and its development is managed properly and if a true sustainable community is built on and around it, it will be highly sought after – its value would sky-rocket. It’s a bit ironic because no one would actually be able to capitalise on that value other than qualifying to live there. Beautiful. Poetic even. Now that is the true value of property.

For more information about Community Land Trusts, check out the entry on Wikipedia or the UK-based Community Land Trust Directory.  London-based charity, London Citizens is bidding to develop the first CLT in London on the former hospital site of St. Clement’s.  Read more about it here.