‘Affordable housing’ is a commonly used term but each person or organization can interpret its meaning differently. For the purposes of this hub, the term ‘affordable’ will be used as an overarching term that applies to all types of housing including standard market-based housing. Where there are references to housing that is commonly considered ‘social housing’ or government-subsidized housing, the term ‘non-market housing’ will be used except for instances where ‘social housing’ is the terminology used in legislation. Alternatively, the term ‘market-affordable housing’ will be used for housing that is market priced and meets the general requirements of affordability based on household income.
Defining Housing Affordability
The Canada Mortgage and Housing Corporation (CMHC) defines housing as affordable when a household spends less than 30 per cent of its gross (before-tax) income on acceptable shelter. Shelter costs will differ between renters and home owners.
|Renter shelter costs||Home owner shelter costs|
|Rent payment||Mortgage payment (principal & interest)|
|Heating||Condominium/strata fees (if applicable)|
|Essential municipal services (i.e. water)||Electricity|
|Essential municipal services (i.e. water)|
Acceptable shelter refers to housing that is adequate in condition, suitable in size, and affordable. In other words, affordable housing means housing that is available at a cost that does not compromise a household’s ability to attain other basic needs of life, including needs for food, clothing and access to education. Under these definitions, affordable housing applies to all Canadians, whether they earn $20,000 or $200,000 per year. It is simply a ratio of a household’s shelter costs in comparison to their income.
The following tables provide an approximation of what shelter costs should be limited to for households earning between $20,000 and $100,000 in order to meet the CMHC’s definition of affordability.
|Gross annual income||$20,000||$40,000||$60,000||$80,000||$100,000|
|30% of gross income per month||500||1,000||1,500||2,000||2,500|
|Less: Utilities (monthly)||(150)||(150)||(150)||(150)||(150)|
|Maximum rent (monthly)||$ 350||$ 850||$ 1,350||$ 1,850||$ 2,350|
Assumption: A portion of the utility cost is covered in the rent amount (i.e. water and sewer)
The table demonstrates that a household earning $60,000 per year would need to keep its rent below $1,350 per month to meet the definition of affordability. This figure is based on the assumption that a portion of utility costs (i.e. water and sewer) is covered in the rent amount, which is common in many rental accommodations. If heat and electricity utilities cost more than $150 per month, then the household would need to reduce its rent accordingly to remain under the affordability threshold.
|Gross annual Income||$20,000||$40,000||$40,000||$80,000||$100,000|
|30% of gross income per month||500||1,000||1,500||2,000||2,500|
|Less: Utilities (monthly)||(250)||(250)||(250)||(250)||(250)|
|Less: Property taxes (monthly)||(25)||(80)||(135)||(185)||(240)|
|Max. mortgage payment (monthly)||$ 225||$ 670||$ 1,115||$ 1,565||$ 2,010|
|Maximum purchase price||$ 39,000||$ 117,000||$ 195,000||$ 274,000||$ 350,000|
Assumptions: 5% down payment, 5% interest rate, 25 year amortization
In terms of home ownership, the same household earning $60,000 would need to keep its mortgage payment below $1,115 per month to meet the affordability threshold. Assuming a 5 per cent down payment, 5 per cent interest rate and a 25 year amortization, a maximum mortgage payment of $1,115 per month would allow a household to purchase a home worth approximately $195,000.
Looking at the numbers for low-income households
Assume that a single person working 40 hours per week earning $11.20 per hour (Alberta’s 2016 minimum wage) would earn a gross income of $23,296. Using the 30 per cent affordability calculation, that individual would need their shelter costs to be less than $580 per month including utilities.
How many units are in your community where the rent and utilities are less than $580 per month?
The housing continuum documents the variety of housing types that exist in Canada. Each has varying characteristics such as whether support services are attached, if costs are subsidized and whether they are short-term or long-term in nature.
|Emergency Shelter||Transitional Housing||Supportive Housing||Subsidized Housing||Market Rental||Market Ownership|
- Shelters: emergency facilities that offer short-term space i.e. a mat to sleep on, food and some support services.
- Transitional housing: accommodation for six months to three years with extensive support services.
- Supportive housing: long-term accommodation with varying degrees of support services depending on the needs of the users.
- Subsidized housing: rental or ownership whereby the cost is subsidized either through a capital construction grant or the rental rate is subsidized via a grant to the landlord or the tenant. This type of housing serves those with limited income but who have no need for support services.
- Market rental or market ownership housing: regular market housing where the cost is determined by the industry and market.
Core Housing Need
Core housing need is a key statistic used by governments to measure trends in housing affordability. A household is in core housing need if it cannot find somewhere to live that is in reasonably good condition and is big enough for the household without costing more than 30 per cent of its gross income.
A more detailed explanation is provided by the Canada Mortgage and Housing Corporation that explains that a household is considered in core housing need if its housing does not meet the standards of adequacy and suitability and it would have to spend more than 30 per cent of its total pre-tax income to pay the median rent of alternative local housing. Housing is considered adequate when it does not require any major repairs and suitability is determined by the National Occupancy Standard.
Core Need Income Threshold
Each year, the CMHC and the Government of Alberta partner to develop income and rent level tables for each community in Alberta. The tables, called the Core Need Income Threshold (CNIT), state the maximum income levels that a household may earn and still be eligible for a rent subsidy in eligible rental projects in the community. The data covers varying unit sizes, from bachelor units to houses with five+ bedrooms.
The CNIT tables mean that a household earning less than the maximum income level would be challenged to find appropriate housing for less than 30 per cent of its income in that particular community. The CNIT tables can be found on the Government of Alberta website.
Affordable housing versus social housing
The term ‘affordable housing’ is often used inter-changeably with the term ‘social housing’. However, affordable housing is a broad term that can refer to any type of housing whether it is rented or owned, government-subsidized or market-based. The confusion around these terms is why this Hub uses the terms non-market housing and market-affordable housing.
Social housing represents a category of non-market housing where the ongoing cost of housing is subsidized by the federal or provincial government.
Putting affordable housing programs in perspective
Whether Canadians realize it or not, a significant number of Canadian homeowners have used an affordable housing program. The program comes in the form of the mandatory CMHC mortgage loan insurance for any buyer that is purchasing a home with less than a 20 per cent down payment. The program allows borrowers to purchase a home with interest rates that are comparable to those that are offered to buyers with larger down payments. Without CMHC’s mortgage insurance program, mortgage lenders would consider buyers with minimal down payments as higher risk borrowers and would in turn charge higher interest rates to offset the lenders’ risk. Those higher interest rates would reduce affordability and present barriers for many people to own their own homes.
It should be noted that the CMHC mortgage loan insurance is not funded by the government. It is paid for by the same home buyers that use the insurance but the initiative is still considered an affordable housing program because it allows for more people to purchase a home.