A solution to housing affordability for owners and renters

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New homes should be built to accommodate multiple families – not just one

Published on May 8, 20244 minutes reading time

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Montreal multiplex for saleMultiple units in one building make Montreal the rental capital of Canada, where nearly two-thirds of households rent, while in Toronto less than half are renters. Photo by Dave Sidaway/Montreal Gazette

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By Murtaza Haider and Stephen Moranis

Canada needs to build six million new homes by 2030 to achieve affordable housing. However, achieving this goal will require more than doubling the current build rate, which seems increasingly unlikely.

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However, a breakthrough is possible when new homes are designed to accommodate not just one, but multiple households, where the new home is built with an accessory dwelling unit (ADU) that can accommodate an owner and a renter household. In a broader sense, a triplex apartment offers space for one owner and two tenants.

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Adding ADUs to existing homes increases the potential to house more households in fewer buildings, reducing the unattainable goal of building millions of new homes.

“The ability to build new homes and renovate existing homes with legal (accessory dwelling units) or basement apartments is a win-win-win-win situation. Benefit No. 1 is homeowner affordability as rental income supports mortgage payments,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, said in a recent note.

He added that the other three gains include cheaper rental alternatives, the use of municipal infrastructure to create more housing and the construction of the accessory units in accordance with municipal regulations.

SVN Rock Advisors Inc., real estate veterans, is behind this idea of ​​a self-financing home. In a book of the same name they explain the concept and the mathematics behind it. They said secondary rental income can lower the income threshold for mortgage qualification by 30 to 60 percent, “depending on the living arrangements chosen by the owner.”

With ADUs, new homeowners, especially first-time buyers, become homeowners and landlords from day one. Guaranteed rental income is the missing link for young and low-income households whose homeownership dreams face seemingly insurmountable hurdles, including high mortgage rates, rising real estate prices and burdensome regulations like stress testing.

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The conversion of new single-family homes into multi-family homes also helps to address the rental housing shortage. An ADU can be rented to a household with a ground-level (and spacious) apartment, rather than being forced to choose from a restrictive selection of properties consisting primarily of high-rise apartments.

Housing options are limited for young renter families with children who need more space than one- or two-person households. With ADUs, renter households also have access to backyards and porches that are typically missing from apartment-style homes.

The concept of a self-financing house also works for existing houses. A newly constructed home can come with an ADU, while an existing home can be remodeled to convert the basement into an ADU. In both cases, the math behind it is simple.

A new home buyer must expect typical mortgage and other household costs. But a basement rental ADU can provide a monthly income that reduces operating costs and improves the buyer's finances to qualify for a mortgage. The house becomes an investment and the homeowner simultaneously owns a revenue-generating (rental income) business.

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The self-financing house is more than a concept. In Montreal, there are many apartments with ADUs, where the owners live on one floor and the tenants live on other floors in multiplexes. According to the 2021 Census, more than 13 percent of the city's housing consists of apartments or condominiums, while 57 percent are apartments in buildings less than five stories. In contrast, only 14 per cent of Toronto's apartments are in buildings less than five floors.

The additional residential units make Montreal the rental capital of Canada. Almost two-thirds of households in Montreal rent, while in Toronto less than half are renters.

Builders and governments must embrace the concept of the self-financing home to realize its potential. Local governments must remove hurdles that could limit rental space in traditional single-family homes. The federal government may want to include self-financed home designs in its proposed catalog of pre-approved home designs. Mortgage lenders must recognize the rental income potential of homes with ADUs in order to make larger loans than homes without ADUs.

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Most importantly, home builders must grapple with the new concept of a housing unit that is designed and built to provide shelter for more than one household. In the past, builders were happy with designs that accommodated only one family per apartment. However, the future requires a break with the past to address the housing shortage.

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The self-financing house demonstrates a way to provide more accommodation with the same amount of land and community infrastructure. It also promotes diversity by accommodating renters and owners with different incomes and backgrounds in the same neighborhood.

Murtaza Haider is director of Regionomics Inc., a consulting firm specializing in predictive analytics and machine learning. Stephen Moranis is a real estate industry veteran. They can be accessed on the Haider-Moranis Bulletin website at www.hmbulletin.com.

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