In Canada, there is no standardized measure of what makes a rental home affordable, and those that do exist are more commonly tied to real estate market trends (e.g. percentage of average market rent) rather than income trends. Given this challenge, the LEMR Housing Monitor created our own definition of rental housing affordability.
Our rental housing affordability definition considers the units that are financially accessible to renters by economic family size based on their income. We have also chosen to focus on economic families instead of households. Statistics Canada defines an economic family as a group of people who live together and are related to each other by blood, marriage, common-law union, adoption or a foster relationship. While many households are comprised of economic families, they can also include roommates who may only be living together for financial reasons and are otherwise unlikely to stay together as a unit.
It is commonly accepted that shelter is considered affordable if it costs less than 30% of gross monthly income. We applied 30% to the median before-tax income of economic families that were renting and additionally filtered out economic families that paid no rent and that were receiving government subsidies. The median income was calculated for each region independently to account for geographic variation in income. Therefore, for example, our rental affordability definition procures a different maximum affordable shelter cost for a two-person family in Toronto and a two-person family in Halifax.
Because the income of one-person households is quite different from two-person families and because families of different sizes occupy different sized units, our rental affordability definition produces a different maximum affordable shelter cost for each family size. In other words, our rental affordability definition asks, for example, what is the maximum shelter cost that is affordable for a one-person household and what size units are suitable for that household? We repeat this question for each family size. This contrasts with other affordability measures that set a single shelter cost threshold regardless of the family size.
We chose median income based on a historical analysis of the buying power of renter economic families. The median has traditionally marked a turning point where renter economic families no longer have disproportionate access to the rental market relative to their income. For example, a family in the 25th percentile income, may only have the purchasing power to access 10% of the rental units available on the market. History has shown that families in the median (or 50th percentile) income tend to reach parity and can afford approximately 50% of the rental units available on the market.
To match family sizes to units, we applied an occupancy standard of a maximum of one bedroom for every person and a minimum of one bedroom less than the maximum. Therefore, for each family size, there is one maximum affordable shelter cost applied to two different unit sizes. For example, for a two-person family, 1-bedroom and 2-bedroom units meet our occupancy standard and we count the number of units for both that are under the maximum affordable shelter cost (30% of median income of two-person renter economic families).
In a competitive rental market, the average market rent typically lags behind current asking prices for rent. This is because sitting tenants benefit from rent control which limits annual increases. Since we are interested in the asking prices of units, we can exclude units with long-standing sitting tenants by looking at households that recently moved. While the Census allows us to identify households that moved in the last year, in our rental affordability definition we have used households that moved in the last five years in order to increase the sample size.