Drive till you qualify?
Growing up in Perth, Western Australia I was all too familiar with the concept of urban sprawl. Its a city dependent on the car and the streets and freeways that accommodate them. As a result I had a car from the moment I could drive, in fact I bought my 1984 Nissan Pulsar, like the one pictured above, a few weeks prior to getting my license in anticipation of the freedom I was about to enjoy.
In 2008, I moved to Vancouver and in 2012 I moved again to San Francisco, two cities where car ownership is more of a luxury than a necessity and at times can be a burden. Here in SF, if I don’t move my car at 7am each Monday to a week long parking area of the city then my week is dominated by 2 hour parking restrictions and the need to constantly dance with the street cleaners.
And it’s hardly ground breaking to explain how the reliance on the car affects the lifestyle of those in each city. But until now all of my consideration of car ownership had centered around convenience, it was not until our participation in the REach program, an industry accelerator aimed at accelerating the real estate industry, that I considered reliance on the car in terms of housing affordability and was introduced to the concept of ‘drive till you qualify’
What is that?
The concept is simple enough, drive further and further from the city centre till you find a house you qualify for. It’s a concept born from the ‘American Dream’ and one that many people abide by.
It’s easy to see why so many people chase the American Dream, it has been drummed into us for a long time, it stands for independence and success. I have mixed feelings on this. I think that if people want to buy homes that include commuting hours each day then that is their choice and it always will be, although I do wish they would consider the environment. And of course there will always be developers willing to do whatever the market wants and we cannot build infinitely more dense cities for our ever increasing population so some growth sideways is necessary.
It’s getting increasingly obvious that we need to support better urban planning – it makes economic sense that any development, be it inner city or further from an economic centre (where people work), is only approved if it is sufficiently connected to the existing urban environment. Connections include green areas, public transportation, cycling paths and walkways. Alternatives rather than a major highway that will ultimately just offer a gridlocked commute to those having to use it.
Sometimes, the problem extends beyond public choice…local zoning laws can make finding solutions to this problem difficult by prohibiting some kinds of development closer to city centers. In some areas, it may not be currently politically possible to solve the ‘drive until you qualify’ problem.
The political landscape has been in the business of promoting car dependent development for a long time. Since the Federal Aid Highway Act of 1956, Washington has spent billions building highways and subsidizing the suburban housing industry. As long as gas was cheap and there was room to grow it seemed to work.
So what should we consider when choosing a location
In recent years people have started to become aware of the combined effect of housing and transportation costs and have begun considering both in determining the affordability of their new home.
“The average american today spends 52% of their income on housing and transportation combined”
Shaun Donovan, Secretary of Housing and Urban Development
All of this came to a bit of a perfect storm in 2008 as the price of gas peaked while the economy tanked, making housing in these outer suburbs even less affordable as the owners were dependent on their cars.
Some estimate the cost of gas for an average suburban household doubled between 2003 and 2008.
And a quick review of the foreclosure data shows that percentage of homes foreclosed or delinquent rose around the same time. It also held true that in most major American sprawl towns the farther out a house was from a major city or economic centre, the greater the chance of it being foreclosed. So the foreclosure crisis has been a timely wake-up call on transportation costs.
Homes with access to public or other transportation methods dropped in price the least throughout the foreclosures of the last few years. As gas prices continue to rise, it seems denser neighborhoods are showing their superior resilience to economic downturns.
How much do transportation costs affect housing affordability as you move away from city centers and how much do transportation costs make housing more affordable as you move closer?
Obviously the answer is unique to each location, but adding transportation costs has a considerably impact on affordability in outer suburbs. For inner suburbs removing the costs of gas in exchange for alternative transportations has less of an effect on total affordability as demand drives prices higher in these areas – but these costs are something few of us can afford to ignore.
The screen shot below is from the H&T Affordability Index website. It shows the areas surrounding Phoenix. Those shaded in yellow are considered affordable (where average housing costs are less than 30% of the average income – a fairly typical measuring stick). Areas shaded in blue are less affordable (average housing costs account for more than 30% of typical household income).
Compare that to the screen shot below – again in Phoenix. This time the image shows the combined housing and transportation costs for the area and the ‘affordable’ areas are shown again in yellow where the combined costs represent less than 45% of the average income. As you can see when you consider the two costs in combination the affordability is narrowed to a much smaller area.
Rewarding consumers via their mortgage based on their choice of location
Despite the mortgage industry largely benefiting from ‘drive till you qualify’ it is pleasing to hear that some industry bodies are experimenting already with ‘location efficient’ mortgages.
Like energy efficient home loans, mortgages for location efficient properties reward borrowers who live close to economic centers due to the financial benefit of decreased transportation time and cost. But I think the advantage extends beyond the favorable terms of your mortgage – imagine the social benefit of increased productivity and family time when you significantly cut your the time spent commuting.
These could be a great success if made available to the right people through the correct channels. Young people continue to behave with a preference for living in more vibrant communities with a less car-dependant lifestyle. Seventy seven per cent of the 80 million millennials born between 1977 and 1995 prefer to live in an urban core.
With the average american spending 52% of their income on housing and transportation is it time the combined costs be factored into mortgage underwriting?
The video below shows you how to use Planwise to quickly determine the impact of housing and transportation costs when considering your next move. If you would like to discover what your financial picture looks like, try using Planwise for free: get.planwise.com