Association for Public Policy Analysis & Management

Housing prices and rents in Canada have risen significantly over the past decade, and continue to rise in several cities. When confronted with rising housing costs, households dedicate an increasing share of their paychecks towards shelter costs, and adjust their saving and spending accordingly. For households with constrained budgets, the impact of increasing housing costs on non-housing resource allocation is potentially significant, particularly if it requires sacrificing spending on other necessities such as prescription drugs and food. In this paper we examine how housing costs differently impact the non-housing resource allocation of households and investigate if these effects differ between renters and homeowners. To do this we draw on data from the Survey of Household Spending, a representative survey of Canadian households conducted annually, which includes detailed information on sources of household income and resource allocation. Our results show that as the share of household income dedicated towards housing increases, households spending more than 30% of their income on housing (deemed the affordability threshold) respond with a reduction in health care spending first, followed by a reduction in food expenditures. Renters, on average, spend a larger portion of their income towards housing than homeowners, and notably, they shows different substitution preferences than homeowners when their share of income dedicated to housing increases. These results highlight the relevance of tenure and non-housing resource allocation when examining the affordability of housing costs in Canada.