How affordable are homes on the Canadian housing market?
This is the question at the top of every mortgage broker and home hunter’s mind. As mortgage rates begin to climb and home prices creep ever higher, industry leaders are keeping a close eye on affordability in an attempt to avoid a bubble.
It’s no secret that more and more houses are being priced out of the range of first time home buyers. This is especially the case in major metropolitan areas like Toronto and Vancouver. With today’s increasingly expensive markets, what does affordability even mean? We asked Robb Nelson of FamilyLending.ca to help better explain this important measure and how it could impact your mortgage rate and ability to buy.
What is Affordability?
“Simply put, affordability is the percentage of median pre-tax income that is needed to pay to cover the cost of your mortgage, your property taxes, and your utilities,” says Nelson. “Lenders look at your affordability in order to better understand your risk.” A good rule of thumb? Associated costs should never be higher than 23 percent of your gross income.
Here are the affordability number for major centres across Canada (based on the average price of a single family home and the posted five-year mortgage rate), according to a recent report released by Royal Bank:
| Average
Price in Q1 |
Qualifying
Gross Household Income ($) |
RBC Housing
Affordability Measure |
Average
Housing Measure Since ’85 |
|
| Canada | $366,500 | $77,700 | 42.5% | 39.0% |
| Vancouver | $786,300 | $147,300 | 82.3% | 59.8% |
| Calgary | $451,800 | $89,500 | 38.7% | 39.1% |
| Edmonton | $330,000 | $71,900 | 30.4% | 33.1% |
| Toronto | $556,600 | $113,300 | 53.8% | 48.7% |
| Ottawa | $389,800 | $88,400 | 39.1% | 36.8% |
| Montreal | $294,500 | $63,900 | 40.1% | 36.8% |
As you can see, keeping your living expenses within the 23 percent safe-range isn’t easy – in fact, it’s nearly impossible. As such, more and more first time home hunters are looking at smaller dwellings, specifically condos, as a way to realize their home ownership dreams.
Affordability on Both Ends of the Spectrum
Condo affordability is a far easier pill to stomach for young couples and average income earners. Currently, condo affordability sits at roughly 28.1 percent on a national basis. On the flip side, two-storey houses clock in at close to 48 percent nationally. In Vancouver, expect twice that – affordability is a dismal 87.2 percent on the coast.
How Are People Still Buying?
“While it would appear that houses are no longer affordable, the truth is that affordability hasn’t really changed all that much in the past few years,” says Nelson. City’s like Vancouver and Toronto have always been well over the suggested 23 percent rate. What’s more, low mortgage rates have helped offset the spike in high home prices, helping temper the market and ensure that first time buyers can still afford to take the first step up the property ladder.
Could a Correction Be Coming?
So what does this all mean, now that mortgage rates have started to increase? Well, that depends. According to national numbers, home prices also saw an increase back in May. If the market is to right itself, a pricing drop has to be on the horizon, but there’s no telling how soon or how soft that landing will be.
Factors Further Impacting Affordability
As dismal as affordability appears, the story gets worse when you factor in a floundering economy and the frustrations of student debt. Young adults, a demographic that has traditionally dominated first time home sales, are finding it increasingly difficult to find employment that pays enough to pay back student loans and move out of their parent’s basement. Throw in the need to save a sizeably down payment (at least 5 percent) and it’s no wonder more and more young Canadians are turning to the rental market or condominium MLS listings in order to spread their wings.
With increases in both home prices and mortgage rates, now’s the time to take a serious look at affordability and your future as a home owner. For assistance, contact Robb Nelson and his team of talented Canadian mortgage brokers.