Jason Heath | March 24, 2015 |
Source: Financial Post
It’s hard to scan a Canadian newspaper these days without coming across an article about the country’s lofty real estate prices. And it’s also hard for parents to tell their kids the “I used to walk to school barefoot” stories. Or is it? Is it really that much more expensive to own a home these days than it was 30 years ago?
Thinking of buying a home in West Vancouver? Your income better be at least $320,932. To buy a house in Trois-Rivières though, your salary would need to be just $39,379
Let’s focus on the particulars for the country’s largest city and one of the two crown jewels of the real estate market – Toronto (the other being Vancouver, of course).
In 1985, the average home price was $109,094 according to the Toronto Real Estate Board. Currently, the average home in Toronto will set you back by $566,696. Prices have therefore risen by 5.65% annualized over the past 30 years. During that time, prices rose quickly from 1985 to 1989, fell through 1996 and have since been on a near straight line upwards.
Back in 1985, the median Toronto family income was approximately $31,965. So a house cost 3.41 times the median family income. Currently, family income in Toronto is about $74,366, meaning the home value to income ratio currently stands at 7.62 times income – more than double the ratio from 30 years ago. Score one for the “prices are crazy right now” team.
This provides some perspective, but it doesn’t tell the whole story.
Homebuyers needed 25% down in 1985 compared to only 5% currently. Five-year fixed mortgage rates (posted) were 13.25% in 1985, versus 4.79% now.
This means a first-time homebuyer needed a downpayment that was five times larger and paid three times as much interest on every dollar borrowed. Maybe things weren’t so great back then after all.
Let’s try to compare apples to apples in 1985 Toronto versus today:
Obviously home prices have risen considerably more than incomes over the past 30 years. But it’s easier to buy a home now because you only need 5% down and not 25%. More lenient mortgage rules have, in part, fueled home prices.
Interest rate declines have been the only thing that has kept home affordability in line with 1985, given that monthly mortgage payments relative to family income have only creeped up a little bit in the past 30 years. Our numbers, however, assume a 25% downpayment to compare to the minimum downpayment required in 1985. This can be really hard to scrape together for young homebuyers today, who frequently put down much less.
Going forward, interest rates aren’t likely to increase in the short term in Canada. In fact, there is a possibility of further rate decreases. But when interest rates rise, housing affordability will be squeezed because more of a family’s income will go towards mortgage payments and other interest costs.
Will this cause home prices to fall? Maybe. But during the peak of the Toronto housing bubble in 1989, mortgage payments as a percentage of median family income were about 50%. We’ve got a ways to go yet if that’s the tipping point.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto, Ontario.
Illustration by Chloe Cushman, National Post
Need more information or advice on #mortgage_qualification, contact the The Ray McMillan Mortgage Team