Back in the good old days – assuming you deem pre-Second World War the good old days – there was a time-honoured maxim. It went like this: “One week’s salary for one month’s mortgage payment.”
That was the measuring stick for how large of a mortgage you should get. It defined a comfortable life whereby your payment would never be big enough to cause ulcers, marriage breakups and other bad stuff.
Over the years, for reasons that follow, that measuring stick got bigger. But in 2016 and 2017, regulators put the smackdown on free-spending mortgagors, bringing us all the way back to the days when families gathered around the radio and ate dinner at the same table.
As the 1980s began, homeowners spent an average of 17 per cent of their income on mortgage payments, property taxes and heat. But as people demanded nicer homes closer to big cities, home prices climbed faster than incomes, and so did debt-servicing costs. By the fall of 2016, new home buyers were spending an average of 25.6 per cent of their income on basic housing outlays.
Most new buyers have never heard of the one-week pay rule because one week’s pay stopped buying what it used to. Today, it doesn’t get you to first base in our biggest cities. As of December, the average wage earner making $992.87 a week and putting down 20 per cent could get a $289,000 mortgage with a payment that’s 25 per cent above their weekly earnings.
As years went by, lenders and policy makers catered to home-buyer demand by allowing a bigger percentage of income to be consumed by housing costs. Whereas the old rule of thumb suggested no more than one-quarter of your income should go to housing, the industry let that number rise, up to 39 per cent (or even 50 per cent at pricey non-prime lenders).
The trouble is, not only did debt ratios and allowable amortizations go up, but interest rates went down. So people could take on more and more debt with the same payment size. That’s a concern when rates are falling. But it’s a macroeconomic danger when rates are climbing.
Until somewhat recently, the stats hadn’t been overly alarming. Most people were merely taking on the same amount of debt as they always have, relative to income. But a rising-rates environment changes everything. A significant minority of those same borrowers would find it much harder to make those payments if interest costs “normalized.”
Seemingly overnight, federal policy makers have taken us back to yesteryear.
By imposing new mortgage stress tests, they’ve required most lenders to use a two-percentage-point higher interest rate when assessing people’s debt-service capacity.
Effectively, that has pushed down the maximum mortgage payment that the average Canadian can be approved for to, you guessed it, about one week’s pay.
So, it seems what’s old is new again. Whether it was Ottawa’s intention or not, they’ve single-handedly brought us back to a quaint historic metric: “One week’s salary for one month’s mortgage payment.”