Try not to pull something laughing. Canadian real estate became slightly more affordable this year. The Bank of Canada (BoC) published their update to the Housing Affordability Index (HAI) for Q2 2018. The update shows the cost of ownership declined slightly from last year. Despite the good news, the cost of ownership is still at one of the highest points in Canadian history.
Housing Affordability Index
The BoC’s Housing Affordability Index (HAI) estimates the income required for housing. The index is updated quarterly, and used a household’s disposable income for the number. Costs included are mortgage payments and utilities, but nothing else. This means taxes, maintenance, and insurance (TMI) need to be added on top of that. It’s also worth remembering that housing costs vary across the country, but incomes don’t have that big of a delta. Even though it’s high, expect it to be much higher in cities like Toronto and Vancouver.
Canadians Spend Nearly 35% of Their Income on Housing
The amount of disposable income required is coming down, but it’s still pretty high. Homeowners need 34.8% of their income to afford housing in Q2 2018, down 1.97% from the previous quarter. The ratio is down just 0.57%, when compared to the same month last year. Housing is getting more affordable across Canada, but not by much.
Bank of Canada Housing Affordability Index
The percent of income used to service mortgages across Canada. This number includes mortgage payments, and utilitilies.
Source: Bank of Canada, Better Dwelling.
The Reading Is Likely To Move Higher In Q3
The single quarter decline isn’t likely to set a new trend into Q3, considering prices and mortgage rates. The Federal Reserve Bank of Dallas observed real home prices bumped higher in the most recent quarter. The BoC used a reporting period that was just before the increase. The cost of servicing a mortgage is also on the way up, reaching the highest level since 2009. The combination of the two factors are likely to push a lack of affordability higher.
The lack of housing affordability for Canadians is far from over, but it does seem to be running out of gas. Affordability improved, but Canadians are spending nearly 35% of their income on housing. That’s before TMI, which adds another few points to the cost of housing. After housing and taxes, there’s not a whole lot of money for households to save or spend on consumer goods. Both of those points being important for long-term growth of the general economy.
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Taxes 2%, Insurance 1%, Maintenance 2%. You’re looking at 40% of disposable income for a house ACROSS Canada. Not in the major cities young people are required to live in to find a job.
When I bought a house 20 years ago, it was not even close to as difficult for young people to buy a house. My job also came with a pension, a union to protect my rights, and a position right up to retirement. What we’re doing with young people today is unsustainable, and anyone that says otherwise is just a greedy, delusional prick.
Somehow the country was able to do it without taxing more than half of your income as well. Chop 50% to taxes, and 40% of what’s left to housing. Now you get 30% of your gross pay to take care of kids, buy grocery, invest, and consume if we want the economy to keep growing. That’s why people need to pay their mortgage and draw from a HELOC at the same time. It can’t keep going like that forever.
Thank you Patrick! So heartening to read a comment like this.
I so agree Patrick. What baby boomers also forget to mention is the interest-free loans that the Canadian government provided to their parents in order to buy a house, setting Canadians up for several generations. Interest-free loans! And yet nobody accuses them of not working hard enough to “deserve” housing.
Patrick,
Nice piece. I agree and it’s not fair for the younger generations. A complete housing price meltdown would be the best scenario for them if it wasn’t for dismal economic climate that would ensue.
The best for them to expect is progressively rising interest rates which would stop home prices from rising while disposable income catches-up and simultaneously allow their savings to grow.
And mom and dad help them get into their first place by borrowing against their home. lets face it you can’t take it with you so you might as well help your kids get a foot hold in the housing market…but I do agree the big one is coming to a neighborhood near you. I just managed to get out of the market in August and I’m a renter now….not by choice but by the demise of a marriage breakdown. good luck to those going through one of these…I would truly never wish this on my worst co worker ever ! I think we all know we have one of those. lol
That said..I am debt free for the first time since the age of 18 with a little cash left over after my kids student loans were paid off..cheers
I am glad that people like you still exist and they recognize the reality as it is.
lol if anyone today gets a pension or belongs to a union. I can’t get behind any kind of union structure….ever. It’s not the 1920’s.
It’s almost the 20s again, and overseas companies with pre-1920s labor conditions are now competing “next door” by way of our modern global economy.
What do oversea’s labour conditions have to do with Canada? Is it bad in Canada? Should we inform the Ministry of Labour?
Good lord Sasha. I don’t even know what to say to that, except make a sound of exasperation. Yes, it is bad in Canada. Housing is a privilege not a right, that is out of reach of many who work hard everyday. Homelessness is rising every month. Cities are hollowing out. All the conditions and benefits Canadian workers fought for are gone. The “global economy” has single-handedly destroyed what made Canada a good place to live. If precarity is still OK by you, then just wait until you have kids, or get sick or injured and can’t work, or just get old. I am pretty sure our Ministry of Labour is aware of this decline so no need for you to alert them. But thanks for offering.
Global economy destroyed Canada? Really? Should we stop participating ourselves? Get a grip, Canada is still great, you’re just spoiled.
Interesting that property taxes are not included in the affordability index calculation. Given that with the rapidly increasing real estate values, taxes have doubled or tripled in some areas, the value of those increases would have been greater than the increases resulting from rising interest rates. For the GTA, in real numbers, taxes for many have gone up from around 4K- 5K to 8K-12K over the last couple of years.
Taxes are a nice chunk of change. That $8k-$12k is post-tax income as well, so you basically need to make $14k-22k to cover that. I’m guessing you’re in York region, where it’s a little higher?
This is a good point and something that rarely gets any coverage. All of the mortgage+reno buyers, with building permits, would be re-assessed after the permit closes. Sure you can get around the odd washroom/water-hookup but not much more and these guys can be savvy. Even if you didn’t do any work but paid twice the last assessed value, I can only imagine ‘the man’ is coming for hit kitty, especially if revenue drops. If property values drop, your taxes will not. A fixed cost more or less. Only a few thousand but I don’t have that just lying around. Most people don’t. Tick tock. BD4L.
Who are you? And where do you come from? I am thinking that you are the spoiled one. Me? I am getting my campervan ready for life under the bridge, after a lifetime of working hard, paying taxes, and being a responsible and contributing citizen. Good luck to you, My Friend.
Some context for the affordability spike in 2007-8. Most of that was in the oil patch, when places like Ft. Mac cost almost as much as a Toronto condo today.
Our oil centric government at the time of the Great Recession gave housing stimulus to prevent a meltdown in the oil patch. Around Toronto and Vancouver, home prices were still below real historic peaks, and were quite affordable. Sloppy policies like 40 year amortizations and liquidity injections to help our banks deal with US investments going South bled into our fairly normal market at the time.
Now those oil patches are affordable, but the cost of servicing is being driven almost entirely by Toronto and Vancouver, and their surrounding regions.
Great article.
We don’t need to debate about property taxes because RBC already included those in affordability calculations.
Here is the total affordability picture for new buyers:
http://www.rbc.com/economics/economic-reports/pdf/canadian-housing/house-sep2018.pdf
About RBC and affordability
That is so funny where RBC is stating that affodability would be getting worse if rates rise when in fact unsustainably low interest rates are the root cause which made high home prices unafordable.
Its quite surprising how different the aggregate cost of housing is in the RBC report vs. the BOC numbers. 20% difference can’t just be attributed to TMI – any thoughts where RBC gets its data from? And speaking of data sources – this is exactly why stats canada wants individual banking data – all the data we are using to make these conclusions is garbage. In the health stats world there’s a saying – “garbage in, garbage out”.
BOC is looking at the cost of existing homeownership, while RBC is looking at the cost of buying a home. Slightly different. The BOC is also looking at the cost people are paying, while RBC is looking at the median home price and the median income.
It’s like the rent issue. All new rental reports for Toronto show that rentals cost $2200. Statistics Canada’s census showed the average rental cost at $900. If you buy when the demand is willing to pay substantially more, you end up paying more. That demand will will fall back to normal levels soon, at which point cap rates will adjust as well.