A common thing I’ve been hearing is that Toronto families don’t make enough to support home prices at these levels. Bank executives, economists, fund managers, and even real estate agents have repeated this in the media – but they never offer any numbers. I always find it strange when the echo chamber gets activated, without even a single fact flowing out. Running some quick numbers shows that there’s actually a good chance that this market can be supported by local incomes.
Now let’s get this out of the way first, I don’t think this is a healthy market. I’m a firm believer that regression to the mean is one of the strongest rules in finance. Any sudden pop in prices will be followed with a proportional downtrend to balance. Sometimes that downtrend is hidden through inflation and devaluation of a currency, so it’s not always visible at first glance. I also believe that people today are paying large premiums for future values on property. However, that’s not what today’s analysis is about. Today we’re looking to answer the question of whether or not there’s enough families that make enough to support the city’s expensive prices.
19,318 Sales Were Over A Million Dollars Last Year
The number of homes sold over a million dollars is soaring. According to the Toronto Real Estate Board (TREB), there were 19,318 sales over a million dollars in 2016. This represents a massive 77% increase from the year before. This is about 17% of total sales in the whole TREB region, which is also a significant number.
Source: TREB.
Household Needs To Make At Least $150k/Year
To support a million dollar home, your family needs to make at least $150,000. At a qualifying interest rate of 4.64%, you can score a mortgage of $850,000. Add to that a 20% down payment (the minimum a million dollar home requires), you have the ability to buy a place at over $1,050,000 – conservatively speaking. So how many households in Toronto make over $150,000 annually?
According to Statistics Canada’s latest income release, a lot. They estimate 11% of households in Toronto made over $150,000 in 2015 after tax. That means there’s 264,110 families with the firepower to buy a $1M+ home last year. This is a 17.98% increase from the year prior, which means 40,259 families joined the $150k+/year club.
The chart above shows the number of Toronto households that brought home over $150,000 after taxes. Before taxes, 415,373 Toronto households had income levels above $150,000. Source: Statistics Canada.
7.3% of These Families Would Support These Levels
This is surprising to me, but there’s a metric buttload of people that can afford to buy in this market. To support last year’s $1M+ market, only 7.3% of households that make above $150k would have needed to purchase. This is half the number of new families that started making over $150k+ annually the year prior. Sure, not all of these people are buying. A good portion of these families already have homes, and many will wait for prices to cool down. People that are good with money generally don’t chase valuations. The possibility of them supporting these prices however, does exist.
Once again, I’m not naive. I understand that there are families stretching themselves thin to get into this market. There’s mortgage fraud, a booming private lending sector, and a massive number of speculators buying lower priced properties. There’s also the issue that incomes are quickly polarizing, and people on the other end of the spectrum are finding it hard to find shelter.
Cities need people at all levels of the financial spectrum to operate, so this increased premium on housing is going to have severe economic consequences. However, we now have an answer to the question if local incomes can support home prices at these levels. Yes they can. Are well-heeled locals the ones that are buying? That remains to be seen.
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Totally agree. The kind of buyers I’ve been seeing are not using pocket change to get into this market.
What’s with all of the contradictions from this blog? You were bearish on real estate, then all of a sudden you’re pro-real estate. It makes no sense.
Contrary to what people think, we’re not pro or against real estate. We just crunch numbers and put facts to trends in the news. Often unqualified statements flourish in the media, and we see what the data says.
Data is going to conflict with an unqualified guess. So when the media is pro-real estate without a reason, data will bring it down to reality. When the media thinks the real estate world is going to end, data will bring it back up to reality.
Do you have a source on the StatsCan data you sourced?
I’m curious because the latest data I can find on StatsCan goes up to 2014.
I think you’re missing the point… 17% of the transactions in the last year could only have been soundly financed by 7.3% of families.
That means each family that makes above $150k per year had to buy and sell about 2.3 times last year…
I’m not sure if I understand what you’re saying. The author said over 40k more families made $150k after taxes, which would have qualified them for a new mortgage in the million dollar range. Only half of them would need to purchase last year to support these levels.
Why would they have to do 2.3 transactions? It’s a wealth rush, to a wealth spend the next year. 40k people with new wealth buy 20k homes the next year, sounds possible. This excludes any upgrades, and people with significant wealth outside of income.
Sorry miscalculation 0.5 transactions per year.
Do you actually think half of families making over $150k move in one year? How often do you think people move?
Can you provide the source of the stats canada income report?
One valuable takeaway from this article is it shows how the large number of domestic speculators that seem to be most of the fuel for the rising prices can afford to buy/speculate even with prices so high. Like the article says, it doesn’t mean that it’s going to turn out to be a good investment (just because you can doesn’t mean you should), and most analysis on this site suggest it won’t end well, but this analysis is a valuable contribution for explaining how there can be so many domestic speculators fueling the market even at million dollar prices. And that’s without even considering the access to equity many of these domestic speculators have because, given their income, they probably already own a home that has appreciated significantly.
I highly doubt the average Toronto couple with no support who makes over 170K+ per year has 20% down to put on a home.
It’s obvious the market consists of:
1) domestic speculators with cash looking to flip
2) developers again looking to flip
3) domestic buyers looking to use their current equity to move up (and actually live in the home)
4) foreign buyers looking to park money
5) domestic buyers with access to the bank of mom and dad
6) last buy not least.. couples making 170k+ with no support who are willing to live house poor
Agreed that there are a number of high income earners however historically higher income earners were able to purchase really nice homes (mansion caliber) and now are in bidding wars for pieces of junk. Those in the city that are middle class are overpaying for townhomes/condos when historically could have bought larger homes. The lower income folks are fighting to survive. Real tragic how things are playing out. What’s worse is how house poor people are becoming.
This is the biggest ponzi scam where we have young people and immigrants overpaying to fund others retirements so the govt can wash their hands of any responsibility.
Where did you obtain those statistics?
The majority of people I know from high school since graduating in 2007 (they will be late 20s by now) are either unemployed, living in their parent’s basement, working at least 3 minimum wage jobs with terrible employers who do not consider occupational law, and/or they are at-risk of entering the criminal justice system because of how they earn their money (which I will not mention what they do for a living because I believe that a woman should choose her profession).
Only those who live at Forest Hill, York Mills, Rosedale, Downsview, Bayview or any other high-income area of Toronto are able to afford those obscene prices for overpriced real estate in the City of Toronto.
Money laundering and the proceeds of crime also play a role in foreign investors parking their cash into overpriced Toronto real estate, but the Canadian government would rather invade the bedrooms of women who choose to sell their bodies because of a few angry social activists who view those professions as competition.
Agreed!!!!!!
You forget to consider whether families with those incomes have high debt from education, lines of credit, cars, etc. which factors into whether or not they can use all their earning power to buy a house.
At the same time you don’t need to be making that much to buy a $1m property. So long as you bought a house a long time ago, have little debt and have built up enough equity, you could take out a HELOC and use the proceeds on a down payment for another house as a speculative investment.
Your analysis and commentary is misleading. Families do not need to “make” $150,000 – they need to make a given pre-tax amount that would net them $150,000. That’s a completely different ball of wax.
You also breeze over the 20% downpayment requirement as if that’s minor – any guesses as to how long it would take the average family earning $150k (after tax) to assemble that pool of funds?
To come to the conclusion that “a lot” of people can afford Toronto real estate prices seems like a major stretch.
By these numbers there are 2,401,000 households in Toronto. That seems like it is way too high of a number. I am guessing you conflated population with households?
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