After I wrote an article and some posts on housing affordability, I received plenty of questions and observations from readers. The interest warrants another article explaining the tools of measurement, along with a closer look at the affordability of homes in Canada and around the world.
The annual Demographia International Housing Affordability Survey uses a simple way to determine affordability. They took the median price of a home in a city and divided it by the median income of a family in the city. The resulting number was the “Median Multiple”, or simply, the number of years of income it would take to pay a mortgage for the home.
It was no surprise Hong Kong’s homes are the least affordable in the world by this and every other measure, and for good reasons: It’s a densely populated island with over seven million inhabitants packed into 1,106 square kilometers, it’s a major hub of world commerce, mainland developers are driving up costs with the government’s blessing which has no incentive to cool this market. Demographia International’s recent survey put the median home price at 18.1 times the gross annual median income. In other words, it will take a resident of Hong Kong 18 years to pay off a $900.000 home earning $50,000 a year…if they had absolutely no other expenses such as food, utilities, travel, shopping, commuting, and an occasional outing.
For a more in-depth look at Hong Kong’s housing market, check out this excellent video CNBC put together.
The second least affordable city in the world was Sydney which scored an astonishingly out-of-reach multiple of 12.1 for the average family. There are plenty of reasons housing has become so unaffordable in Sydney, but it boils down to the booming economy and the serious shortage of housing inventory.
In Canada, Vancouver currently leads the way with a median multiple of 11.8, though Toronto, which started at started the year at 7.7 and Victoria at 8.1. (Victoria’s median multiple of affordability was higher because Toronto’s median income, the divisor, is quite a bit higher). For greater perspective, the median multiple of financial hubs London and New York pale in comparison coming in at 8.5 and 5.9 respectively. Have a look at Demographia International’s 2017 Survey result. It’s quite interesting.
A more useful way to measure affordability is to look at home ownership as a percentage of monthly pre-tax income. According to the Canada Mortgage and Housing Corporation’s benchmark, housing is considered “affordable” when no more than 30% of pre-tax income is spent on home ownership expenses.
RBC recently came out with a report stating Canada’s housing affordability is at its worst in 27 years with the national average at 45.9%. This means many Canadians will spend nearly half of what they earn paying off their mortgage and household ownership related expenses, such as property tax.
Home Affordability in Vancouver and the GTA
Vancouver still tops the chart at 79.7% in the first quarter of 2017 even after the decrease since the third quarter of 2016 which saw it at an astonishing 92%. British Columbia’s 15% foreign buyer’s tax may have contributed to the decrease, but there’s a lot of argument about whether the government’s new tax made the difference, or if the market was simply due to cool on its own.
The Greater Toronto Area (GTA) comes in second place at 72%, up 8.3 percentage points compared to the third quarter of 2016. Ontario’s new 16-point housing affordability plan implemented in April has unarguably cooled the market and single detached home prices took a precipitous drop of nearly 40 percent over the summer months. However, Condos and Town homes continue to have a strong market appeal due mainly to the fact that they are now more affordable options to the average family.
Home Affordability in the Rest of Canada
Montreal, Calgary, and Ottawa round out the top five most unaffordable list at 43%, 39.6%, and 34.8%, respectively. Although these numbers are lower than Toronto and Vancouver, they’re still above the 30% affordability threshold.
The most affordable homes in the country are in Atlantic Canada. Saint John, N.B. leads the way at a mere 26% of pre-tax monthly income, or four percentage points below the affordability benchmark, followed by St. John’s, N.L. at 28.6%. While affordability in these cities has decreased slightly, they remain relatively stable compared to Toronto and Vancouver.
OSFI Recommendations Will Soon Impact How Much Home Your Client Can Buy
If you clients are an average-income family or first-time home buyer, a townhouse or condominium may be their most viable option (unless they are planning on uprooting to move to Atlantic Canada). If a condominium or townhouse just isn’t going to work for their situation, and you’re privy to the fact that they have been saving a larger down payment for a single detached home, encourage them to work with you now before the new stress test rules recommended by OSFI (Office of the Superintendent of Financial Institutions) come into effect.
At this time, homebuyers can find creative ways to increase their down payment. They can go to an alternative or subprime lender, or even the "bank of mom and dad" to borrow money to boost their down payment to 20% or more to avoid the stress test. Proposed new regulations will close this loophole, and they will need to qualify based on the ability to make a much higher monthly payment based on the current five-year posted rate by the Bank of Canada (currently at 3.410 percent as of October 2017). That ultimately means they will not be able to qualify for as large a loan, and you might have disappointed clients on your hands when they are unable to help them purchase the home they want.
By Mathieu Powell
In Vancouver, consumer demand for condominium units and townhouses has significantly outpaced the desire for free-standing homes. The MLS Home Price Index benchmark price of condos increased by 18.5 per cent compared to July 2016, up to $616,000, and the benchmark price for townhouses grew 11.9 per cent over the past year, up to $763,700.
In Victoria, gains weren’t as steep, but they are not far behind. The MLS Home Price Index benchmark price of condos is up by 17.7 per cent over July 2016, up to $402,499, and the benchmark price for townhouses grew 7.4 per cent over the year, up to $506,614.
What is driving gains in the condominium and townhouse market?
Two factors: affordability and inventory.
Although the average price of homes in BC is lower than last year, a closer look at the data reveals the composite of homes being sold has shifted to smaller free-standing homes, condos, and townhouses. BCREA economist Brendon Ogmundson attributed this shift to a pronounced need for more affordable residential real estate along with short supply.
“(The) supply of homes available for sale has not recovered and is still declining in many markets around the province,” says Ogmandson.
Indeed, home prices in most BC markets are being pushed higher due to severe supply constraints. This is particularly true for the Victoria region, which currently has less than two months of total inventory for sale.
Victoria Real Estate Board President Ara Balabanian stated "This July, we saw a strong focus on the lower priced end of the market, with condos and townhomes and single-family homes listed for under $700,000 in high demand. Many of those properties saw multiple offer situations."
The lack of supply is also very apparent in Vancouver’s apartment and townhouse market. Jill Oudil, president of the Real Estate Board of Greater Vancouver said in her recent CBC News interview “detached home listings have increased every month this year, while the number of condominiums for sale has decreased each month since February.”
Out East, Toronto’s housing market may have cooled overall, but that isn’t true for the condominium market. Prices continue to soar as speculators interested in flipping and families desperate for affordable housing flock to the market.
"Despite the recent dip in overall GTA home sales, the condominium apartment market was quite resilient,” said Toronto Real Estate Board President Tim Syrianos in TREB's Q2 2017 Condo Market Report. “Condo apartment sales accounted for a greater share of overall transactions during the spring compared to the same period last year.”
The average selling price for the GTA market area at the end of Q2 was $532,032, and the average price in the City of Toronto was $566,513. That’s a 28.1 per cent increase over Q2 2016, making condominiums the fastest growing of all home types in the GTA.
What do these trends mean for condominium and townhouse prices here in Victoria?
Our economic fundamentals remain strong, the climate is delightful, inventory is low, and many more people want to live here. We predict a seller’s market and rising prices for quite some time to come.
by Mathieu Powell
Last week, the Bank of Canada reviewed the financial system and downplayed fears that the Canadian economy was in serious jeopardy from a potential real estate market correction.
We are NOT going to suffer a U.S.-style melt-down. If a big drop in home prices were to occur in the Vancouver and Toronto regions, (which Is unlikely), it wouldn't drag the rest of the country down with it. As the Bank of Canada sees it, a full-on bust in the Toronto and Vancouver regions would have only “modest direct spillovers to housing markets in the rest of the country.”
Most experts do not see anything like a full bust coming, albeit sensationalist reporting from, for example, CTV news quoting David Mandani, senior Canadian economist of Capital Economics on Monday continues to scare home owners who haven’t done their research.
In the interview, Mandini stated, "I see a correction between 20-40 per cent in the Canadian housing market in five years," He suggests “there will be a slight dip in Toronto housing prices before the end of the year, but that's all it will take to scare many homeowners into cashing out of the market.”
His proof? The latest housing data from the Real Estate Board of Greater Vancouver and the Toronto Real Estate Board. He says the ratio of sales to new home listings is falling, which would indicate that a large decline in prices is on the way.
I’m no economist, but a little common-sense thinking demonstrates why his predictions are very unlikely. A normal family is not going to be scared into selling their homes as Mandini suggests. Rather, they are going to take on the “hunker down and weather the storm” attitude, simply because selling their current home would mean they then need to buy a new home. Uprooting your family to move is a big undertaking!
A more likely scenario is many families will decide to access their home’s equity to increase their family’s financial liquidity while the opportunity exists. That will lead to a big bump up in household debt coming by Q2, and a short-term increase in economic consumption through Q3 and Q4.
There may very well be a “soft” landing for real estate prices in Vancouver and Toronto, which will have a cooling effect on provincial economies in British Columbia and Ontario as home owners who remortgaged to sustain their current lifestyle find the “bank of house” drying up, coupled with the decline in consumption related to home purchases like furniture and appliances.
The central bank’s financial review detailed concerns over household debt and the housing markets, but allayed fears that a U.S.-style meltdown and broader Canadian crisis is part of the equation. They believe Ontario’s recent measures - the 15-per-cent tax on foreign purchases to tame the scorching-hot housing market in and around Toronto - should ease the risk. (But remember, Vancouver is now on the rebound after slumping in the immediate aftermath of B.C.’s implementation of a tax on foreign purchases).
In their list of threats and vulnerabilities, a moderate risk for B.C. and Ontario includes “the fall in house prices leading to negative wealth and collateral effects, which further weigh on consumption spending,” but Benjamin Reitzes, Canadian rates and macro strategist at BMO Nesbitt Burns feels the overall finances of Canadians are nonetheless in decent shape.
“Admittedly, households are vulnerable to higher rates, but it doesn’t look like big rate increases are coming any time soon,” he says.
the Canadian Real Estate Association releases its May report on sales and prices, BMO expects the report to show home sales down 5.5 per cent from a year earlier, and average prices up 6.5 per cent.
There’s no doubt Canadian families’ fortunes are closely tied to their homes. Watch for Statistics Canada quarterly report on household debt and wealth later today which, among other things, measures household debt to disposable income. It will be released later today.