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.