Analyzing Home Affordability in Canada and the World

In the news of late, there is a good deal of discussion about home affordability in cities around the world. A major contributor to this conversation is Demographia International. They just published their 13^th annual Housing Affordability Survey in which they use a simple method to determine affordability. They take the median price of a home in a city and divide it by the median income of a family in the city. The resulting number is 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, and for good reason: A densely populated island with over seven million inhabitants packed into 1,106 square kilometers, it’s a major hub of world commerce, and mainland developers are driving up costs with the government’s blessing. 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 used every dollar of their income to pay the mortgage and 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 compared to 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 (no surprise) with a median multiple of 11.8. Toronto started the year at 7.7 and Victoria at 8.1. Victoria’s median multiple of affordability is not higher because home prices are higher, rather, Toronto’s median income, the divisor, is quite a bit higher than Victoria’s median income.

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. Keep in mind, they are surveying ALL homes, not just condominiums.

Home Affordability in Canada

A more useful way to measure affordability is to look at homeownership 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 homeownership 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.

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 still some disagreement about whether the government’s new tax made the difference, or if the market was simply due for a cool down.

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 inarguably cooled the market and single detached home prices took a precipitous drop of nearly 40 percent over the summer months. However, Condos and Townhomes continue to have a strong market appeal due mainly to the fact that they are now the most affordable option for the average family.

Montreal, Calgary, and Ottawa round out the top five on the list of most unaffordable homes 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’s Recommended Changes Will Soon Impact How Much Home You Can Afford
(October 20th, 2017 Revision: OSFI's New Rules Take Effect January 1st, 2018)

Right now, homebuyers 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 you 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). That ultimately means you will not qualify for as large a loan, and you may not be able to purchase as large a home after the stress test is in place.

If you’re an average-income family or first-time home buyer, a condominium is a viable option (unless you’re planning on uprooting to move to Atlantic Canada). You can get a great deal of home in a condominium at a great price as compared to a detached dwelling. The average price of a condominium in Greater Victoria is $488,348, whereas the average price of a detached home is $884,196.

If you have been working hard to save your down payment, contact us before the new stress test rules recommended by OSFI (Office of the Superintendent of Financial Institutions) come into effect. We have access to strategies to help you save money, and Triple Crown has an excellent selection of beautiful, modern pre-built condominiums in Langford close to every amenity and recreational pursuit a family could want.

Call us to discuss your options.

Todd & Justine