In the news of late, there is a good deal of discussion about home affordability in cities around the world. Demographia International is a major contributor to this conversation with their Annual Housing Affordability Survey They use a simple way 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 will come as no surprise Hong Kong 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 their 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…that means if every dollar of their income was used to pay the mortgage and they had absolutely no other expenses such as food, utilities, travel, shopping, commuting, and an occasional outing, it would take them 18 years to pay off their mortgage.
If you are interested in a more in-depth look at Hong Kong’s housing market, check out this excellent video CNBC
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.
Home Affordability in Canada
Here in Canada, Vancouver currently leads the way (no surprise) with a median multiple of 11.8. Toronto started 2017 at 7.7 and Victoria at 8.1. Victoria’s median multiple of affordability is higher not because home prices are higher, rather, it is because Toronto’s median income, the divisor, is quite a bit higher than Victoria’s median income.
A more useful way to measure affordability in Canada 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
If you’re an average-income family or first-time home buyer and you have been saving a larger down payment, contact me before the new stress test rules recommended by OSFI (Office of the Superintendent of Financial Institutions) come into effect.
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 what you need or want after the stress test is in place.
If you’re planning to purchase your next home soon, give me a call to discuss attaining a long-term rate hold and other financial strategies to help you save money.