The good news on housing as we head into the second half of 2019 is that roughly three-quarters of Canadians live in communities where home ownership is affordable.
But that other 25 per cent? In the words of the Royal Bank of Canada economists who produced their bank’s most recent housing affordability study, the situation is “dreadful.”
Three urban areas make up that terrible 25 per cent of the housing market: the greater Toronto and Vancouver areas and Victoria. A rule of lending is that the borrower shouldn’t spend more than 35 per cent of their gross income on mortgage payments, property taxes and utilities – mainly heat. RBC’s data show these housing costs would eat up 82 per cent of the median pretax household income in Vancouver, 66 per cent in the Toronto area, 58.6 per cent in Victoria and 51.4 per cent for Canada as a whole.
The second-half outlook for housing is worth considering for a couple of reasons, one being that affordability for first-time buyers is bound to be an issue in the federal election campaign this fall. At the same time, we are approaching a tipping point of unaffordability in the three most expensive markets. It’s starting to look like they may never again be in reach of families who don’t have income way above the median level.
Here’s how hopeless home ownership is getting in these cities, according to RBC. Twenty-one per cent of families in Victoria have the income to afford an average-priced home, compared with 20 per cent in Toronto and 12 per cent in Vancouver. Saint John was the most accessible for home ownership of the cities tracked by RBC, with 56 per cent of families able to afford the average-priced home.
Vancouver remains deadly to aspiring homeowners despite a decline that saw the average resale price in May almost 9 per cent lower than a year earlier. Toronto’s market has slumped as well, but May results suggested a possible turnaround. And Victoria is riding some kind of la-la land wave that keeps prices moving higher.
Trends driving house prices over the past year include an increase in mortgage rates and stress tests for borrowers that ensure they can survive higher rates. These trends did depress prices in many cities, but affordability in Toronto, Vancouver and Victoria remains dreadful.
Mortgage rates have backed off a bit lately, and that could help affordability in the second half in Vancouver, Victoria and Toronto. Bigger mortgage rate declines would help even more, but we’re not likely to see those unless the economy tanks. If that happens, people are going to be thinking more about their job security than opportunities to buy homes in Toronto and Vancouver.
Beyond Saint John, other cities where affordability in the first quarter was solid include St. John’s, Regina, Quebec City, Halifax, Saskatoon and Winnipeg. All have been right around their average level of affordability since 1985, RBC’s numbers show. These locales are a useful reminder not to generalize about housing affordability in Canada using numbers that reflect the terrible trio of Toronto, Victoria and Vancouver.
Cities with borderline affordability include Calgary, Ottawa and Montreal. It took between 40 per cent and 44 per cent of median pre-tax income to afford the average-priced home in these cities.
Millennials are a big voting bloc now, so expect to hear politicians on the campaign trail this fall acknowledging how hard it is for them to buy homes in expensive cities. Their comments will serve as a gauge of their credibility on economic issues.
Governments can help clear the way for more home building, and there’s arguably room to offer modest assistance along the lines of the First-Time Home Buyer Incentive, announced in the 2019 federal budget. But we’re not being honest with young adults if we fail to acknowledge that the near universal home ownership of the baby boomer generation is unsustainable in cities that house one in four Canadians.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, July 2, 2019