Buying a home? Forget the listing price!
The listing price is only one of many factors that determine whether someone can afford a house. In reality, people care about monthly cash flow. That includes the mortgage payments, property taxes, maintenance, etc. That’s the true cost of home ownership, and is why – in the past – people have been able to buy homes with exorbitant list prices.
Today, not so much.
Home affordability is ultimately measured as a proportion of a household’s income. Right now, Vancouver and Toronto are almost impossible for the median family to afford without making major sacrifices (catfood for dinner, anyone?).
In a recent report, RBC Economics comments on affordability in these two cities:
Vancouver area – Affordability relief unlikely to matter much Vancouver-area buyers finally saw some affordability relief in the fourth quarter when RBC’s aggregate measure fell for the first time—by 5.2 percentage points—in almost three years. Such relief unlikely made much of a difference, however, because homeownership costs remain incredibly steep. RBC’s aggregate measure was 84.8% in the fourth quarter, which clearly indicates that owning a home at current market prices—especially a single-detached home—is still out of reach for a typical area household. Owning a condo apartment is less of a stretch (RBC’s measure was 46.1%); however, it too is beyond the grasp of many households. A succession of policy measures has dampened resale activity substantially since reaching an all-time high in early 2016, and demand-supply conditions have become more balanced in the past half-year. Sky-high prices for single-detached homes have weakened modestly in recent months, although this was not the case of condo prices which remained on an upward trajectory.
Toronto area – Sounding the alarm bell Contrary to our expectations, policy measures implemented last spring and fall by the federal government to cool Canada’s hot housing markets have had few discernable restraining effects on the Toronto-area market. Quite the contrary, we observe that demand has continued to grow, supply (listings) has dwindled further and prices are still going through the roof—at an accelerating pace of all things. These factors have crushed (already poor) housing affordability, with RBC’s aggregate measure reaching the second-worst level on record for the area since the mid-1980s in the fourth quarter of 2016 (64.6%). The last time affordability was in such a state (in 1990), Toronto’s housing market subsequently fell into a deep and prolonged slump. The situation is different this time because most of the affordability stress is concentrated in the single-detached segment—whereas it was pervasive in 1990— however, recent acceleration in condo prices tells us that stress soon will mount significantly in this segment too. Left unchecked, this situation will get worse, putting at high risk Canada’s largest housing market. Further policy intervention would be prudent to avoid a 1990s-style outcome.