By now, most of you who are interested in real estate news and comment (and therefore reading this article) will have seen about RBC’s latest , released July 3.
To recap, the story is that homeownership costs are rising across Canada, worsening housing affordability levels. In the Greater Â鶹´«Ă˝Ół»area in 2018’s first quarter, homeownership costs (mortgage, property tax and utility payments) reached a record 87.8 per cent of the median pre-tax household income, now at what RBC (and most people) call “crisis levels.” Victoria homeownership costs are also high at 62.7 per cent, said the bank, while Toronto’s are 74.2 per cent. The national average is up slightly to 48.4 per cent – still way above the acceptable 30 per cent.
This is alarming stuff. “How can anyone afford 88 per cent of their income on housing? How will they even eat?” people cry in disbelief. And yes, Greater Vancouver, Toronto and Victoria are all shockingly expensive real estate markets that are extremely tough for people to buy into, and there’s much that should be done about that (a topic for another time).
But here’s the thing. While RBC’s report is an interesting measure of comparative affordability between Canadian cities (albeit still a flawed one), the actual methodology and scenarios employed, and therefore the percentage measure of homeownership costs, are nonsensical.
For its report, RBC supposes that a household on a median income (for that city) is buying a median-priced home. It assumes that, aside from a 25 per cent down payment, there is no other money going towards the purchase of that home. So in Greater Vancouver, for example, a typical household on a median income (which RBC does not list, but StatsCan says is a fairly modest $72,662 a year) is supposedly buying a $1,158,300 home with a 25 per cent down payment. That’s a mortgage of around $869,000. RBC says of Greater Vancouver, “Clearly, current price levels are an impossibly high hurdle for many would-be buyers to clear.” Sure, if you’re trying to buy a $1.15 million home on nothing but a $72K income. Of course that’s not affordable – you’d never even qualify for that high a mortgage.
But, fortunately, that’s not a realistic picture of what is happening on the ground. Households earning $72K a year are not buying $1.15 million houses, they’re buying condos or small, surburban townhomes. They’re getting into the market the way everybody else does – at the bottom of the property ladder, then working their way up.
Median-income millionaires
When you’re talking about households earning a median income, it’s the people who have spent years paying down their first few homes’ mortgages and are moving into a house who are spending $1.15 million or more. And most of those are doing so because they now have way more capital to put down on that house. They’ve built huge amounts of equity, partly from paying down their mortgage, and in part precisely because of the skyrocketing home prices. Add to that, for many 40-and-over buyers, they might have also had some inheritance that goes into their purchase. So this household may still earn a $72,000 annual income, but that income merely pays off the much-reduced mortgage on this million-dollar-plus house. It’s easy to buy a home for $1.15 million, if you only paid $600K for the now-$1.1 million home you’re selling, and you put a chunk of inheritance into it, and now your mortgage is only $250K. There are all kinds of ways that regular folk on median household incomes are owning – and trading – million-dollar-plus properties. I know this from personal experience (on my very typical journalist’s salary).
RBC’s report also breaks affordability down by property type, and here’s where it gets a bit more realistic. Typical homeownership costs on a $657K condo in Greater Â鶹´«Ă˝Ół»are 51 per cent of a median household’s income. Still too high to qualify for a mortgage, but more reasonable. And in Victoria, condo homeownership costs on a median Victoria income are typically 38.4 per cent.
The flaws in RBC's report are cold comfort for those hoping to buy their first home on a median household income. My honestly held advice to them is this. Go to a mortgage broker. Find out what you can afford to buy in your city, and what mortgage you qualify for. If possible, pool financial resources with a partner, friend or relative. And if you can only buy in an area where you wouldn’t want to live, buy anyway and become a landlord. Greater Vancouver, Victoria and other Canadian cities are expensive real estate markets, but it doesn’t look like they’re getting any cheaper. Which means – like all the owners of those million-dollar-plus homes – if you’re in, you win.
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