Here’s how home prices compare to incomes across Canada

Here’s how home prices compare to incomes across Canada

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There is a simple personal finance test for buying a home: Buyers should aim for a property that is priced at or below four times their income. But the ability of average Canadians to stick to this simple rule is quickly fading across much of the country as property values ​​continue to climb.

In the housing boom linked to the pandemic, the average value of residential properties has been decoupled from average incomes over large swathes of the county.

Here’s a look at average incomes versus average home prices in the markets over the past 40 years.

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National statistics show that the national average price of a home is now more than seven times the average household income, according to data from the Canadian Real Estate Association and Statistics Canada.

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The average price of a home is not a perfect measure of what home buyers face in the real world, as the metric can be influenced by changes in the types of homes sold over a period of time. . Yet the numbers give a clear picture of how quickly accessibility is eroding.

For more than a decade, growing home prices much faster than incomes has been a problem largely confined to Vancouver and Toronto, two of the country’s most expensive and active real estate markets.

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In Metro Vancouver, the average price of a home was nearly 12 times the average local income in 2016, according to data from the Canadian Real Estate Association (CREA) and Statistics Canada.

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That ratio fell a few notches after the implementation of provincial and federal measures to cool the housing market between the second half of 2016 and 2018. But amid the pandemic housing frenzy, it rose again, according to the numbers.

In Toronto, the average home price hovered around eight times the average local household income before the pandemic. Now he’s reached 10 times the average Toronto income.

But the current housing extravagance is dramatically widening the gap between home prices and incomes in a number of markets across Canada, the data shows.

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In Ottawa and Montreal, for example, the average price of a house is now about six times the income of local households.

Homes in Moncton, New Brunswick are still relatively affordable, but the recent rise in home prices is remarkable. In 2019, the average price of a local house was 2.5 times the eminently reasonable provincial average household income. Now an average priced home is worth 3.5 times the average income.

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The jump was more pronounced in some of the smaller communities in Canada. In February, BMO economist Sal Guatieri noted that in Woodstock, Ont., The benchmark home price rose by $ 118,200 in the previous 12 months, more than the $ 86,970 the family earned. local median in 2018.

“We are in a very unusual time now,” Guatieri told Global News. “You earn more money sleeping at home than working there.”

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Even in Alberta, where the housing market has been dormant for years, activity is heating up. This year Calgary had its best March in terms of sales volumes since 2007.

The benchmark home price, at $ 441,900, was more than six percent higher than last year’s levels, although property values ​​remain below their 2014 highs, the Calgary Real Estate Board said. .

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Comparing house prices to incomes is not the only way to assess affordability. Another important aspect of it is the relative size of mortgage payments. What percentage of their monthly income should middle-income homeowners spend on their mortgage for a mid-priced home?

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In the 1980s, for example, homeowners easily spent 50% of their income on mortgage payments because of double-digit mortgage rates, notes Diana Petramala, senior economist at the Center for Urban Research and Land Development at Ryerson University.

In 2020, thanks to the drop in interest rates caused by the pandemic, the ratio between mortgage payments and income fell to the lowest since 2014, she adds.

“Much of the frenzy we see when buying can be explained by low interest rates,” she says.

Now, however, prices have risen so much that they have eroded the affordability gains of very cheap borrowing, she adds.

And for recent buyers, the question is what happens when interest rates rise from record lows.

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“Households are more sensitive than they have ever been in the past to small increases in interest rates,” says Petramala.

The question, says Petramala, is what will happen when many homeowners who bought into the current boom renew their mortgages in five years.

“Even if households repay their equity over the next five years, if interest rates were to (rise) by one to two percentage points in (during that period), when it comes time to renew, many households who buy now will eventually see their mortgage payments increase, ”she adds.

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And « if families are poor at home… it’s money they don’t spend on restaurants, vacations and shopping, ”says Mike Moffatt, senior director of policy and innovation at the Smart Prosperity Institute.

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“What happens in the housing market is important and can easily spill over into the economy at large,” he adds.

The mortgage stress test, which Ottawa rolled out in two phases in 2017 and 2018, helps reduce the risk of higher borrowing costs. The test means federally regulated lenders must check buyers’ finances to make sure they would still be able to make mortgage payments at a higher interest rate.

But even homeowners experiencing stress could feel the pinch of higher borrowing costs, says Petramala. And not all recent buyers had to pass the stress test, which isn’t mandatory for all lenders, Petramala notes.

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What’s next for house prices?

The dizzying pace of house price growth in recent months is « quite unusual and it is certainly unsustainable in the long run,  » this Guatieri.

At some point, he adds, something will have to give way. It is likely that house prices will stabilize for perhaps several years, allowing incomes to gradually catch up with some of the lost ground.

But if the current meteoric appreciation continues, “then we’re going to enter a situation where it is almost necessary for house prices to actually go down to restore order and balance in the housing market,” Guatieri says.

The risk of a housing collapse is higher in some of the small communities that have experienced strong price appreciation, Moffatt says.

In large urban centers, even if house prices were to fall, they would eventually rebound thanks to new housing demand resulting from population growth, Moffatt says. But in small towns that have seen property values ​​soar without sustained population growth, ” you could have a house price collapse and never see that demand come back, ”he says.

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« And that’s going to be very problematic for the people who bought at the top… and who will never see those house prices go up again, ”he says.

Chart methodology: The charts show the relationship between average house prices and average incomes. Average house prices do not take into account variations in the types of houses sold. For income, we used the total average income of economic families and people not belonging to an economic family. For the years 2020 and 2021, we have assumed revenue growth based on the average rate of revenue growth between 2016 and 2019. Home prices and income data are in 2019 dollars.

© 2021 Global News, a division of Corus Entertainment Inc.

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