Why everyone else can afford a house in Canada, but you
The dark side of housing affordability
In my first article about the Canadian housing market, I was looking at two seemingly contradicting charts: the ever increasing house prices, and the housing affordability chart which showed that for the three decades ending in 2020, housing was affordable (the index was hovering between 30–35%).
This has probably not been your experience while dreaming of buying a house. Did the chart lie?
Let’s look at the formula behind this number!
We’ve already reviewed the ugly fraction with the interest rate. The rates dropping from 20% to 1.5% over the time period did a lot of heavy lifting to keep the tripling housing prices affordable. This was a tangible help to home buyers.
But there are some hidden factors in that formula that work against those dreaming of their first house. The main culprit: statistics. Both the price, the income and the mortgage rate are national averages.
Average price
“M₀ is the total value of the mortgage, where we assume a 95 per cent loan-to-value ratio, so that M₀=(0.95)*P₀. P₀ is the 6-month moving average of the Multiple Listing Service average resale price; therefore, this measure strictly reflects existing homes and would include all housing types sold in Canada.”
MLS is a national source of real estate information, using smart methods to average housing prices over a nation where a run down house in a rural community can cost $50,000, while a mansion in BC goes for $50,000,000. The benchmark price for a home today (2024 January) Canada wide is $707,800. A drop of 17.3% from 2022 March’s peak of $855,800. This amount can buy the white picket fence in Saint John, Thunder Bay, or Sault Ste. Marie. But most Canadians who don’t yet own a house live in population centers like Toronto and Vancouver, where even houses marked for demolition are more expensive than that.
While you are looking to buy a house in the community where you’re renting an apartment, or where you grew up, Bank of Canada is using the national average price to calculate affordability.
Average income
“The denominator, average household disposable income, is measured by using total quarterly household disposable income from the National Income and Expenditure Accounts, divided by the number of households in Canada. Our estimate of households is based on census data and is calculated using an extrapolative headship-rate method.”
Bank of Canada is doing us a solid. While online financial gurus — and even the CMHC — are saying that affordable means housing expenses don’t surpass 30% of pre-tax income, Bank of Canada is more realistic, and uses the disposable income.
Average vs median
Income follows a very uneven distribution. With many earning closer to the minimum wage, and few bringing home multiple times that. This puts the mean significantly lower than the average. There’s also a bias for home ownership: those who earn more usually already own a house, maybe even paid down already.
While you’re looking to buy a house from your — statistically — below average salary, Bank of Canada is calculating affordability using the average salary that includes senior engineers, doctors and CEOs.
Household income vs individual salary
Bank of Canada is calculating the average income for households. While households are shrinking, the average household size was still 2.4. More households are occupied by two people than are by one. And most houses are occupied by a family with two or more earners.
While 65% of Canadians in their 30s or 40s are married or have a common law partner, if you’re in your twenties, there’s a 72% chance you’re budgeting for a house from a single salary.
To add insult to injury, if you’re still living with your parents, or you’re renting with roommates, your income actually increase the average household income, making housing look even more affordable.
Average interest rate
It goes without saying that higher credit scores get people better rates. And the best ways to boost your credit score (assuming you made all your payments, as you should) are: to have a long credit history, already have a mortgage, and don’t have inquiries on your record. Usually the exact opposite of how a young person’s credit score looks.
Higher downpayments also give people access to better rates. Resulting in better rates for those looking to upsize or downsize. Partly as a reward for being a good debtor, and partly because they will have more capital to put down. They might already know a good mortgage broker who can arrange a lower rate.
As a first time home buyer, you won’t see the advertised rates on your pre-approval.
+1: Chances are you’re an immigrant
Canada has been compensating for low birth rates through immigration, bringing in ~0.7% of it’s population every year. While fresh immigrants only make up a small portion of the population (0.7% are in their first year, 2% are int their third years, and so on), we are overrepresented in the non-home-owning class, given that they didn’t have time to buy a house. Immigrants also get the short end of many sticks, but that’s a story for another time.
Conclusion
Statistics are useful, but they don’t tell the whole story. When it comes to housing affordability, every single component of the equation is biased against those actually looking to buy their first house. And that was before Bank of Canada’s (un)affordability index left the 30%-35% and shot up to 55%, taking away the already small chance of owning a house from most young Canadians.
