Monday, June 11, 2012

Canada's Housing Unaffordability Problem

Royal Bank of Canada Economics recently released its Housing Trends and Affordability research for the first quarter of 2012 outlining how the affordability of Canada's housing market has changed from the previous quarter.  Despite repeated warnings from the mainstream media and the not-so-mainstream media, housing affordability in Canada faded in the first quarter of 2012 when compared to a year earlier.  How could this be?

RBC suggests that the slightly deteriorating affordability is related to the effects of "vigorous housing demand in the early stages of 2012....".  Strong demand was the result of warmer than normal winter temperatures across most of Canada (a very weak and completely unsustainable reason to push prices ever higher) and the "mortgage sales" held by Canadian banks including the Bank of Montreal who were offering limited time, five year fixed mortgages at the fire-sale rate of only 2.99%.  We'd better get that really cheap money while the gettin's good!

RBC tracks affordability in three types of housing; detached bungalows, condominium apartments and two-story homes.  Here is a graph showing the affordability measure (ownership costs as a percentage of median pre-tax household income) for all three types of housing since 1988 keeping in mind that the higher the number, the more difficult it is to afford a home:

That chart doesn't look so bad, does it?  Again, noting that a rise in the affordability measure means a decrease in affordability, affordability for detached bungalows rose by 0.8 percentage points to 43.1 percent, by 0.5 percentage points to 48.7 percent for two-story homes and by 0.3 percentage points to 28.8 percent for condominium apartments.  Oddly enough, the writers of the research state that "The measures stand slightly above historical averages in all cases. We, therefore, conclude that there is only modest affordability stress being exerted on Canadian homebuyers at the moment."  This is in very sharp contrast to what many experts are saying about Canada's current housing market, however, if one uses the average affordability measure from across Canada, perhaps there is some justification for this conclusion.  That said, it is the affordability in some selected markets which just happen to be Canada's largest real estate markets, that should be cause for concern.

As I noted above, the authors do point out that there are regional differences in affordability with Vancouver ranking at the farthest end of unaffordability as noted on this bar graph which notes the changes in affordability quarter-over-quarter:

The white part of each bar shows the change in affordability that is related only to price changes from the fourth quarter of 2011 to the first quarter of 2012.  Notice that Vancouver stands out as adding 4 percentage points in the affordability measure related to a rise in prices alone.  Toronto is in second place among major markets with price adding 1.5 percentage points to the affordability measure.  As always, the smallest changes in affordability are in the Atlantic provinces and in Calgary and Edmonton where high median household incomes have a very nice way of balancing out relatively high real estate prices.

Let's take a more detailed look at what the authors have to say about two provincial markets; British Columbia and Ontario.

Here is a graph showing the decline in affordability of residential real estate for homeowners in British Columbia since 1988:

You will notice a big difference from the affordability graph for all of Canada as posted above.  Despite a relatively recent decline in ownership costs for some types of real estate, housing in British Columbia is frighteningly unaffordable.  In the first quarter of 2012, detached bungalows rose by 1.2 percentage points to 68.6 percent, two story homes fell by 0.6 percentage points to 73.4 percent and condominium apartments were flat at 35 percent.  Remember, these numbers mean that, for British Columbia as a whole, the ownership costs for two story homes consume 73.4 percent of household income.  This leaves very, very little income for such necessities as food, fuel, transportation etcetera.  No wonder HELOCs (home equity loans) are on the rise.  After all, people eventually do need to eat and get back and forth to work!

Just for your illumination, here is a graph showing the cost of home ownership as a percentage of household income for Canada's (and perhaps the one of the world's) most over-heated residential real estate markets, the city of Vancouver:

Vancouver's overall affordability measure reached a stratospheric 88.9 percent in the first quarter of 2012 with qualifying income hitting $155,900, by a wide margin, the highest in Canada.  A standard two-story home would suck up 93 percent of a household's income and a bungalow would require 88.9 percent of a household's income.  This has to be an unsustainable situation, particularly if interest rates bump up by even one or two percentage points.

Here is a graph showing the decline in housing affordability in the province of Ontario:

Housing affordability in Ontario eroded slightly over the quarter, particularly in some markets where home prices continued to rise; overall, all three types of real estate saw their affordability decrease by between 0.4 and 1.0 percentage points.  Price gains for bungalows alone exceeded three percent on a quarter-over-quarter basis.  Despite the drop in affordability, home sales are up and, in Toronto, the supply of for-sale homes barely keeps up with demand with bidding wars erupting on some properties.  On average, Toronto's overall affordability measure reached 62.6 percent, up 1.3 percent on a quarter-over-quarter basis and the qualifying income reached $129,800.  A detached bungalow required 53.4 percent of a household's income and a two story required 62.6 percent of a household's income.  Don't these numbers look reasonable when compared to Vancouver?

While many of us know that there is a problem in Canada's real estate market and that the current situation is unsustainable over the long-haul, it is interesting to see RBC's measure of affordability and discover just how much of a household's before-tax income is required to pay for four walls and a roof.  In some markets, one has to wonder how people find enough money to pay for anything other than their housing costs and income taxes.


  1. Though quite grainy, your charts tell the story nicely.

  2. Sorry, it's the best resolution that I can get.

  3. And I was just in Louisville where they think a 1 acre property with a 2500sqft bungalow 5 minutes from downtown is overpriced at $200k-$250. Never mind that their wages are about the same as ours, their taxes much lower, and general living costs are some 70% of ours. Yes, they do need to pay for health insurance when out of work but those premiums are lower than the income tax differential for any household with 100k+ in annual income.

    Good commentary, price depression in areas that were previously manufacturing/mining/timber centers does skew the Canadian average considerably. There are homes in Northern Quebec some 200km away from any employer that can be had for $

  4. very interesting! thank you.