By Lydia McNutt
Skyrocketing home prices dominated the headlines in 2016, and it's no surprise that housing unaffordability remains the news of the day as we wrap up the year. Affordability has hit an eight-year low in the third quarter of 2016, according to the latest Housing Trends and Affordability Report issued today by RBC Economics Research.
Despite the new mortgage qualification rules and policy changes in B.C., which had an overall cooling effect on Canada's housing markets, RBC reports that housing affordability has continued to deteriorate.
RBC's housing affordability measure rose for the sixth consecutive quarter nation-wide -- up 1.3 percentage points to 44.3 per cent. The higher the measure, the worse the affordability. Leading the pack once again, single-detached homes rose by 1.3 percentage points to 49.4 per cent, followed by condos, up 0.8 percentage points to 35.6 per cent.
Vancouver still takes top spot on the unaffordability scale (up 2.2 percentage points to 92 per cent) but for the first time in two years it has been surpassed by the Greater Toronto Area, where affordability deteriorated by 3.0 percentage points to 63.7 per cent, "the highest point since the all-time peak reached in the spring of 1990," as outlined in the report.
To put these numbers in perspective, when you're applying for a mortgage, lenders combine your total housing costs and calculate what percentage they are of your gross monthly income, known as your Gross Debt Service ratio (GDS).
Under the new mortgage rules, your Gross Debt Service (GDS) ratio - total housing costs including mortgage, property tax and heating -- must not exceed 39 per cent of your gross income. The Total Debt Service (TDS) ratio, which includes total housing costs plus any other debt payments, must not exceed 44 per cent.
What does this mean? Canadians dreaming of a single-detached, two-storey life should expect to shell out 49.4 per cent of their pre-tax income - providing they earn at least an "average" income. This leaves a 10 per cent gap between the actual cost of home ownership and Ottawa's new GDS ratio of 39 per cent.
Add to this taxes, living expenses and other debts, and that doesn't leave much for your rainy-day fund, never mind retirement savings.
To afford a home, Canadians will need to increase their income, or decrease their housing budget -- and expectations.
Who says the key to happiness is a 2,500-square-foot detached house?
Today, more than ever, creating a realistic budget is key. This will be your first step on the road to home ownership -- before you start making your wish list. Your budget will define what area you can afford to live in, the type of home, and the lifestyle you'll lead long after your offer is accepted and your boxes unpacked.
Determine what you can comfortably afford. This doesn't mean the mortgage amount you've been pre-approved for. Calculate your monthly mortgage payments, property taxes and utility costs. Then, add your other expenses: student loans, car expenses, and daily costs like groceries, clothes, medical/dental and the like. Do you have kids, or are you planning to? That'll cost you even more. Then, don't forget about those retirement savings!
Only now can you think about the home itself. Really think about it. Who says the key to happiness is a 2,500-square-foot detached house? Maybe your lifestyle is better suited to an urban condo, where you may not need a car and its associated expenses. Weigh the pros and cons, then decide. The perfect home is out there, with something suited to every budget. Maybe you'll just have to explore some different definitions of "home" to find the right one.
"The third quarter could be a turning point toward improving affordability in the Vancouver area in light of a recent easing in detached home prices, but further deterioration is likely to occur in the near term in Toronto," according to Craig Wright, RBC's chief economist. "New mortgage insurance rules may help affordability over time, but 2017 is likely to see a tug of war between these market-cooling policy measures and rising longer-term interest rates, pulling affordability in opposite directions. The net effect of this on the costs of owning a home is unclear at this point."
For more essential real estate reading, visit YPNextHome.ca.
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