Income Growth (or lack thereof) versus Home Price Appreciation
The Ontario Real Estate Association (OREA) and the Toronto Real Estate Board (TREB) Home Ownership Matters campaign released statistics from a survey they conducted in relation to home ownership. As a quick recap, 54% of renters cited affordability as a key reason for not owning a home, 81% believed that it is more difficult to own a home than it was for their parents, and 89% were concerned that it will become even more difficult in the future.
Well, given the statistics, I don’t blame those eighty-nine-percent for feeling that way. See for yourself! On the left is a side-by-side comparison of the average Toronto home prices, average Toronto female full-time earnings, average Toronto male full-time earnings, and average mortgage rates from 1977 to 2009.
Notice that the average price of a Toronto home showed an increase of 512% in 2009 from 1997, whereas average Toronto male income increased by 21% and average Toronto female income by 67% (however, make note that the average Toronto female income is still significantly lower than average male income despite a stronger growth rate). Due to a lack of available income data for 2010 and 2011, I was not able to compare the two most recent years. I will take a wild guess though, that despite an average Toronto home price inflation of 18% from 2009 to today, average incomes have remained relatively the same. In addition to increasing prices, there are now municipal land transfer taxes and regularly inflating property taxes involved, among other things, making home affordability that much more unattainable for a typical single person or couple.
There is no doubt that the Toronto real estate market is overheated. According to Capital Economics, housing in Canada is probably overvalued by about 25%. Considering that the average price of a Canadian home is $346,950, a 25% cut would result in $86,000 off the price (although, such a drop is highly unlikely). More realistically, home values could drop by about 12% within the next two years as the housing market heads for a correction, says TD Bank. Another possibility, according to Benjamin Tal, deputy chief economist at CIBC, is house prices stagnating for years before displaying some price appreciation. Either way, the depreciation of home values is expected to be a slow and gradual process rather than a sudden one. “The likelihood is that prices in the Canadian market and its sub-segments are higher than what can be explained by factors such as income growth, rent, and household formation,” said Tal. No kidding.
Despite a warning issued by the Bank of Canada about Canadians taking on record levels of debt, first-time buyers continue to jump into the real estate market thanks to low and promising interest rates. There is undoubtedly a fear that if this continues, Canadians won’t be able to afford their mortgages once rates inevitably rise and the market cools off. According to the Bank of Canada, the amount of debt taken on by Canadians is a record-breaking 142% greater than income.