Understanding Affordability Challenges of Homeowners

RBC HeadlineWhen the RBC Economics division released its “Housing Trends and Affordability” report for the year 2013 and headlined that homeownership was slightly less affordable in Canada at the end of 2013, it got me thinking about the implications of this report on the housing sector in major cities in Canada but especially in Ottawa. Housing affordability in the RBC context is about consumers or households ability to afford market or unsubsidized housing. Affordability therefore is not to be confused with social or subsidized housing .

And for Ottawa our area of interest they noted that “employment uncertainty” might be eroding buyer confidence. While it’s certainly true that buyer affordability is a little worse towards the end of the year, we have to do a full 360 to understand that for renter households who are the most likely to move into the market for housing as potential first time homebuyers, they are being shut out of the market completely. All you have to do is look at Chart 1 below to see what we mean. Unfortunately the RBC report doesn’t really address this reality.

We have constructed some charts which show more clearly what affordability means for the would be homebuyer, namely renter households compared with that of families. In the RBC report there’s no mechanism to distinguish between affordability for those who already own a house and for those who don’t. The report implies that fundamentals have gotten worse for all. In order to show how renters are doing if they wanted to buy a house, we used widely published median income from Statistics Canada. Also we use average interest rates from the Bank of Canada. We then construct an income based maximum house price that can be afforded for the median income household or family using the basic bank rules to get a mortgage loan. The use of income based measures allows us to see and know the limits of affordability. Income represents a budget constraint to house buying and this is the picture that is captured for Ottawans in the charts.

Looking at Chart 1 below shows the huge gap that stands in the way of renters getting into the market. Average house prices towards years’ end were running at around $325,000 but renters earning a median income can afford to buy a house priced just around $200,000.

Contrast that with their more generally family types who may or may not already own a house (some families may not be home owners and would be therefore potential buyers). The second chart shows their ability to access the market for a home. The chart clearly shows that with house prices decreasing towards years’ end and affordability moderating for these folks they can enter the market with confidence. In fact, their house purchasing power has historically exceeded house prices. Affordability is not a problem at all whether at the higher downpayment of 10% or 5%.

Chart 1Chart-1

Chart 2Chart-2

Brett Ifill


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