Jason Heath – Financial Posty

It’s hard to scan a Canadian newspaper these days without coming across an article about the country’s lofty real estate prices. And it’s also hard for parents to tell their kids the “I used to walk to school barefoot” stories. Or is it? Is it really that much more expensive to own a home these days than it was 30 years ago?

Comment: No. It isn’t.

Let’s focus on the particulars for the country’s largest city and one of the two crown jewels of the real estate market  – Toronto (the other being Vancouver, of course).

In 1985, the average home price was $109,094 according to the Toronto Real Estate Board. Currently, the average home in Toronto will set you back by $566,696. Prices have therefore risen by 5.65% annualized over the past 30 years. During that time, prices rose quickly from 1985 to 1989, fell through 1996 and have since been on a near straight line upwards.

Comment: But you have to account for inflation. That number is meaningless until you adjust it for inflation. It more than doubles to $220,296 in current dollars. That turns the price increase into a more reasonable 3.2%. And a 3.2% annual increase does not a bubble make!

Back in 1985, the median Toronto family income was approximately $31,965. So a house cost 3.41 times the median family income. Currently, family income in Toronto is about $74,366, meaning the home value to income ratio currently stands at 7.62 times income – more than double the ratio from 30 years ago. Score one for the “prices are crazy right now” team.

Comment: And that income would be equal to $64,548 in today’s money. You can’t use old incomes without accounting for the different value of money today. House value to income ratio doesn’t change though, as the ratio between them doesn’t change. But price to income has been proven to be misleading and not useful, time and again. It is dumb measure as it does not take into account borrowing costs. And mortgage rates have a LOT to do with house purchasing power!

This provides some perspective, but it doesn’t tell the whole story.

Comment: So far, the only story has been one of old numbers used to create misleading math.

Home buyers needed 25% down in 1985 compared to only 5% currently. Five-year fixed mortgage rates (posted) were 13.25% in 1985, versus 4.79% now.

Comment: BMO is offering mortgage rates of 2.79%, where did you get 4.79% from?

This means a first-time home buyer needed a down payment that was five times larger and paid three times as much interest on every dollar borrowed. Maybe things weren’t so great back then after all.

Comment: You think? Go back a few more years to the early 1980s when mortgage rates were almost 21.5!

Let’s try to compare apples to apples in 1985 Toronto versus today:

Comment: This chart is so WRONG I had to make a new one to show you the actual data. The one above is full of mistakes, errors and downright misleading information. It is so wrong… wow… obviously done to prove a predetermined point. The one below has the right numbers in it. Not my opinion, the actual and proper numbers from the real world.

Obviously home prices have risen considerably more than incomes over the past 30 years. But it’s easier to buy a home now because you only need 5% down and not 25%. More lenient mortgage rules have, in part, fueled home prices.

Comment: But the charts above both compare the same mortgage with the same 25% down payment, to keep apples to apples. Down payments are moot for this discussion. Except to help show that today isn’t really all that much worse than 30 years ago.

Interest rate declines have been the only thing that has kept home affordability in line with 1985, given that monthly mortgage payments relative to family income have only creeped up a little bit in the past 30 years. Our numbers, however, assume a 25% down payment to compare to the minimum down payment required in 1985. This can be really hard to scrape together for young home buyers today, who frequently put down much less.

Comment: Yes, interest rates have a HUGE impact on today’s housing market. No one will argue that. But it is exactly those rates that must be accounted for, why we need to compare monthly mortgage costs, not absolute prices.

Going forward, interest rates aren’t likely to increase in the short term in Canada. In fact, there is a possibility of further rate decreases. But when interest rates rise, housing affordability will be squeezed because more of a family’s income will go towards mortgage payments and other interest costs.

Comment: Thank dog, at least one person isn’t claiming interest rates are going up a million percent tomorrow.

Will this cause home prices to fall? Maybe. But during the peak of the Toronto housing bubble in 1989, mortgage payments as a percentage of median family income were about 50%. We’ve got a ways to go yet if that’s the tipping point.

Comment: Amen!

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Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
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