Ah, affordability. The word is enough to inspire countless media articles, heated public debate and vitriolic social media lashings. It’s incredibly difficult to measure, and yet everybody has a strong opinion about it.
As I’ve mentioned in previous op-eds about flawed affordability reports, which compare local incomes with home prices, there’s a world of difference between the average home price and the average mortgage debt. The latter, I personally believe, is what should be used to assess affordability, as it’s what people actually pay for their homes out of those hard-earned monthly incomes. For those who haven’t read my previous articles, the gist of my argument is that it doesn’t matter to an average-earning homebuyer if a property costs a million bucks, for example, if they have already built up $650K of equity and only need a $350K mortgage.
However, statistics on what Metro Vancouver residents are typically shelling out in mortgage payments each month have historically been scant. That’s why it was interesting to see a new report out of the Canada Mortgage and Housing Corporation (CMHC) this week, assessing mortgage and other debt in major Census Metropolitan Areas (CMAs) across Canada, including Metro Vancouver.
CMHC found that the average monthly mortgage payment in the Vancouver CMA in 2018’s first quarter was $1,800. That’s approximately the payment on a mortgage debt of between $305K and $360K, depending on the interest rate. It’s also 6.5 per cent higher than a year ago, roughly in line with overall price increases.
When comparing this $1,800 average payment against the median household income, around $73,000, it’s just under 30 per cent of monthly gross earnings – 30 per cent being the universally agreed threshold for affordability.
This is no coincidence. Banks simply don’t let mortgage applicants take out a loan for more than they can afford to pay back. So it makes total sense that the average mortgage payment in the region is around 30 per cent of the typical income.
What’s more, CMHC found that delinquency rate among mortgage holders is dropping, now at just over 0.1 per cent in Vancouver CMA. In turn, this is leading to higher credit ratings for mortgage holders in the region. All told, homeowners seem to be managing just fine.
Equity and time
So how can all these homeowners own such expensive homes and yet easily afford the mortgage payments? All sorts of reasons. For my part, I have a very average household income, no private wealth, my condo is probably worth about $800K, and yet my mortgage is only about 23 per cent of my earnings. That’s entirely due to equity built up over time and the paper value of my home rising since I bought it. Other people have different methods. Lots of young buyers are benefitting from massive generational wealth transfer, from older generations downsizing, and from inheritance – much of that wealth created by rising real estate values. Others, of course, have private wealth behind them.
And remember, these are just mortgage payers – about half of the owned homes in the region have no mortgage on them at all.
Of course, all this is no help to those local residents who don’t benefit from the above, for whom getting into the real estate market is often completely out of reach. And it doesn’t apply to renters, many of whom pay far more than 30 per cent of their income on their monthly rent, which as a financial obligation doesn’t have to pass the same qualification standards as a mortgage payment.
But the CMHC finding offers one way of making sense of what’s going on in our market. It also provides an interesting counterpoint to sensationalist studies that suggest Metro Vancouverites are paying 88 per cent of their income on their homes. That’s simply not happening.