ROB CARRICK
Simple economics tells us there may soon be a new social class emerging in Canada that we'll call the house-poor.
These are the people who are buying into a housing market where average prices are soaring, even while their income is hardly rising enough to offset inflation.
The most recent numbers from Industry Canada indicate that wage increases are coming in between 2.2 and 2.5 per cent this year. Meanwhile, the average house price in Canada is up about 13 per cent nationally this year after gains of about 9 per cent in both 2005 and 2004.
Hidden in these average numbers are hot spots like Vancouver, where prices are up about 21 per cent this year; Calgary, where prices have soared about 37 per cent; and, Halifax, where prices shot up about 48 per cent. "To me, it's unbelievable," said Stanley Kershman, an Ottawa bankruptcy lawyer and author of Put Your Debt on a Diet: A Step-By-Step Guide to Financial Fitness. "I don't know how people can afford the house, how they can afford to furnish the house or how they can afford to fill the house with electronics."
Mr. Kershman suspects that a lot of people are using debt - be it credit cards or lines of credit - to pay for the extras. Down the line, he believes that the combined debt load of mortgages and other borrowings will drive an increasing number of people into bankruptcy.
But never mind that, because most people won't come anywhere near declaring bankruptcy. They'll just suffer in silence as the country's house-poor.
As much as housing prices have soared, it's still not a huge stretch to get into the housing market today, thanks to interest rates that remain low on a historical basis even after a recent runup. That's why the affordability of housing, while deteriorating, has not yet fallen to alarming levels.
But being able to merely afford the cost of owning a house is not the same thing as being able to afford it, comfortably.
Lenders have two ways of assessing the ability of home buyers to afford a mortgage. One is the gross debt-service ratio -- the rule here is that mortgage payments, property taxes and heating costs should account for no more than 33 per cent of your gross pay. The other is the total debt-service ratio, and the thinking here is that your housing costs plus other debts should eat up no more than 40 per cent of your pretax income.
Now, let's say you just bought the average Toronto house, valued at $366,000, and you have a mortgage of $275,000. Your monthly payments, based on the 5.25-per-cent rates you can get on variable-rate mortgages today, would be just about $1,640. Add $300 a month in estimated property taxes plus another $150 in heating costs and you've got monthly costs of $2,090.
You'd need a salary of at least $76,000 to carry costs like this and be onside with the gross debt-service ratio, but what if you have other debts? Let's add a car loan costing $400 a month and a line of credit that costs you another $200 a month. Using the total debt-service ratio guidelines, you'd need to make almost $81,000 a year.
Requiring a household income of $81,000 to afford all this glorious debt may not seem egregious. But the 33- and 40-per-cent guidelines are maximums, and if you bump up against them you may find it a struggle to manage your family cash flow. "It doesn't leave you a whole bunch of money to throw around at Starbucks, or wherever you go," said mortgage consultant Paul Mims. "If you want choices, you have to be comfortably below those limits."
Doug Porter, deputy chief economist at BMO Nesbitt Burns Inc., wrote a recent report on the housing market in which he warned that housing prices in Canada are rising fast enough to raise concerns about a nasty downturn at some point. The big risk is that more price increases will make it even less affordable to buy a home than it is now.
House affordability is generally measured using interest rates and housing prices, but that's too limited a view. "There are a lot of other items that are facing upward pressure as well," Mr. Porter said. "Gasoline, in particular, but anything related to energy has upward pressure, and property taxes have been forging higher across most of the country."
Mortgage lenders have come up with a few measures to help affordability. These include mortgages that allow you to pay as little as 5 per cent or even zero down, and amortization periods that can be extended to 30 or 35 years from the usual 25.
Neither is a good solution, but they may help people afford a home and thereby join the ranks of the house-poor.
加国新房售价攀新高“房贫”阶层出现