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72% of income goes towards affording housing in Vancouver

May 24, 2011

Filed under: Real Estate Market,Vancouver — Richard Morrison @ 12:16 pm
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Vancouver real estate homeowners are spending more than 72% of their household income on the costs associated with owning a home, says an RBC Economics Research report released Friday.

The report – which found that owning a home became less affordable all across the country in the first quarter of 2011 – said the average costs in vancouver are now “testing the boundaries of rationality.”

“We fear that the vancouver homes market is becoming increasingly disconnected from local demand conditions and vulnerable to a painful correction, especially once interest rates resume their ascent,” said Robert Hogue, senior economist with RBC and author of the report.

The primary reason for the erosion of affordability, after two straight quarters of im-provements in the second half of 2010, was rising home prices in the majority of key markets. With the Bank of Canada expected to raise rates soon, things are not likely to ease.

Homeowners put 72.1% of their pre-tax income toward home ownership costs, including mortgage payments, utilities and property taxes on a typical detached bungalow in vancouver houses during the three months ended March 31, 2011. That was up 3.4 percentage points from last quarter. Toronto’s affordability index came in at 47.5% (up 0.8 of a percentage point), Ottawa stood at 39.0% (up 0.4 of a percentage point), Calgary was at 35.9% (up 0.9 of a percentage point), and Edmonton at 31.5% (up 0.5 of a percentage point). Montreal is now also losing its affordability status, with homeownership costs up 2.0 percentage points to 43.1% in the quarter, the report says.

Mr. Hogue said the measure, which looks at median household income against average home prices, indicates a typical family in vancouver cannot afford to own a bungalow or two-storey home in that city. The general rule of thumb for affordability is spending about 32% of pre-tax household income on housing costs, he said.

“It’s only folks at the higher end of the income distribution that can afford those housing types, which leaves essentially condominium apartments as the most likely housing type your average Vancouver resident can afford,” he said.

However, he said anecdotal evidence suggests the skyrocketing measure in vancouver is skewed by foreign investment in the luxury end of the housing market as local economic conditions in the British Columbia city showed no improvement in recent months.

“So that points to the foreign element as probably the most plausible explanation for the kind of price increases we saw earlier this year,” he said.

Elton Ash, regional executive vice-president with Re/Max of Western Canada, agreed it is not the average homebuyer driving up prices.

“It’s really been the upper-end and luxury-home, move-up buyer segment of the marketplace that has driven that,” he said, adding, “this is an income demographic who quite frankly don’t care about affordability.

“We saw the run-up in the first quarter of this year driven by Mainland Chinese investment in vancouver -again, not an affordability concern there.”

Mr. Ash said while house prices in the vancouver area are unquestionably high, there are still pockets of the city where it is possible to buy something in the range of $350,000 as opposed to $800,000-plus.

“Affordability comes back to make a little more sense. That doesn’t mean that it isn’t an issue -it certainly is -but it’s not taking 70% of their income to carry that home,” he said.

The RBC report uses the cost of owning a detached bungalow as a benchmark for the Canadian housing market. A reading of 50% means home ownership costs make up more than half of a household’s monthly pre-tax income. The benchmark for the country as a whole was at 40.5%, up 0.7 of a percentage point from the last quarter of 2010. The standard two-storey home and condominium came in at 46.2% and 27.7% respectively, both up 0.2 of a percentage point.

Source: Christine Dobby, Financial Post

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One response to “72% of income goes towards affording housing in Vancouver”

  1. Johana says:

    thanks for the insights your post gave me :)

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