I’ve yammered on enough about affordability and how despite being at record high prices, mortgage payments as a percentage of incomes are only middle of the road compared to historical norms. Looking at the latest numbers for January, that is still true, although it is getting more and more stretched.
So despite the fact that today’s average house price of $800,000 has more than tripled since 1993, it is taking about the same percentage of the average income to service the mortgage. Of course this doesn’t take account the down payment. In order to avoid CMHC, someone purchasing today’s average $800,000 house would need $160,000 while in 1993 they only needed $50,000.
Put another way, someone buying in 1993 would have to save all their disposable income for 2.5 years to come up with the down payment for the average house, while in 2017 they would have to save every spare penny (and by that I mean not eating) for over 4 years. Of course people are making it happen somehow. Larger gifts from the bank of mom and dad, fewer percent down, or some free money from Christy Clark.
However that’s really not the main problem with the idea that since affordability is OK, all is well. Let’s take the same hypothetical buyers in 1993 and 2017. At the beginning, they both have mortgages that take the same percentage of their income and will take 25 years to pay off. That’s where the similarities end.
Now imagine they both get a 10% raise and put the extra money towards their mortgage payment. How does the situation change?
10% extra on payments carved more than 6 years off the mortgage term for the 1993 buyer compared to only 3.5 for a buyer now. No matter how low interest rates are, you still gotta pay that $640,000 back somehow.
Even that isn’t the whole story though. In 1993 that buyer could have looked forward to continual drops in interest rates every time they renewed, with fixed rates dropping from 8.7 to 4.2% over the term. Meanwhile if today’s buyer is extremely lucky interest rates might stay as low as they are for their term. Here’s the effect:
So there you have it. Despite monthly affordability being exactly the same, today’s house buyers will have to save almost twice as long for down payments and will be paying for the place 5 years longer than an equivalent buyer 25 years ago.