There has been lots written on the price of housing, and its impact on housing affordability for all sectors of the population. But coupled with the price of housing are two other factors: incomes that are not keeping pace with housing prices, and mortgage rules that affect who is allowed to enter the housing market.
Anecdotally, people recognize that typical incomes are not keeping pace with the increases in the price of housing – regardless of what housing choice they may prefer. But over the past decade, average millennial income growth has increased by $16,930 whereas the price of a new home has grown by $158,000 over the same period. In Hamilton, as of February 2017, the average price of resale homes increased to $556,818 (average of overall residential – freehold and condominiums).
So when a potential first time home buyer gets that 3% increase on their paycheck each year, it’s a good thing. But when the price of housing has increased year over year by 23.2% for freehold type houses (single family homes, semi-detached, etc.) and 19.7% for condominiums, right here at home, it means that every day that goes by, potential new home buyers are priced out of the market. If they can’t afford to buy today, they sure can’t afford to buy tomorrow. The gap just continues to grow.
The amount of the downpayment that is required has gone up year over year relative to the price of housing. We’ve all heard stories about family helping out Junior and his or her family buying their first house. The numbers may surprise you – it is estimated that 44% of homebuyers are receiving financial help from the “bank of mom and dad”. This really distorts the reality of who could afford the actual house on their own. And of course this down payment says nothing about qualifying for a mortgage.
We’ve also heard lots about the changes to mortgages last fall. These rules were implemented to protect equity that people have built up in their homes, in the event of an economic downturn (lower house prices impacts the equity built up in people’s homes). But those rules were just the last in a long line of changes since 2008. Mortgage amortization rates for first time buyers moved from 40 years, to 30 and now to 25 years. People have to qualify after meeting the new mortgage risk assessment. It makes sense of course to try to ensure that people don’t over extend themselves when purchasing a new home. But these rules, coupled with the fact that mom and dad had to help pay the down payment really push many out of the dream of home ownership altogether.
So what can be done to help people achieve the dream of home ownership? Well, let’s try to eliminate some of the roadblocks in front of potential home buyers. I’ve talked about supply issues in the past, and that remains a key factor in the price of homes that desperately needs addressing. But additional mortgage rules limiting who can enter the housing market has negative overall economic impact. Let’s not exacerbate the status quo at this stage. Economic growth in general needs to be a focus, to ensure that people are employed and not at risk of not affording any type of housing. We could consider alternate third party financing for the downpayment portion of a new home, which is significant. What we need is a true Housing Strategy, where governments look at all of these issues, which are complicated when combined, to understand how all of these small changes in policies, whether they be land development policy or mortgage rules, affect the housing market as a whole.