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Career & Finance Fridays

Money & Finances

Buying A Home That's Too Expensive

If you’ve ever been house poor, you will know that it is not a fun place to be! It stinks to have a house payment that feels like it leaves you broke every month.

The problem is that many people are house poor in the current housing market. In fact, I just watched a short news story on the state of housing in Canada. It compared the average home price with the average household income in 1980’s when interest rates were high as compared to today.

The comparison looked at a home in Toronto, Canada, which was valued at around $250,000 back in the 1980’s. In that same era, the average household income was around $47,000.

Today, that same home is valued at around $1.2 million and the average household income is around $89,000. So even though interest rates are not as high today as they were back then, it is still harder to buy a home in the market today. 

In today’s market, that home is around 13.5 times the average household income. Back in the 80’s it was around 5.3 times.

So housing prices have gone up way more aggressively than salaries. Because of this, people are spending more and more of their monthly incomes on housing. In fact, any sort of financial budgeting information will tell you that your living expenses should not account for more than 30-35% of your take home pay. But most people who are buying homes today are spending upwards of 60% of their take home pay just on housing alone. 

That, my friend, means that you are house poor. If 60% of your income goes right out the door to pay for your living expenses, you’ve barely got enough left to cover food and fuel. Let alone anything else.

So what is the solution? Well, in my estimation, the solution is to not buy a home that you cannot afford - EVEN IF the banks will lend you the money to do it.

It is not worth the stress to always feel cash poor because your house is too expensive.

Recommended Book

Home Buying 101

Feb 15, 2022
ISBN: 9781507217405

Interesting Fact #1

For instance, the rise in demand for outdoor space and amenities, driven by the COVID-19 pandemic and quarantine rules around it, saw a reimagining of great eco-friendly and well-designed yards with swimming pools, kitchen gardens, trees, and firepits. These amenities can come at a high premium, and the actual property a home sits on will cost you money to maintain.


Interesting Fact #2

According to Indeed, housecleaners earn on average $18.68 an hour. A lawn maintenance worker can run approximately $17.05 an hour, while pool servicing could cost between $80 and $150 a month.


Interesting Fact #3

A McMansion is a colloquial term usually referring to a large, often ostentatious, mass-produced builder's house. McMansions or similarly larger houses decked out with swimming pools, fire pits, and large decks became popular again in the real estate market during the COVID-19 pandemic, when people were seeking more space outside and inside.


Quote of the day

“We are attempting to buy a house. Shopping for houses is amazing. People who would never invite you into their homes under any other circumstances open their doors wide, allow you to peer into their closets, pass judgment on their wallpaper, ask pointed questions about their gutters.” ― Audrey Niffenegger

Article of the day - Posthaste: Affording a home in Canada has never been tougher, with one city in 'full-blown crisis'

The latest edition of the Royal Bank of Canada’s housing affordability measures makes for some grim reading.

Article content

According to the report, it has never been tougher to afford a home in Canada, and at least one city is in “full-blown crisis.”

Though it paused last summer, the Bank of Canada’s “historic” hiking campaign continues to weigh on the housing market, with high interest rates pushing home ownership costs to new heights in the fourth quarter of 2023.

A household now needs to spend a “staggering” 63.5 per cent of the median income to cover the cost of owning a home at the average market price, up from 61.8 per cent in the third quarter, says Robert Hogue, assistant chief economist at RBC.

Home prices nationally have fallen slightly, but the soaring cost of interest has more than made up for it.

RBC calculates that the monthly mortgage payment on the composite home valued at $796,300 increased by $125 or 3.3 per cent last quarter to $3,990. Meanwhile, home prices dipped just 0.5 per cent from the quarter before.

Housing affordability deteriorated in all the markets that RBC tracks, with Vancouver, Victoria and Toronto getting the worst of it. But Ottawa, Montreal and Halifax are also at or near the worst levels of affordability ever.

“It’s never been as expensive to own a home anywhere, anytime in Canada as it was in Vancouver in the fourth quarter, said Hogue, who says the city is in “full-blown crisis.”

Covering ownership costs here takes 106.4 per cent of the median income, meaning that buyers have to make a really high income or save or receive considerable wealth to put towards the purchase.

This has narrowed the pool of buyers significantly and kept sales soft and prices flat, a situation that RBC sees continuing in the months ahead.

Toronto’s affordability also reached its worst levels in the fourth quarter at 84.8 per cent, keeping home sales at historically low levels.

Even Calgary, “Canada’s current housing hotspot,” is feeling the pressure. Home prices here are rising at the fastest pace in the country, eroding affordability to 48.3 per cent, the worst level since 2007.

A strong economy and surging population growth continues to drive the housing market, but the decreasing affordability could put a damper on activity if the trend continues, said Hogue.

Across the country, high interest rates are “seriously crimping” home hunters’ budgets, he said.

RBC estimates the extra costs have shrunk the home-buying budget for a household with a median income by 22 per cent since the first quarter of 2022, when the Bank of Canada began raising rates.

Over the same period home prices have fallen just 1.8 per cent.

“It’s no wonder homebuyer demand has cooled so much,” said Hogue. “The ability of many Canadians to get into the housing market has greatly diminished.”

RBC expects the Bank of Canada will begin to cut its rates by the middle of the year, offering homebuyers some relief. Affordability could even start to improve earlier if long-term interest rates ease ahead of the central bank’s first cut and household incomes continue to grow, said Hogue.

However, the scope for improvement in the year ahead will be small compared to the “dramatic loss of affordability that occurred during the pandemic,” he said.

RBC predicts that the share of average household income needed to cover home ownership costs will only fall to mid-2022 levels by 2025.

“That would scarcely lower the bar for most potential buyers,” said Hogue.

“Meaningfully restoring affordability will likely take years in many of Canada’s large markets.”

Canada’s labour market has thrown up a new twist just days before the Bank of Canada decides on interest rates April 10.

Data out Friday showed the unemployment rate rose to 6.1 per cent in March, the highest since January 2022. Except for the pandemic years, Canada hasn’t had a jobless rate above six per cent since 2017.

The economy also lost 2,200 jobs, the first decline since July, while economists had been expecting a gain of 25,000 jobs and unemployment rate of 5.9 per cent.

“The cracks that had been emerging within the Canadian labour market suddenly got a lot wider,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a note on the data.

“While markets had been pushing back expectations for a first Bank of Canada interest rate cut following strong GDP data to start the year, today’s labour force data should see them pulling those expectations forward again closer in line to our expectation for a first move in June.”

Question of the day - What do you believe is the ideal percentage of monthly income to spend on living expenses?

Money & Finances

What do you believe is the ideal percentage of monthly income to spend on living expenses?