Canadians are finding it harder to afford their first home.
A new report by the National Bank of Canada says housing affordability is deteriorating. It now takes more of the average Canadian income to make the average mortgage payment in Canada. Simply put, home prices are continuing to tick up double digits each year. This is especially true in big cities like Toronto, where the average detached home is now more than a million dollars, and salaries are not keeping pace.
Now first time homebuyers are looking for more affordable alternatives and many are seeing condos as the most reasonable way to jump into the real estate market.
Toronto remains expensive
Across Canada how much home you can afford compared to your salary can vary significantly. But the expensive hotspots remain the same. The National Bank of Canada study says, at the greatest pace, “affordability deteriorated in Vancouver, Toronto, Victoria, and Hamilton,” in the last quarter of 2015 compared to the same time in 2014. In Toronto, for example, the report says the deterioration was 1.5 percentage points. Home prices were up 10.4 per cent and incomes rose 3.8 per cent. The study shows in Toronto the average mortgage payment represents 48 per cent of the average income.
Still, this is a much better situation compared to Vancouver. That city saw the sharpest deterioration from a year earlier. Housing affordability deteriorated 3.44 percentage points, home prices up 11.9 per cent and median income up only 2.6 per cent.
Condo an affordable option
In the condo segment, meanwhile, affordability has steadily improved in recent years, says the National Bank of Canada report. For condos in Canada the MPPI is now below the long-term average, unlike other dwellings. For example, the average condo in Q4 of 2015 is $372,299 in Toronto. That is up 5.9 per cent since a year ago at the same time. According to the study it will take around 34 months to save for a down payment on an average priced condo in Toronto and represents on average 30 per cent of the average income.
This proves once again that condos can be a great economical choice.
Make sure to take these important steps before buying your first piece of real estate.
- Calculate your affordability based on a rate 2 percentage points higher than what the bank is offering. It ensures you can afford your mortgage if rates change before the end of your mortgage term.
- Understand the difference between a variable and fixed rate. A variable mortgage is tied to the floating rate, which can change during your term. A fixed rate stays the same regardless of where interest rates go.
- Make every effort to have a 20 per cent down payment. This will avoid expensive Canada Mortgage and Housing Corporation (CMHC) insurance that is required on any home with less than that amount of down payment.
- Put money aside for your closing costs. After realtor fees you can spend roughly 1.5 per cent to 4 per cent of your purchase price on closing costs. Expenses such as an inspection, legal fees, and land transfer taxes can all add up.
- This is probably the biggest purchase you will ever make. Make sure it’s what you really want. After work one day, try out the commute and see how long it would take you to get home. Take the time to educate yourself on the potential costs of owning a condo and budget accordingly.
- Check your credit score. You can save time by checking your report and score ahead of time, and fixing any mistakes that might be lingering.
- Talk to a mortgage specialist. You can get more information at PCFinancial.ca. They can walk you through the initial steps. This helps demystify the process for you, with no pressure.
RUBINA AHMED-HAQ is the Finance Editor for HPG. You can read her musings in Condo Life and Active Life. She’s also the Family Finance Advisor for PC Financial. She regularly contributes on TV and radio including CBC Radio, CBC News Network and Global News Toronto. Follow her @alwaysavemoney