Home ownership still out of reach for most low, moderate income households

Entry into home ownership markets remains out of financial reach for low, moderate and even middle-income Canadians, according to a new analysis from the Wellesley Institute. In its latest semi-annual review of ownership affordability in Canada, RBC Economics reports that “low mortgage rates and persisting downward pressure on housing prices will to continue to help repair affordability”. While the RBC’s affordability measure is easing somewhat, the bottom line is that most Canadians who haven’t been able to buy a home still won’t be able to afford to buy one. Two-thirds of Canadian households earn less than the qualifying income for a standard two-storey home using the RBC scale. The Wellesley Institute is preparing a comprehensive State of the Nation’s Housing report that will examine affordability in the private rental and ownership markets, along with government investments in a range of housing policies.

Affordability in Canada’s ownership market is critically important to overall housing policy. About two-thirds of Canadians live in owned homes (the percentage is significantly lower in larger urban areas and the province of Quebec). Successive federal and provincial governments have encouraged high levels of home ownership through a variety of government subsidies, mainly tax-based incentives including home ownership savings plans and the non-taxation of capital gains on principal residence.

The annual capital gains subsidy alone will cost taxpayers $11.2 billion in 2009, according to the federal department of finance. That is five times the annual funding from the federal government for subsidized housing programs for low and moderate income Canadians. While most subsidized housing programs for lower-income Canadians are income-tested (larger benefits go to poorer households), the housing subsidies delivered through ownership incentives are not income-tested (the biggest benefits tend to flow to the most expensive houses, and that often means the wealthiest households).

The RBC Economics affordability index determines a qualifying income for a mortgage, then compares that to median household incomes to create its affordability index. But a significant number of Canadian households have annual incomes less than the qualifying income set by RBC Economics, and that excludes them from the home ownership market. The following lists the type of home and qualifying income (from RBC Economics) and the percentage of Canadian households which earn less than the qualifying income (from Statistics Canada):

Standard condo $46,200 (41.3% of Canadians have annual household income below this)

Standard townhouse $54,400 (50.5% of Canadians have annual household income below this)

Detached bungalow $67,200 (58.6% of Canadians have annual household income below this)

Standard two-storey $76,200 (65.7% of Canadians have annual household income below this)

Canadian households that already own a home will likely have accumulated some equity, which will allow them to trade up to a bigger home. But the RBC Economics numbers show that, for Canadians seeking to enter the home ownership market for the first time, qualifying income can be a formidable barrier.

Financing the purchase of a new home is complex and there are plenty of variables that can also become big barriers – starting with the requirement of a down payment. To keep things simple, RBC Economics assumes that a home buyer pays a down payment equal to 25% of the purchase price – or $49,775 on the entry-level condo unit. However, Canada Mortgage and Housing Corporation reports that the median net worth of renter households is $14,000 – less than one-third of the amount set out by RBC Economics.

Mortgage lenders are willing to accept a 5% down payment ($9,955 on an entry-level condo). But a lower down payment means a bigger mortgage (an additional $221.51 monthly, according to RBC’s on-line mortgage calculator), and higher monthly payment costs – which further erodes affordability. And a low down payment means mortgage insurance fees that can amount to $6,000 or more. The down payment barrier gets larger with the higher purchase price for different ownership options set out by RBC Economics: $59,450 for a standard townhouse; $73,450 for a detached bungalow; $82,525 for a standard two-storey.

While RBC Economics includes financing costs, property taxes and utilities in their housing measure, they don’t include condominium maintenance fees. Statistics Canada puts the average annual cost at $2,600. RBC Economics also leaves out insurance, repairs and other standard household costs (which can average another $1,000 or more annually). Add these costs to the financing, taxes and utilities, and home ownership as an affordable option is far out of reach for low, moderate and even middle-income Canadians.