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Homes Becoming More Affordable – But Don’t get Too Excited

3 December 2012

According to RBC’s affordability index, the cost of homes in Canada is becoming more affordable. But before you get too excited, you should know that regardless of what the index is, properties still have a little ways to go before they become truly affordable for the average homebuyer.

RBC’s affordability index shows that due to small increases in Canadian incomes, and small drops in prices, Canadian homes have become more affordable. Bungalows now sit at 42% on the index, dropping one percentage from last year; and two-storey homes have dropped more than a percentage – 1.2% – to now sit on the index at 47.8%. While condos saw the smallest drop, at 0.6%, it’s condos that are still the most affordable – sitting at 28% on the index.

And if you look at what your actual affordability should be when you apply for a mortgage, you can see that condos might be the only properties that are truly affordable right now.

That’s because lenders and banks use a ratio known as Gross Debt Service Ratio (GDSR) to determine how affordable a home actually is for you. With this ratio the lender will factor in not only the cost of the home, but also things such as heat, gas, cable, and other utilities, as well as your mortgage payment and property taxes. If all of these items simply add up to too much, the lender will deny you a mortgage on those numbers alone.

The problem is that today lenders want your GDSR on any given property to be below 32%. If it’s not, it tells them that the home is unaffordable for you, and they should not give you a mortgage. This calculation is determined using two factors – the total monthly cost of owning a home for you, and your monthly income.

For instance, you want to buy a home in Toronto that will cost you $1800 a month after your mortgage payment and utilities. Your gross monthly income equals $5500 a month. Lenders will calculate your household costs by dividing that figure by your income, and multiplying the total by 100 to determine your ratio.1800/5500*100 = 32%.

Any higher than this, and lenders most likely approve you for a mortgage, as 32% is the ratio that they’re looking for. And higher, and you’re going to have trouble finding that mortgage. This is exactly why the numbers on RBC’s affordability index may not be the good news it’s attempting to spread. With the exception of condos, the one type of property that so many people are currently concerned with.

But RBC does acknowledge that the index could go even lower.

“The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat” says RBC chief economist Craig Wright.

But he does also say that the decline in numbers does show that homes are becoming more affordable.

“This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability,” he continues.

But of course if  you really want to see how affordable housing is for you in your province, you need to break down the numbers even further – and RBC has done just that.

“The cost of owning a home took a smaller bite out of household pocketbooks in the third quarter as home prices fell – most notably in the Vancouver area, though it remains the least affordable market in Canada by a wide margin.

Wide indeed. In Vancouver the index sits at a whopping 83.2%, followed by Toronto that’s far lower at 52.4%.

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