Housing affordability in Canada is as alive as the chances of the Toronto Blue Jays making the baseball playoffs and the appeal of eating a Cronut burger.
Housing was just barely affordable before mortgage rates started climbing earlier this summer. Now, with the popular five-year fixed rate up roughly two-thirds of a percentage point or more, the costs of buying a home are rising out of reach for a generation of first-time buyers with stagnant after-inflation incomes and mixed job prospects.
For many months now, the idea of affordable housing was based only on historically low borrowing costs that date back to the aftermath of the global financial crisis. Sure, you could afford a house with a mortgage at 3 per cent, a stunningly low rate by historical standards. But what about 3.89 per cent, which is what Royal Bank of Canada raised its discounted five-year rate to this week?
You can still get a five-year mortgage as low as 3.49 per cent at lenders accessible through mortgage brokers. But the trend in borrowing costs follows what’s happening in the bond market, and rates there have been soaring lately. If new buyers haven’t hit their affordability ceiling yet, give it a week or two.
Let’s say you wanted to buy a house priced at the national average of $382,373 and you had a 5-per-cent down payment. The difference between paying 3 per cent and 3.6 per cent amounts to $117 per month, which is money you might have been able to save for retirement or put toward family vacations, a new washing machine, surgery for your cat, braces for your kid or repairs to your basement after a flood.
Home affordability is calculated by banks as if you don’t have a life outside your mortgage. On that basis, houses were affordable on paper, and they may still be so for some buyers. But the window for owning a house and living your life is closing fast.
Buyer’s logic argues that the time to buy is now, before rates move higher. But this view fails to recognize that rising rates are bound to catch up with you at renewal time. Does your job offer potential for the pay increases you’ll need to carry a more expensive mortgage in the future, as well as the additional financial obligations you’ll almost certainly acquire as time passes? Nothing in the latest data on pay increases suggests an encouraging answer to this question.
Affordable housing used to be a phrase. Now it’s an oxymoron.