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Nadine K. Mohammed and her husband Gordon Brown are seen near their Etobicoke, Ont. home on Thursday Dec. 27, 2012. (Tim Fraser for The Globe and Mail)

Nadine K. Mohammed and her husband Gordon Brown are seen near their Etobicoke, Ont. home on Thursday Dec. 27, 2012.

(Tim Fraser for The Globe and Mail)

Frozen out: Behind Canada's housing 'affordability crisis' Add to ...

Because she knows mortgage rates will likely be higher by the time she and her husband buy a home, Ms. Mohammed figures they will take longer to pay off their mortgage than their friends who already own homes.


‘House poor’

Right now, just getting into the housing market is a huge challenge for many Canadians.

The average home in Canada now costs about $350,000, roughly five times the average household income. In the mid-1970s, it was three times average income, says University of British Columbia professor Paul Kershaw, who crunched the numbers for a recent report on generational income gaps.

There are many ways to judge how affordable a house is, but on that most basic measure – how many years of earnings it takes to buy a typical home – houses in Canada are dramatically more expensive than they were four or five decades ago.

Building up enough cash for a down payment can be crippling for many people, Prof. Kershaw says.

“Take an average 25– to 34-year-old in 1976, working full-time and making the average wage. That person had to save for five years to build up a 20-per-cent down payment for an average home,” he said. “Today, take the same 25– to 34-year-old. Now, they have to save for 10 years. And in B.C., it is 15 years.”

The underlying reason for this, Prof. Kershaw points out, is that housing prices have risen dramatically, while household incomes – adjusted for inflation – have barely moved at all since the mid-1970s.

In 2012, “home ownership is so much more challenging,” he said. “And in urban settings, the home you are purchasing, as a younger person, is far less likely to have a yard. And if it does have a yard, it is because you are tolerating a far longer commute.”

There are huge social implications in this shift, Prof. Kershaw argues. Young people are becoming resentful of those already in the housing market, and are subject to significant financial stress. Buying a house is getting out of reach, he said, even though it is “a central part of the transition into adulthood.”

Two decades ago, one in five Canadians bought homes with less than 25-per-cent down, the amount needed to avoid paying for mortgage insurance. Today, three-quarters of home buyers require insurance from Canada Mortgage and Housing Corp., though the government has lowered the threshold to 20 per cent.

Royal Bank of Canada’s respected Housing Affordability Measure underlines the impact of interest rates on housing costs. The index, which tracks the proportion of pre-tax household income required to pay principal and interest on a mortgage, along with property taxes and utilities, shows a huge spike in the early 1980s and again in the early 1990s, when interest rates jumped dramatically.

Significantly, however, the RBC chart also shows that ownership costs have tracked upward pretty much non-stop for the past decade, even as interest rates declined to the current rock-bottom levels.

In the Vancouver market, houses are far less affordable now than they were even during those earlier interest-rate spikes, the Royal Bank’s figures show. The current ownership cost of an average two-storey house eats up close to 80 per cent of average household income. Elsewhere in the country, the average is closer to 50 per cent.

A health-care worker in southwestern Ontario who didn’t want his name used, said mortgage and child support payments make up roughly half of his take-home income, and that leaves very little for long-term investments such as RESP plans for his kids’ education, or retirement savings. “Any forward planning is really limited,” he said. “When you are living this way it feels precarious, and that is with a great mortgage rate.”

The big worry, he said, is what will happen if rates rise and his payments increase significantly. That could require a drastic lifestyle change such as renting out his basement or selling the house and renting. “That weighs heavily on me,” he said.

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