"Someone paid a quarter-mil more than asking for this Riverdale semi,” screams the headline on The Globe and Mail website.
Click on the video link and the seller’s ecstatic real estate agent guides you through the fully renovated 2,000-square-foot, four-bedroom Victorian home in the leafy inner-city Toronto neighbourhood.
Treating the $990,000 asking price as a mere suggestion, the buyers would eventually pay $1.3-million for the house – a 53-per-cent premium over what it sold for just three years ago.
This is part of the new reality in frothy markets, such as Toronto and Vancouver, where an average home will set you back more than $1-million.
The Bank of Canada fretted last week, in its semi-annual review of the health of the financial system, about all the various risks that could cause the country’s housing market to unravel. Among them: rising long-term interest rates, a sharp rise in unemployment, a condo price crash in Toronto, and a Chinese banking crisis.
Another often-overlooked danger is affordability. When buyers balk at paying inflated prices, the market will start to come undone.
Nationally, out-of-reach prices do not appear to be a major problem. The Bank of Canada, for example, judges that affordability has remained “relatively stable” for more than a decade thanks to low mortgage rates.
The Organization for Economic Co-operation and Development likewise concluded in a report last week that Canadians “generally enjoy good quality and affordable housing,” with the share of household income spent on shelter close to the OECD average.
But real estate is a collection of local markets rather than a single national market. For too many Canadians, high prices are destroying the dream of home ownership, exposing some to excess financial risk and forcing others into unwanted commutes.
Zero in on the hot spots and another picture emerges. The OECD pointed out that nearly four in 10 Canadians live in a city where house prices are “seriously or severely unaffordable.”
In Toronto, owning a home now swallows 56 per cent of household pretax income, according to the Royal Bank of Canada’s first-quarter housing affordability index. In Vancouver, it’s an astonishing 82 per cent. Across Ontario, the index has reached a 24-year high of 51 per cent.
Canada Mortgage and Housing Corp. defines affordability as spending a maximum of 30 per cent of household income on shelter.
A boom in condominium construction is relieving some of the pressure. Roughly a quarter of new condos are bought as investments and rented out as apartments.
But now there is a growing glut of new condos in Toronto and elsewhere, and a dearth of new single-family homes. That’s adding upward pressure to prices, causing some buyers to “let their emotions get the better of them” and to overbid “on the house, or odd shack, of their dreams,” Bank of Montreal economist Sal Guatieri remarked in a recent report.
The condo boom is slim comfort for lower-income-earners, who typically can’t afford the rents on these high-end units. Construction of new rental units has been stagnant for more than a decade in Canada.
Low-income renters are suffering disproportionally from rising housing prices, according to the OECD. Forty per cent of renters are now paying more than 30 per cent of their pre-tax income on shelter.
The tight housing market is causing another phenomenon in around Toronto, Vancouver and a clutch of other pricey cities – urban sprawl. New-home construction has been pushed to the outer fringes of cities, where services and infrastructure are poor, jobs few and public transit inadequate.
This trend is feeding a new form of inequality – between wealthy city-dwellers and low-income earners living on the fringes, a theme explored by University of Toronto social work professor David Hulchanski in his 2010 study, The Three Cities Within Toronto: Income Polarization Among Toronto’s Neighbourhoods.
Unable to afford million-dollar downtown homes, these buyers are forced into cars, putting undue strain on the road network. That has both an environmental cost – among wealthy countries, Canada is second only to the United States in per-capita carbon emissions from transport – and a financial price.