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A house for three times your income? Think again

If houses in Toronto were affordable for middle-class families, they'd cost an average $228,657.

The late 1990s were the last time prices were that low in the city. The actual average in September was $627,395, which is a gross undersell because it includes homes in the suburbs around the city. In Toronto proper – the 416 area code, in other words – the average cost of a detached house was around $1-million.

The affordability measure used here is the price-to-income ratio, which is a rough guideline based in personal finance as opposed to hard-core economics. It's said that the cost of a house should be no more than three times your gross household income.

There are a bunch of cities in Canada where this is more or less possible, and we should keep this in mind as we debate whether the housing market has gone off the deep end. But with a new Liberal government aiming to improve the position of the middle class, let's also recognize that housing in some cities is slipping out of reach for this segment of the population.

The price-to-income ratio shows that in Toronto and Vancouver, the old standard of affordability has become a joke. The next tier of unaffordability is represented by Victoria and Hamilton, which is increasingly scooping up buyers who cannot handle prices in nearby Toronto.

Then there's a modestly unaffordable tier – cities such as Edmonton, Calgary and Montreal, where the price-to-income ratio comes in above the preferred limit, but not enough to generate much concern. Finally, there's a broad selection of affordable cities that includes Saint John (a beauty of an affordable market), as well as St. John's, Halifax, Quebec City, Ottawa, Winnipeg, Saskatoon and Regina. Cities in this analysis were chosen on the basis of them being part of the monthly price survey on CREA's national average price map and Statistics Canada's household income database.

Vancouver's price-to-income ratio is 11.2, while Toronto's is 8.2. The population of these two cities as a metropolitan area represents roughly one-quarter of the Canadian total, so their impact on national affordability numbers is huge. What's interesting about both cities is they have the highest average prices, and among the lowest median incomes.

This tells us that houses in these cities are increasingly for individuals and families making well above the median income and wealthy foreign investors. With an average price of $627,395 in the Greater Toronto Area, a household would need income of at least $209,000 or so to be in sync with the guideline of having a price-to-income ratio around three. A recent estimate shows us that the median household income in the city is $76,219.

The ideal peak house price for people making Toronto's median household income would be $228,657, or three times $76,219. In Vancouver, $230,415 would be the maximum affordable price, based on median family incomes. You have to go back to the early 1990s to find prices that cheap in Vancouver.

Hamilton's average price has risen to $449,233, which suggests an ideal household income of at least $150,000 or so. The actual median income in the city is $86,119. Victoria residents who buy now should have an income of almost $170,000 based on an average price of $507,650; in fact, the average income is $88,432.

You want a nice match between housing prices and income levels? Try Saint John, with a price-income ratio of 1.9. Prefer a bigger city? Ottawa, with among the highest median family incomes in the country, comes in at 3.5. Calgary's up there with a ratio of 4.2, but we may see that decline if low oil prices keep weighing on house prices.

Low interest rates have allowed price-to-income ratios to rise above levels that used to be considered ideal. A relatively modest decline in borrowing costs can offset a meaty price increase. Maybe this dictates that we use a more lenient measure of affordability for the time being, say a price-to-income ratio of four or even five.

Such leniency doesn't help much for the twin terrors of housing affordability: Toronto and Vancouver. They're moving ever further out of reach of the middle class, and that's a worry. Somebody's going to need to buy the houses that boomers start putting on the market in the decades ahead. Are there enough high earners to go around?

Affordable housing markets? Yes, we have some

A traditional measure of home affordability is for the price to be no more than three times your gross household income. Here, you can see which cities are close to this threshold and which are above it.

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