Don’t expect the income boost we’ve been seeing to last

Buying a home in Canada hasn’t been this affordable in four years, but there’s a catch — actually more than one.

According to a top financial institutions Economics’ Housing Affordability Measure that came out this week the proportion of income Canadians need to meet housing costs (mortgage, taxes, utilities) fell 3.3 percentage points to 47.3% in the second quarter, the most affordable since 2016.

Substantial improvements were evident from coast to coast with an average buyer now able to afford an average home in most markets, though the most expensive cities Victoria, Vancouver and Toronto remain the exception.

Even these cities though recorded the largest declines on the measure (which means homes got more affordable) and “decade-strong drops took place in virtually all markets we track,” said a top 5 banks senior economist.

But the catch to this new-found affordability is that it is rooted in the federal government’s unprecedented income support during the coronavirus pandemic.

The $56 billion Canadians received through government aid programs in the second quarter was more than the $23 billion they lost in wages because of COVID-19, said Hogue and this has distorted the housing affordability picture. Household disposable income leapt 11% and that income rise alone shaved 3.5 percentage points off the affordability measure. Lower mortgage rates and a slight drop in the cost of utilities also helped affordability, though gains were somewhat offset by higher home prices.

Without that surge in income, affordability would have worsened, and for that reason the bank expects the relief will be short-lived. “Everything else being equal, a return to pre-pandemic income levels would effectively roll back all of last quarter’s substantial gain in affordability,” said the senior economist.

So what does this mean for the housing market?

The expert said the improvement in affordability “no doubt greased the wheels” of housing’s stunning rebound this summer. In August average home prices in Canada soared almost 20% and sales spiked 33% from the same month last year.

But the pandemic is changing the housing market in other ways too.

Working from home and a decline in the appeal of big cities because of social distancing “are increasingly driving buyers further away from downtown locations into suburbs, exurbs and even cottage country,” said the expert.

Demand for rentals in urban centres is declining, and this is cooling investor interest in condos, he said. A growing desire for homes with more space is also hitting condo sales and shifting demand to single and semi-detached homes.

“The bottom line is we expect condo prices to weaken in larger markets next year, while we see prices for single-detached homes remaining generally resilient — albeit increasing at a slower pace. “

These trends were particularly noticeable in Toronto and Montreal.

At 64.5% income needed to support a home, Toronto is the second worst for affordability in the country, only behind Vancouver. Changing housing preferences have seen a boost in demand for single-family homes, the least affordable category, pushing prices up even further. Meanwhile, the supply of urban condos for sale has increased.

Montrealers also are increasingly migrating to the suburbs, said the expert. Buyers looking for bigger homes with a yard have been snapping up properties in Laval and on the north and south shores, and more condo owners on the Island are selling. Affordability here is at 40.5% despite rising prices, but the expert said that is unlikely to be sustained.

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Source: Financial Post