Housing Affordability: Where are Things Heading?

Thursday, October 5, 2023

Last month, I shared my thoughts with you about the new federal First Home Savings Account as a way to save for the down payment on your first home. Saving for a home of your own is daunting in a market overwhelmed by ever-increasing house prices and disturbingly high interest rates.

I want to spend some time breaking down what all of this means. We all know that to buy a home, you need to put together a down payment and arrange for a mortgage. Last month, I went through some of the options for saving for your down payment.

What are current house prices like?

But just how much do new homeowners need to expect to need for a down payment? Let’s start by looking at the price of the house you want to buy. The most recent reports, from August, the average price of a home in Kitchener as $798,000. In Kitchener, this breaks down as $995,000 for a single detached home, $672,000 for a townhouse, and $493,000 for a condo unit.

How much do you need for a minimum down payment in Canada?

That helps set a context for how much the previous homeowner or builder is going to receive, but let's look at just how much you need to offer as a down payment. As you might expect, there are tiers to how much you must have as your down payment.

Those tiers look like this:

5% on the first $500,000
10% on anything above $500,000, up $ 1,000,000
20% on the full price for any home over $1,000,000

So, what does that mean? What minimum down payments would be required for the house prices we already looked at?

An average-priced (median) house – $54,800
An average-priced single detached home - $74,500
An average-priced townhouse - $42,200
An average-priced condominium - $24,650
A single detached home just 10% over the average ($1,094,500 above $1,000,000) - $218,000

But that’s not all. You also need to include mortgage insurance for any down payments less than the 20% threshold. And sometimes, you will have to take out mortgage insurance even when you have a 20% down payment, if you are self-employed, or you have a poor credit history.

I wrote about the issue of having mortgage insurance last July – Insure Your Life-Not Your Mortgage. As you will see, I present the argument that term life insurance will serve your financial interests much more effectively. Have a look, nothing has really changed.

But after the down payment, there are the monthly payments!

Yes, figuring out what you need to put down as your down payment is only the first step. Assuming that you can save up enough for a down payment, then you are going to have to keep paying down that mortgage for many years to come.

Let’s look at some quick calculations here in Kitchener. According to CMHC, the average household income before taxes in Kitchener-Cambridge-Waterloo is $95,081. And with that income, according to one online mortgage calculator, you can afford a maximum purchase price of $495,078 with monthly mortgage payments of $2,476 on a 5-year fixed-rate closed mortgage amortized over 25 years.

That’s enough to buy an average-priced condominium and doesn’t come close to affording a townhouse or the type of house most of us think of when we consider where we would like to live.

We need affordable housing.

No wonder there is so much talk these days about the need for affordable housing. These kinds of prices, along with the equivalent squeeze caused by increasing rent for those who don’t have a mortgage, make it clear we are in a crisis.

But the Ford government’s current proposal is not a solution. It is clear that we need more housing, but there is plenty of space to do that without spoiling the Green Belt, which serves all of us, not just as a new source of land for a bunch of greedy developers.

Besides, new single-family homes on large tracks of land well away from current infrastructure will not create the affordable housing that we need.

Let me know what you think.