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The Disappearance of Housing Affordability and Choice
Analyses of homeownership affordability indicate that, for Canada as a whole, affordability is reasonably good – not as good as during the late 1990s and early 2000s, but better than 2007-2008. The percent of average family income required to service the mortgage payments on an average priced home illustrate changes in the ability of typical families to purchase a home over time. In 2001 this was 16.5% and today it has increased to about 22%.
The key elements in the calculation are family incomes (which typically rise slowly over time), house prices (which are affected mainly by changes in the cost of land and building a home), and mortgage interest rates (which vary significantly from year to year, depending on the overall economic situation). Using this type of analysis, it appears that homeownership affordability in Canada should not be a major source of concern.
But this is the wrong conclusion.
The ‘reasonably good’ affordability situation at present is due to record low mortgage interest rates – which will not prevail over the longer-term. The average 5-year posted mortgage interest rate over the 1991-2012 period was 7.5% – well above the current 5.2% rate. When, inevitably, interest rates rise to more normal levels, affordability will deteriorate significantly.
The real situation with respect to homeownership affordability in Canada is very much different from that presented in current affordability analyses.
Removing the impact of interest rates from the calculation illustrates the fact that current analyses mask a significant deterioration in affordability in recent years. This shows the percent of average family income required to service the payments on an average priced home at a constant 7.5% mortgage interest rate – the average rate for the 1991-2011 period. This removes the effect on the affordability analysis of the current historically low interest rates. The current rates result from the extremely accommodative monetary policy measures aimed at addressing the sluggish economic recovery and continuing uncertainties in the world financial system. Clearly, when interest rates rise to more normal levels, the ability of potential home buyers to purchase a home will deteriorate markedly.
The deterioration in homeownership affordability over the past decade is due to the significant increases in housing prices over the past several years – price rises driven, in part, by inexorably rising government-imposed costs and more burdensome regulation. This deterioration, at a time when mortgage interest rates are being held at extremely low levels because of concerns about economic growth, calls for clarification of the concept of ‘homeownership affordability’. There used to be a clear understanding of the differences between ‘homeownership affordability’ and ‘homeownership accessibility’:
Homeownership affordability is determined by housing prices in relation to income levels;
Homeownership accessibility refers to the availability of financing and related mechanisms, and is determined by interest rates, down-payment requirements, gross-debt-service ratios, and other borrowing conditions.
Given the current record low interest rates, access to homeownership is extremely positive. However, overall affordability levels, as measured by the share of income required to purchase an average home, have worsened markedly. Rising housing prices, based on ever more costly and complex government regulation, and ever increasing government levies, fees, charges and taxes, have caused an extremely serious deterioration in homeownership affordability. Rising government mandated costs continue to be a significant threat to homeownership affordability. In particular, increased municipal charges, especially Development Charges, are raising costs for home builders – with follow-on impacts on housing prices and homeownership affordability.
When municipalities impose Development Charges on new homebuyers, they effectively transfer public sector debt into household mortgages, which itself is a cause for concern from a public policy perspective. Examination into Government Imposed Charges on New Housing Construction, a study conducted for CMHC, documented the total municipal charges for typical modest dwellings in 21 municipalities across Canada in 2009. According to the study, municipal government imposed charges on typical new houses range from over $50,000 in Surrey, B.C. and $48,000 in Vaughan, Ontario, to less than $5,000 in some smaller centres in the country. The CMHC study also showed that these charges have increased significantly over the past decade. In many communities, charges have risen substantially since the 2009 study. Also, some taxes, such as the GST/HST and land transfer taxes, are applied to the price of a home. Since municipal charges, such as DCs, are built into the price of a new home, there is a significant element of pyramiding (‘tax on tax’) in the application of these taxes on new homes.
In Ottawa, the City is gearing up for its 5 year Development Charge review and they have already warned that they will be introducing categories to try and gouge new home buyers for as much money as they can to help pay for the Light Rail Transit shortfall. Each layer of government and each department within those governments believes that their tax increase is reasonable and justifiable. To date, the only group looking at the big picture, including the cumulative effect of all combined tax increases is the home building industry. Unfortunately government has become too big, too rich and has too much control for one industry to successfully challenge. Owning a family home has been one of the most meaningful experiences in Canadian life, but it has become a privilege that is disappearing at an alarming rate.
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