I like to think of the price of housing, not from the perspective of the purchase price, but from the perspective of monthly carrying costs – i.e., what you actually end up paying for a house. And I’m especially interested in how monthly carrying costs have changed over time.
RBC for example produces great reports on housing affordability, which chart the proportion of income required to service mortgage payments, property taxes, and utilities since the 1980s.
I decided to replicate RBCs analysis in this post to determine what monthly carrying costs could be like in the future. I used data from TREB, the BoC and Stats Canada (sources shown at the end of post).
So if we take a quick look at the data used for this analysis, we notice some key trends. Notably, house price have risen in the GTA since 1973 (in 2017 $), to about $823,000 as of 2017.
5 year mortgage rates have fallen over the same period, and are currently at historic lows.
And median total income for all families has barely done anything since 1973 (in 2017 $).
When you combine the three variables above together, you get the chart below (RBC produces similar charts, but by quarter, and also takes into account the cost of property taxes and utilities) –
So about half of your income is servicing just the mortgage today. And if you want to look at what you’re actually paying per month, see the chart below (keep in mind the historic data from the late 1980s might seem a bit crazy given it captures a particular period in time with peak house prices and mortgage rates) –
So expect to pay about $3,700 per month today for just your mortgage. This is based on an average GTA house price of $823,000 with a 20% down payment, and at a 4.78% mortgage rate with a 25 year ammortization period.
As I noted at the beginning of this post, I am most interested in the monthly costs in the future. So I decided to set up three different future scenarios to 2030 –
- House prices and incomes rise at 4% and 3% respectively per annum; 5 year mortgage rates fall gradually to 3.2% by 2030 – I call this Rise and assume we see continued economic growth globally and in the Toronto Region.
- House prices fall at 2% per annum and incomes grow at 1% per annum; 5 year mortgage rates rise to 9% by 2030 – I call this Drop and assume we see stagnation and a recession globally and in the Toronto Region.
- House prices and incomes grow at 1.87% per annum (rate of inflation 2016 to 2017); 5 year mortgage rates gradually rise to 5.4% by 2030 – I call this Stable and assume status quo.
The charts below show what those trends look like for house prices, interest rates and incomes (dashed coloured lines represent the three future scenarios identified above).
By 2030, house prices could be between $497,000 and $1,077,000 in 2017 $s (between $633,000 and $1,370,000 in 2030 $s) ; or they could stay at 2017 levels – $823,000 ($1.04M in 2030 $s).
Here we see how the three future scenarios play out with 5 year mortgage rates.
And in the chart below, we see the impact of the future scenarios on median total income. By 2030, incomes could be between $76,000 and $97,000 in 2017 $s ($96,000 to $124,000 in 2030 $s).
Once again, when we combine the three variables above, we get the chart below –
What this chart simply says is that the average household/family will be expected to dedicate about half of their income to just mortgage payments in the future.
And again, when we look at the actual money you are expected to pay per month –
So an average mortgage from now on will cost a minimum of $3,300/month (in 2017 $s), even with a significant drop in prices (of 40% by 2030) and a rise in interest rates. In 2030 $s, this would translate to a minimum monthly mortgage cost of $4,200. Below is a chart showing the monthly mortgage cost indexed to 2030 $s so you can see what you would pay in that year.
So although a drop in house prices would provide some financial relief with respect to monthly mortgage carrying costs, that relief does not appear to be too significant. Unfortunately, it doesn’t particularly seem like housing will get much cheaper anytime soon if you look at the monthly carrying costs.
House Prices – http://www.trebhome.com/market_news/market_watch/
Median Total Income (1976 – 2011) – https://open.canada.ca/data/en/dataset/ed248f3a-65ef-4a8d-860c-deef144bb7a2 (Table 202-0411)
Median Total Income (2000 – 2015) – http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=1110009&p2=33
Mortgage Rates – http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=1760043
Inflation – https://www.bankofcanada.ca/rates/price-indexes/cpi/