As the cry for affordable housing goes up across Canada, two recent studies tell us that affordability remains fairly constant for middle and upper income earners. Record-low interest rates have meant housing has been more accessible to modest-income buyers, but what will happen if interest rates climb?

According to the Housing Affordability Index report, compiled by RBC Financial Group, "recent increases in mortgage rates have made home ownership slightly more expensive than last year, [but] housing continues to be affordable for Canadians and will remain so throughout 2002."

The Housing Affordability Index measures "the proportion of pre-tax household income needed to service the costs of owning a home in Canada." The Index reached a three-year low of 30.6 per cent at the end of 2001 and has risen to 31.4 per cent in the first quarter of 2002. The Index is expected to hit 33 per cent by the end of this year, but report author, economist Carlos Leitao, does not believe this will adversely affect the housing market the way "harmful" Index ratings of 46 per cent did in 1989 and levels of 48.7 per cent did in 1990.

The Index is a reflection of the calculation used by mortgage lenders to determine who they will lend to and how much an individual may borrow. Most lenders use a Gross Debt Service (GDS) ratio of about 28 to 32 per cent. GDS reveals the amount of gross income needed to service the debt (that's make the mortgage payments in plain language). This means that your mortgage payment (comprised of principal and interest), property taxes, half the condo fees, if appropriate, and, often, including heating costs, expressed as a per cent of gross income, must be less than the GDS figure selected by a specific lender in a particular market. If you already have a car loan or other payments to make, the lender uses a Total Debt Service ratio that ranges from 34 to 38 per cent.

The Housing Affordability Index is based on the cost of owning a detached bungalow -- "a typical target for first-time buyers" – not the two-storey models that are hyped by developers as ideal first homes and that are coveted by neo-owners. Therefore, affordability may be further out of reach for first-time buyers than the Index indicates, especially in urban areas and preferred neighbourhoods. In spite of the author's assurances, the Index indicates affordability is already an issue in Vancouver at 47.8 per cent and Toronto at 39.2 per cent.

Affordability is also a concern when it comes to vacation time. Although many Canadians dream of owning a cottage or vacation home, ownership patterns have changed very little over the past 30 years, according to the Survey of Financial Security produced by Statistics Canada. In 1977, just under 6 per cent of households (464,000) owned vacation homes and by 1999 the ownership rate had increased only slightly to about 7 per cent of households (823,000). That's more people, but the same high-income portion of the population is represented, so affordability for the general population has not improved much.

If you haven't bought your cottage yet, don't panic, time may be on your side:

  • The average age of vacation home owners in Canada is 52 and 74% of cottage-owning families do not include children. Since cottages and children go together, it is evident that many Canadians enjoy cottage life by renting, borrowing, visiting or inheriting -- and saving a lot of money in the process.
  • Urban households own 9 out of 10 vacation properties, so if you buy a home in a rural area you could have two homes in one with only one mortgage.
  • Even after excluding the value of the cottage from total wealth, vacation home owners' average wealth is 60% higher than that of non-cottage-owning households – $285,000 compared with $181,000. Increasing the value of your home and increasing your earning power are two smart ways to realize your dream of a vacation home.
  • Before you get caught up emotionally, do the math since the average value of vacation homes in 1999 was over $88,000 and prices are rising. How many days a year will you definitely use a cottage? How much would a cottage cost in your preferred area and how much is the annual up-keep (local real estate brokers know this)? How does this compare with the cost of renting without any of the maintenance headaches of ownership?
  • Real estate is as cyclical as the economy. Be ready to act quickly if prices drop in the areas you love to holiday in.

    Now you know that your "everyone has a cottage but me" whining is off base, does that make you feel any better?

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