Housing Continues To Get Less Affordable, Largely Due to Increased Mortgages
Housing continues to get less affordable for Canadians. A recent report by RBC Economic Research found that housing costs consumed 53.9 percent of a typical household income in the second quarter of 2018. General guidelines state that it’s a good idea to keep housing costs to around 30 percent of gross income. This increase in cost highlights how unaffordable housing has become in many areas of the country. In fact, in cities like Toronto and Vancouver, housing carrying costs can reach up to 75 percent of a household’s income.
The RBC report claims that housing has not been this unaffordable in Canada since the early 1990s.
However, recent affordability issues aren’t necessarily just due to rising real estate prices. One reason for the increase is that higher mortgage rates have resulted in more of a household’s income being used to cover mortgage payments.
Larger Mortgages Causing Issues
While real estate costs have increased in many areas of the country, incomes have not increased at a similar rate. In fact, in many large Canadian cities, recent jobs increases have been due to part-time employment. These jobs often do not result in salaries high enough to afford increased housing costs.
However, despite the lack of growth in salaries, housing costs have continued to increase. One reason why is due to cheap credit and mortgage regulations that promoted borrowing large amounts of money. As mortgages got easier to get, and larger, people were able to spend more on real estate, which pushed prices up.
However, now that mortgage interest rates have been increasing, it has become more expensive to carry these mortgages and make payments. The result is that people are spending more money on housing than they have in several decades.
Federal and provincial governments enacted several regulations in 2016 and 2017 to slow the growth in housing prices. Despite this, many Canadians still take out very large mortgages to be able to afford a home. As interest rates continue to rise, these large mortgages become more expensive to carry. Higher interest rates could be a problem when existing borrowers need to renew their mortgages at much higher rates.
While mortgage rates have increased (and will likely continue to increase) they still remain at historically low levels, which means a large housing market correction is not likely. Instead, the issue of housing unaffordability will likely continue for quite some time.
The Problem with Borrowing Too Much
As mentioned, many people have taken out very large mortgages to be able to afford housing in a market that has shot up rapidly over the years. The issue with taking out a very large mortgage is that, even if you can afford to make the payments, you don’t leave yourself with very much money for everything else.
The reality is that, even if you stick to a strict spending plan and are able to fit housing costs, food, entertainment, transportation, clothing, and the rest of your expenses into your budget, borrowing a large amount of money can still be a problem.
The main potential problem is that you do not leave yourself much wiggle room or space to deal with emergencies. You might be able to afford all your expenses right now, but what if you were hit with a sudden expense? When you’re living paycheque-to-paycheque, a broken appliance or major car repair can seriously harm your budget. You may have to take on additional debt (such as credit card debt) to afford the unexpected expense. If you’re already spending most of your money on housing and monthly expenses, paying off this credit card bill will be difficult and costly. Of course, if you lose your job, you could find yourself in even more serious financial trouble.
This is why it’s critical to build up an emergency fund. Even if you can only save a few dollars each week, it’s better than nothing and it could seriously help you when something unexpected happens.
Another issue with carrying a large mortgage is that interest rates have been increasing lately, and they will likely continue to increase in the future. This could mean that you won’t be able to afford to renew your mortgage at a higher rate when the time comes. And, if you can renew it, you may not be able to make ends meet when your mortgage payments increase.
While housing continues to get more expensive and less affordable, it’s critical to know how much you can realistically afford. Before you take out any loan (including a mortgage) sit down and calculate how you will make the payments. If you cannot realistically afford the loan while still putting some money aside for emergencies, you may want to reconsider.