The reviews are in and according to the big banks and many in the real estate industry, Toronto has achieved the much sought-after soft landing in the housing market. Thanks to the regulatory efforts and foreign buyer taxes the market recovered without needing to go through a (massive) correction. If this is true, then the real pain of this successful housing market is about to hit all future generations.
Throw the rule books out for budgeting because there is no hope of keeping housing spending between 30-40% of a household’s income, 50 to 70% seems more likely. To afford the average Toronto home now requires a household income over $124,000. According to the 2016 census, this is a number only 22% of Toronto households bring in. As the price of housing outpaces wage growth, this percentage will continue to shrink, leaving Toronto less and less affordable for the vast majority of residents.
Even without continued increases to home prices, it is unlikely wages are ever going to catch up. In 2017, Better Dwelling estimated that at the current growth pace, incomes would take 41 years to balance out with home prices. Obviously, prices going up again only prolongs that timeline.
It is often mentioned that housing affordability was just as bad in the late 1980s as it is today. This is technically true; however, it is important to call out how the timelines are different. From 1987-1992, cost of ownership in Toronto versus median income was above the 50% mark. Now, Toronto has been above the 50% mark since 2010. Peak high cost ratio was also shorter lived in the late ‘80s, lasting roughly two years. Current home prices have had Toronto between 65-70% of the median income since 2016. Assuming the soft landing has been achieved, this would imply those ratios will become the new norm, versus another short lived peak.
Return on Investment
For those that believe housing is as much a good investment, as it is a necessity, new buyers are unlikely to see the same return on their investment that previous generations enjoyed. In the last ten years the average cost of a home as doubled. House prices have nearly tripled in the past 20 years and over the last 40 years they have essentially quadruple. With this growth pace seeming unlikely moving forward, today’s buyers will not realize the same financial benefits that previous generations enjoyed, while having to afford bigger mortgages.
Just this week #MillennialRetirementPlans was trending on Twitter as countless young professionals expressed their lack of confidence in their ability to ever retire. With a rising percentage of each pay cheque being required to pay for housing, meaningful retirement savings will be the first many have to cut. This means the stability of the housing market is being achieved at the detriment of other financial goals.
According to a 2018 CIBC survey, it is estimated millennials will need $917,000 saved for retirement. With defined benefit pensions no longer available for most workers, this means the current and future generations will be managing a massive mortgage in one hand and an equally daunting savings requirement in the other.
Perhaps it will all work out in the end. People will adjust to smaller living quarters that cost a lot more, and they will still be able to figure out retirement while earning the wages they are seeking, but that just does not seem likely. While the housing market may have achieved a soft landing, the real problem of high home prices has simply been shifted to other financial commitments. Eventually the cost of living will catch up with the city, and that will be a big problem when it does.