It is widely accepted that in Canada the affordability of home ownership has deteriorated sharply in recent times. That is just partly true.
There are two ways that we should look at affordability: first, how much of a down payment is required, and second, how much does it cost to live in an owner-occupied home?
In the first sense, affordability has worsened. During the past 15 years, housing prices in Canada have increased twice as much as incomes. In general, therefore, it takes about twice as long to save a down payment as it did 15 years ago.
In the second sense, however, houses are still affordable across the country. Many readers will disagree with this statement. After all, they have been told repeatedly that mortgage costs are outpacing incomes.
But, there are two problems with the standard analysis of affordability.
The first problem is the analysts are using the wrong interest rate. They rely on the “posted rates” that are published by the Bank of Canada. These posted mortgage interest rates are set by lenders for administrative purposes. Virtually no mortgages are actually contracted at the posted rates.
The rates that are available in the market are much lower. Variable-rate mortgages are available at less than 2.5 per cent. For fixed-rate mortgages, with five-year terms, lenders are advertising rates well below 3 per cent. Interest rates are even lower for terms shorter than five years.
The posted rate that is used in the standard analysis is currently 4.64 per cent. The result is obvious: The costs of home ownership are being vastly overestimated and, therefore, actual affordability is much better than is being suggested.
Using the posted rate also gives a distorted picture of changes over time: For 2016, affordability is almost the worst ever. (Conditions were worse only during a period of overheating in 1989 and 1990.) For 2016, affordability is 22 per cent worse than the average since 1982.
But, if we use the actual interest rates that can be found in the market, the level of affordability was close to average during 2009 to 2015 and only got out of line this year. For 2016, the cost burden is 10 per cent above average.
Inconvenient? Yes. Catastrophic? No.