The Matter of Affordability
Terrence Belford – Globe and Mail Sales of both low- and high-rise newly built homes cooled significantly in April from the near-frenzied pace of the previous month. Why that happened, and whether the pace will pick up again as summer progresses remain matters of speculation.
The only thing that appears certain is that affordability is going to present major challenges for most residents of the Greater Toronto Area. That includes home owners and renters alike.
RealNet Canada reports new high-rise condo sales stood at 1,484 suites in April, off 40% from March numbers. Low-rise new home sales were 1.712 units, off 13% from March.
At the same time, the average new high-rise condo price jumped $5,033 in April from the month before to sit at $425,120. Low-rise new homes meanwhile dipped an average of $1,113 to $489,282.
Resale home sales continued to be brisk during the first two weeks of May. With 4,887 homes changing hands in that period, sales were up 7% from last year. The average selling price was $448,641, up 12% from early May last year.
What caused the big dip in sales of new homes?
George Carras, president of RealNet, suggests sales may be just taking a breather after six bullish months. He also says buyers may be adopting a wait-and-see attitude at this point.
“There is still a good number of new projects coming online in the next couple of months and people may just be waiting to have a look at them before making a buy decision,” he says. “About 40% of April sales were from newly launched projects.
“What is happening is that people flock to new launches for the first 10 days or so and then interest drops markedly.”
But underpinning demand is the crucial matter of affordability. Especially hard-hit are first-time buyers. People selling an existing home they have owned for maybe five years probably have enough cash from that sale to make a down payment greater than 20% of the purchase price.
That means they do not need a CMHC-insured mortgage and are not subject to the rules set in place by the federal government on April 19. They can take advantage of continuing low variable-rate mortgages or negotiate significant discounts on fixed-term mortgages.
Those with less than 20% down, however, must prove they can make payments at whatever the five-year fixed-term interest rate is at the moment.
The Royal Bank of Canada addressed the affordability issue in late May with a cross-country survey. Robert Hogue, senior economist said: “We expect affordability to deteriorate through 2010 and 2011, but this should be limited as more balanced supply-and-demand conditions will take much of the steam out of the housing market.”
Doesn’t sound too bad, right? Now take a look at RBC’s numbers. The bank says anyone owning a detached bungalow in the Toronto area can expect to see 49.1% of their pre-tax income go towards home-ownership costs such as mortgage payments, property taxes and utilities.
The report continues: “With escalating prices, affordability measures are now above the long-term average. This suggests that additional increases in housing costs may price more and more buyers out of the market.”
So, if you cannot buy, you just rent, right? Renters, however, will probably have some very unpleasant surprises in store over the next few years. The Toronto Real Estate Board says that at the end of April, the average rent for a one-bedroom apartment was $1,463 a month, up 2% from April, 2009, and the average rent for a two-bedroom apartment was a hefty $1,909 a month, up 5% from last year.
Since the mid-1980s, condos have supplied almost 98% of the GTA’s stock of new rental units. Investors buy them, then try to rent them for enough money to cover mortgage and monthly maintenance costs.
For the first quarter of this year, those investors have accounted for up to half of all new condo sales in prime locations – in the heart of downtown, along subway lines or in any other area where there is high demand for rental accommodation. In two or three years time, those suites will be built and at the move-in stage.
The prices investors are paying now for suites are significantly higher than those of two and three years ago, which means they will have to charge significantly higher rents.
It is not inconceivable that a one-bedroom-and-den downtown apartment may command $2,000 a month in five years time and a two-bedroom north of $3,000. Nor is it inconceivable to expect total housing expenses to eat up well over 60% of your monthly take-home pay if you want to live in a great central location in the GTA within that five-year time frame