It’s a debate that pre-dates the invention of avocado toast: which generation has had the toughest time breaking into Toronto real estate?
Boomers, who purchased their single-family homes in the 1980s, point to the much higher cost of borrowing, while 90s buyers had a recession to contend with.
But do these issues outweigh the skyrocketing prices and speculative demand that buyers have had to grapple with over the last eight years? With Statistics Canada reporting that two thirds of Millennials are still living with mom and dad, it’s clear that today’s generation of home buyers are facing greater affordability challenges than ever before.
To find out how affordability has really changed over the last 30 years, a number of factors must be taken into account:
Home Prices vs. Income Growth
The most obvious hurdle for today’s home buyers is the sky-high cost of real estate. The average Toronto home sells for hundreds of thousands of dollars more today than it did in 1980, according to historical data from the Toronto Real Estate Board. Prices have risen from $101,626 to $806,071. That’s a whopping 693-per-cent increase, and a difference of $704,445.
Meanwhile, median household incomes – while seeing double-digit gains – fall far short of the appreciation for houses for sale in Toronto, with earnings growing only 33 per cent, from $58,700 to $78,280, according to the 2016 Canadian Census. Given this widening relationship between median income and average home prices, and it’s clear overall affordability was better for the Boomers.
But Aren’t Mortgage Rates at Record Lows?
Perhaps the most compelling argument for Boomers is that it cost so much more to borrow in the 80s, compared to the historically low interest rates available today. Mortgage financing came with a price tag in the high teens back then, whereas today’s homes can often be mortgaged at a contract rate that’s sub-3 per cent.
However, looking at the average monthly mortgage payment in relation to price paints a less sympathetic picture. Assuming a 5 per cent down payment and 25-year amortization, the average 1980s mortgage payment clocks in at $1,698 – less than today’s average rent for a one-bedroom apartment. That increased to $1,777 in the 90s, $2,156 in the 2000s, and $3,615 today – a growth rate of 112.8 per cent, and well outpacing that of inflation.
It’s Getting Harder to Pay Off Debt
Despite cheaper mortgage rates, Millennials’ ability to service their debt pales in comparison to mortgage holders in previous decades, according to debt-to-income ratios. This affordability measure assesses how much is owed versus what’s brought in by the household, and the higher the ratio, the tougher it is to satisfy monthly debt obligations.
According to various loan studies, households with mortgage debt that exceeds a ratio of 43 per cent, are most likely to struggle with housing costs.
In 1980, the average debt-to-income ratio sat at 32 per cent. This increased in moderate increments over the coming decades, edging to 35 per cent in the 90s, and 38 per cent by the new millennium. However, Canadian debt loads ballooned with the onset of the 2010s, with the average ratio exploding to 59 per cent in relation to rising home prices. This demonstrates that, even taking the double-digit rates of the 80s into account, mortgage payments take a bigger bite out of household expenditures today.
Check out how affordability conditions have changed for Canadian home buyers since 1980 in the infographic below:
Penelope Graham is the Managing Editor of Zoocasa.com, a leading real estate resource that combines online search tools and a full-service brokerage to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse Toronto real estate listings, including townhouses, detached homes and condos.