Can you still afford a detached house in the GTA?

By: Thomas Sigsworth on May 17, 2016
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Can regular folks afford to buy a detached house in the GTA anymore? It’s a question we tackled in the mortgage infographic we released this week, and the answer might have some would-be buyers re-thinking their real estate plans.

Prices: up, up, and away

With GTA home prices rising ever higher, the dream of owning a detached house in the city seems to be moving beyond reach for many Torontonians. Since 2014, average prices have surged by more than 10% per year. An ‘average’ detached house in an ‘average’ GTA neighbourhood costs just a little over $700,000 two years ago. Today that same house costs more than $900,000.

With that figure likely to cross the $1 million mark by next year (many neighbourhoods are already there), some buyers wonder what financial resources they realistically need to buy a detached home.

Tallying it up

To get an idea of the minimum level of income buyers need to get an ‘average’ house in an ‘average’ GTA neighbourhood, we turned to the Canada Mortgage and Housing Corporation (CMHC) lending guidelines

The CMHC says you shouldn’t spend more than 32% of your gross monthly income on housing costs. But how should you calculate those costs? Easy: just remember the acronym PITH, which stands for principal and interest (your mortgage payment), property taxes and heating costs. Add them together and they should not exceed 32% of your gross pay.

Buying a home this year for $910,345 with 5% down translates into a monthly mortgage payment of at least $3,849 (a five-year fixed rate at 2.34%, with a 25-year amortization), or $46,188 per year. Add in property taxes (over $6,400 per year) and heating ($1,800 per year) and you get annual housing costs of more than $54,000. Using the CMHC’s 32% rule, that translates into an annual income need of just over $170,000.

If you have car loans, student loans or credit card debt, you should also be aware of a second CMHC rule: your total debt load and housing costs (PITH) should not be more than 40% for your gross monthly income. Before you finance that new car or book a summer trip to Europe, remember that taking on extra debt could materially reduce the size of mortgage you qualify for.

You need lots of money in the bank too: even with a minimum down payment of just 5% of the $910,000 purchase price, you’ll need to have nearly $100,000 on hand for that and other closing costs (the land transfer tax is a huge chunk of this).

What about waiting until next year?

Thinking of waiting to buy? It could complicate things if prices continue on their current trajectory (rising by 10%+ annually). The average GTA home could be changing hands for more than $1 million next year. That instantly triggers a huge obstacle for buyers since the CMHC doesn’t offer insurance for homes over one million dollars. You’ll suddenly have to cough up a $200,000+ down payment, plus another $60,000 or more in closing costs.

If you can somehow muster up that kind of money, the good news is that your carrying costs won’t go up much because your mortgage will be smaller.

What should you do about buying a home in the GTA?

For many potential buyers, the detached dream may not become a reality – at least in the near term. Some would-be homeowners can benefit from biding their time while they work to save more and hopefully grow their income. Others might seek alternate types of housing, like condos and semis, rather than deciding on a detached home. Some are likely to choose buy into one of the cheaper neighbourhoods or move elsewhere. A few might even choose to rent on a longer-term basis, although the desire to own a home runs strong in the GTA: a recent BMO study found that two-thirds of millennials expect to own a GTA home.

Whatever the challenges of the current Toronto housing market, the dream of homeownership — detached or otherwise — is not going away anytime soon. Home buyers will continue to look for ways to make it happen for them.