As House Prices Rise, Canadians are Saving 'Next to Nothing'

Written by Posted On Monday, 18 February 2008 16:00

As Canadian house prices continue to rise, housing affordability has become a serious problem for many Canadians. While a recent report from RBC Economics says that affordability should improve in the coming year, another report warns that household incomes are not keeping up with debt and many families may not be able to cope financially with unexpected expenses.

There's an increasing percentage of people who are being shut out of the housing market because of climbing prices. While current homeowners are seeing their net worth increasing because of higher house prices, some of them may be in danger of losing those homes because of increasing financial pressures.

The Vanier Institute of the Family says that while the average Canadian household has seen an increase in their total income during the last four years, spending has also increased. "Canadians are spending as quickly as they are earning, and as a result, saving next to nothing," says the institute. "Not surprisingly, the spending trend is accompanied by growing debt levels. Total debt has now reached a record 131 per cent of household income after transfers and income taxes. To be fair, many households have money tied up in real estate and mortgages, and rising house prices have, on average, increased net worth."

But the institute says that many households have so little in savings that common situations, such as losing a job, becoming ill or even rising costs of living, could put them in financial trouble.

"A tabulation for 2005 found that almost one-third of households had a bank balance of less than $500 with another 20 per cent with a bank balance of $500 to $2,000," says The Current State of Canadian Family Finances report. "Some 28 per cent of credit card holders did not pay off all of their credit cards each month. About 11 per cent were behind in a bill or payment and three per cent were two or more months behind in a rental or mortgage payment."

The report, by Robert Sauvé of People Patterns Consulting, says that Canadians' average household spending jumped by 20 per cent between 1990 and 2007, almost triple the seven per cent advance in real incomes.

Assets are also up, with net worth (all assets minus all debt) rising by 18 per cent from 2000 to 2007. "Real estate has played an especially strong role in driving wealth gains so far this decade," says Sauvé. "Excluding both real estate and the mortgage debts that support them, net worth increased by only five per cent over the same period. The rapid rise in house prices over the last several years have benefited homeowners (who bought before the increases) while many non-homeowners got further away from realizing their ownership aspirations.

He says that in 2005, about 92 per cent of the richest fifth of households were homeowners, while just 42 per cent of the poorest fifth of households owned a house.

The latest RBC Economics Housing Affordability report shows a standard two-storey home requires about 47 per cent of pre-tax household income to service the costs of owning the home. A detached bungalow requires 42 per cent of income, a standard townhouse 34 per cent, and a standard condominium about 30 per cent.

Costs vary across the country. A standard bungalow in Vancouver, for example, requires a whopping 72 per cent of income. In Calgary and Toronto it's 46 per cent, while in Montreal it is 37 per cent and in Ottawa it would require 32 per cent of income.

"Almost every house class in every province and major city saw affordability deteriorate last year," says Derek Holt, assistant chief economist for RBC. "Unlike the late 1980s and early 1990s when both unemployment rates and interest rates pushed into double digits and led to declining affordability, the prime culprit this time around has been a long string of house price gains that have outstripped income gains."

Affordability will improve this year because house prices will not increase as rapidly and mortgage interest rates will slowly decline by 50 to 75 basis points, says RBC. "The Saskatchewan-Manitoba border remains the dividing line between over-heated housing markets in Canada," says RBC. "Everything from Manitoba eastward remains well below previous record highs for affordability set in the late 1980s and early 1990s."

In B.C., however, housing affordability has reached its worse level since RBC started charting it in 1985, but the economists are predicting "modest improvement" this year. In Alberta, RBC says many prospective home buyers were priced out of the market last year, but "with a softer influx of migrants, the housing market is poised for a significant slowdown and improved affordability."

It's important that there are ways for lower income people to get into the housing market, says Sauvé, "because home ownership is one of the major ways that households build up wealth. The majority of the poorest are never able to make this jump."

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Jim Adair

Jim Adair has been writing about Canadian real estate, home building and renovation issues for more than 40 years. He is the former editor of Canada’s leading trade magazine for real estate professionals, as well as several home building, décor and renovation titles. You can contact him at [email protected]

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