When we go to the Committee of Adjustment or TLAB to oppose severance applications, we regularly hear the Planners hired by the builders say that their clients are increasing the supply of housing available to “young families”.
It sounds good, doesn’t it? The builders are helping young families get into the housing market.
You might think this post was going to address affordable housing in the sense of increasing the supply of affordable rental housing or housing for low-income families. Instead, we’re talking about housing that an AVERAGE family can afford.
If you follow the real estate listings in Long Branch, you’ll find that the average price of a home is $834,000. This reflects a mix of house sizes as well as condos and single detached homes.
If you narrow this down to single detached houses, you’ll see listings in the range of $1.1 million to $1.7 million. From what we see, the lower end of this scale represents resale homes – a mix of bungalows and modest 2-story homes with 3 or 4 bedrooms.
The upper end of the scale represents homes that have recently been built. Usually, these are larger (approx. 2500 sq ft.), which is what builders say the market wants. And many of these homes are built on smaller lots – often 25-foot frontages – that do not leave much room for gardens or playing area for young children in the back yards.
This begs the question of whether these newly-built homes are within reach of “young families”
The Central Mortgage and Housing Corporation helps first time buyers get into the housing market by offering insurance on mortgages.
According to the CMHC, if you want to buy a home with a down payment of less than 20%, you’ll need mortgage loan insurance. This protects your lender in case you can’t make your payments.
CMHC mortgage loan insurance lets you get a mortgage for up to 95% of the purchase price of a home. It also ensures you get a reasonable interest rate, even with your smaller down payment.
Mortgage loan insurance helps stabilize the housing market, too. During economic slumps when down payments may be harder to save, it ensures the availability of mortgage funding.
However, if the home you want to buy is worth over $1 million – which is more the rule than the exception in Toronto – CMHC does not offer mortgage insurance.
Many mortgage lenders use a CMHC tool called the debt service ratio to determine if potential house buyers represent an acceptable risk. This means looking at the total household monthly income relative to expenses such as heat, hydro, gas, vehicle payments, loan payments as well as the projected mortgage payments to determine just how much house people can afford to buy.
To illustrate, let’s look at an example.
Assume a couple want to buy a home that’s on the market for $1.5 Million – about the middle of the range for newly constructed homes in Long Branch. Let’s also assume they are moving from a rental apartment into their first home and are able to come up with $300,000 as a down payment. This represents 20% of the value of the home.
They want to take out a 25-year mortgage, which would be at 2.5% per year. This would result in monthly payments of $5,383.40.
Now let’s look at their monthly expenses.
Property taxes in Toronto average about 0.45% of the assessed value, which we will assume is the $1.5 million they expect to pay. Their monthly property taxes would work out to $563.75.
Both husband and wife have credit cards and their combined balance each month is $600. Heating their new home could be expected to cost of the order of $200 per month for gas or oil.
When we add up all these expenses, we get monthly expenses of $6,747.15.
The threshold lenders use when determining if a client is credit-worthy is that monthly expenses not represent more than 40% of the combined income.
Using this, for our couple wanting to buy a $1.5 million home, their household income before taxes would have to be at least $202,414. We’ve been very conservative on our estimate of credit card debt and we haven’t allowed for a car loan or lease.
In Toronto, the average household income is $102,721, based on 2015 census data. However, households with incomes over $200,000 represent less than 10% of all households. Household incomes over $200,000 are the exception, rather than the rule.
Such high income levels are not characteristic of “young families”. They represent the elite, not average or typical small families.
So, it doesn’t sound like our young family could afford one of the new homes being built. They might, however, be able to afford something closer to the average in Long Branch. It might be more modest than one of the newer homes, but it most likely will have character and be well-built. And it would be affordable for them. And an entry point into the housing market.
So, a message to planners: please don’t insult our intelligence by trying to pass off developments that will be sold at the high end of the price spectrum as being a way to help “young families” participate in the housing market. The numbers just don’t add up!