Mortgage affordability in Toronto: 1985 versus today

It seems house prices in Canada’s hottest markets will never stop rising, raising the question of mortgage affordability. Consider that the average house price nationwide has risen from $331,000 in 2010 to almost $449,000 today, and the difference is even more pronounced in Toronto. Record-low mortgage rates have led to intense competition for homes, and bidding wars have become commonplace – especially for the city’s limited supply of detached houses – that the average sale price in Toronto is now more than $635,000.

This is a stark contrast from 30 years ago. In 1985, house prices were significantly lower, while mortgage rates were in the double digits. Interest rates have fallen steadily since then, but it still seems homes are less affordable today than they were in that era. That’s partly because rising house prices have outpaced income growth. But monthly carrying costs, driven by interest rates, are also a factor.

We decided to do some digging to figure out exactly how much mortgage affordability has changed in Toronto over the last 30 years. Let’s start by comparing earnings. While the average family income in 1985 was $31,965, today’s household brings in average of $74,366. At the same time, however, the average mortgage amount has increased well over five times, from $87,275 to $508,745.

Over the same period, mortgage rates have plummeted to record lows. While posted rates of 4.79 per cent are common today, five-year fixed rates as low as 2.48 per cent are attainable. Posted rates from 30 years ago averaging 13.25 per cent seem like a cruel joke by comparison. But even with such low rates, the total cost of carrying a home as a per cent of income is still much higher now than it was in 1985. Factoring in utilities and property taxes, monthly carrying costs (including monthly mortgage payments) are up 170 per cent – from an average of 48.16 per cent of total household income in 1985 to 57.91 per cent today.

Of course, these numbers represent the Toronto housing market as a whole. When we take a closer look at the affordability of detached houses and condos, we see two stories.

A recent RBC Economics study shows that for a standard two-storey house sold in Q4 2014, 65.6 per cent of gross household income went into mortgage, property tax and heating costs. Compare that with an average of 54.3 per cent since 1985. A standard condominium sold at the same time cost an average of 33.9 per cent of household income to carry, compared at an average of 31.2 per cent since 1985.

Predictably, the detached housing market is where the real gap in mortgage affordability lies. For Toronto’s condo owners, the cost of ownership has remained relatively steady.

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