Early Indicators of Affordability Crunch Materialize
September 8, 2007Following the 9th consecutive quarter of index price increases, the erosion of affordability for the average consumer has been called into question.
In order to determine ‘affordability’ from a consumer perspective, Urbanation has been tracking changes in the required income to purchase a typical 700 sf condominium unit in the Toronto CMA based on overall average index prices, the current 5-year posted mortgage rate, and assuming a 25% total down payment, 75% conventional mortgage, $0.43 psf maintenance fees (plus $100 per month in hydro) and 1% annual property taxes. Required income is calculated using a 32% gross-debt-service ratio (GDS).
The qualifying income to purchase this hypothetical 700 sf unit remained virtually unchanged at $54,000 to $57,000 for the four year period from 2001 to 2005 as falling interest rates generally offset price escalation. However, since the end of 2005, prices and mortgage rates have been trending upward in tandem, and qualifying incomes started to rise. See Figure 1.10.
In Q2-2007, the overall average index price for a new condominium apartment in the Toronto CMA was $371 psf, and the average posted 5-year mortgage rate was 7.2%. Therefore, based on this scenario, the qualifying income to purchase a hypothetical 700 sf unit was $70,000 per year, an increase of $7,000 or 11% compared to Q2-2006.
This suggests that in theory, general affordability has eroded over the past year, but so far, there has not been any evidence of a negative impact on demand or sales activity suggesting that overall prices (especially end-selling prices) and mortgage rates are still relatively affordable for many buyers.
Vibe at Liberty Village, a new site that has an average price index of $367, which is close to the average price index for the Toronto CMA, is selling a 381 sf studio unit for $152,000. Using the conditions outlined earlier, the qualifying annual income to purchase this unit would be $40,000. Vibe is also selling a 820 sf 2 bedroom unit for $297,000, the qualifying annual income for this suite would be $81,000.
It is unlikely that the pace of sales will remain at record levels if the rate of price inflation observed in Q2-2007 is maintained throughout the year.
Jane Renwick is the Editor and Executive Vice-President of Urbanation.