The discussion around affordability keeps coming up, especially with the recent drop in housing prices and lower interest rates. Arguments for and against real estate are often rationalized based on affordability from both bulls and bears. But what exactly does the historic and current data show?
First let’s define affordability. It is simply the percent of household income taken up by ownership costs. For this exercise, I followed the methodology used by RBC (http://www.rbc.com/economics/market/pdf/house.pdf) because past information was readily available. Household income is based on published numbers for Greater Vancouver (median) and mortgage costs are based on a five year fixed rate mortgage amortized over 25 years. You may argue that this is not representative of buyers for whatever reason, but to do so would be to miss the larger point, which is to simply compare where we are now relative to the past.
Second, let’s look at historic data. I referenced the RBC to obtain affordability percentages (rounded to 5% increments) for various years, as follows (see page 5):
Condo TH SFH
1986 20% 25% 35%
1990 40% 50% 70% (Peak)
1992 30% 40% 50%
1995 35% 45% 65% (Peak)
2000 25% 35% 45%
2004 25% 35% 50%
2008 40% 50% 75% (Peak)
To define the norm, I looked to where affordability ranged for most of the time (say 80%) going back to the early 80’s. The historic norms for condominiums, townhomes and single family homes have roughly fallen between 20-30%, 30-40% and 45-55%, respectively. These ranges ignore the ‘spikes’ of low affordability at peak years (e.g. spring 2008), but also the ‘trough’ of high affordability in the early 80’s.
And finally, where are we now? Using $60k as the median household GVRD income (used by RBC), the latest MLS GVRD benchmark prices (Mar 2009) and the current five-year fixed rate mortgage (using the ING calculator), I come up with 27% for condominiums, 33% for townhomes and 51% for single family homes.
All of those values fall near the mid-range of historic affordability.