House Math

Off-topic from most but here goes.  I wrote about a similar subject that hit the US during the market crash 5 years ago and while Canada is better protected (no sub-primes, no HELOCs for first buys, etc…) the market is near saturation.  Here’s why.

The average “big city” house is about $350,000.  A decent mortgage is say, 3.25%.  If you put $25,000 down, then your mortgage rate is about $1,500 a month.  A house payment (plus insurance, taxes, maintenance and utilities) shouldn’t be more than 35% of your net income.  So let’s get best picture here and say the extras cost you $500 a month.  $2,000 net rolls up to be about $35,000 gross.  That’s only for the house.  The other 65% means you need to bring in another $3,7000.  That’s right, a total of $5,700.  That means a gross income of $104,000.

The average Canadian salary is about $47,000 per year.  Even double that with dual income, you’re still short $10,000 a year.

So if in the best case, where your costs are low, the average couple is unable to purchase the average house and be financially secure in case of mortgage changes, market changes or job changes.  If you then follow the logic that you need an above average salary to buy an average house, the percentage of home ownership at any given time should be less than 50%.  We are at nearly 70%.

Granted, this includes everyone who purchased a house before this housing boom.  Home buyers today have less money and higher prices.  I’m not saying we’re on a bubble, but the upward trend of the market is not sustainable in the long term, especially if the house prices exceed the increases in salary (which are usually just below inflation).  The days of single person home ownership are gone unless you are willing to make some very significant sacrifices.

One thought on “House Math

  1. Good post. I’m also curious to learn how people can not only afford the big house, but also two cars (and not clunkers, but good ones) and also afford one or two trips to a resort per year!


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