How Much of Your Income is Needed to Buy a Home

Ever wonder how much money you would have to put aside to afford a house in Ottawa, Rockland or anywhere in Canada? Right now, the Canadian housing market is on the tail end of a buying and selling frenzy. The seller’s market had dominated throughout the global pandemic, forcing prices to reach astronomical heights. In fact, during that time, housing affordability was at the worst it had been in 31 years. 

Buying a home – how much you should put aside?

Let’s look at this more deeply. 

Percentage of Income and Affordability

Looking at the RBC affordability measure—a percentage that looks at the cost of ownership to household income—it can be seen that in the first quarter of 2021, there was a 0.9 percent increase, moving it to 52 percent. What does that mean? For the average buyer, you must now spend about 52 percent of your income to cover the cost of a home in Canada. That is the highest the RBC affordability measure has been since 1990.

But what about the hottest markets of Canada, like Ottawa, Toronto and Vancouver? It’s even pricier. Vancouver has had super-high prices for a long time, but it is now 74.9 percent. Toronto is at 67.7 percent. 

This price increase isn’t limited to the hottest housing markets either. The prices skyrocketed around the same time the pandemic was at its worst. Many Canadians found themselves seeking a way out of the major cities when working from home, which caused an exodus to smaller cities and towns throughout Canada. This sudden grab for suburban homes also put pressure on the housing market. 

According to the Canadian Real Estate Magazine, the aggregate price for a home in Canada is anticipated to reach $771,500 by the end of 2021. At the end of Q2 in 2021, the price leapt by 25.3 percent from 2020, making the average price $727,000.

Robert Hogue, a senior economist for RBC, stated, “Since the pandemic, mortgage carrying costs have increased more as a share of household income in Windsor, Hamilton, London and Niagara than in Vancouver, Ottawa, Montreal or Toronto.”

The result? Affordability declined across the board, from Nova Scotia to British Columbia and Ontario. 

What Does That Mean For the Housing Market? 

Although there is some speculation that these rising home prices won’t last for much longer, the increase has undone any benefit of the boosted household income programs of 2020. The additional downside to these abnormally high housing prices is this: if the housing supply remains scarce, the market cannot balance itself immediately. Housing affordability might erode a little more before any positive changes are seen. 

And if you’re thinking about going for a condominium, now might not be the time. Before the pandemic, condos were considered a less expensive option. However, because of the pre-pandemic affordability, many buyers rushed to grab them up. Inventory has dropped significantly, meaning that whatever is left is also going to be more expensive than usual. 

For instance, the typical price for a condo in downtown Toronto is between $500,000 to $650,000. 

There is only one place in Canada that is currently affordable (aside from the prairie) and that is Saint John, New Brunswick. You only need about 23.4 percent of your income for home ownership there, but experts believe that level of affordability won’t last for long. Others have taken notice. 

To Buy or Not To Buy Right Now

Does this news mean that you shouldn’t aim to buy a home right now? For some, waiting might not be an option, especially if you have a job or children or other responsibilities to consider. 

That means you are going to have to do research on the affordability of the area that you want to move to and then figure out your budget and down payment from there. If money is tight right now, take a look at your current lifestyle and consider downsizing. To downsize is to reduce your expenses by living below your means during a period to save money. Any extra money that you save is sent to a savings account. 

Another way to save up some money for a major purchase is to cut out some bad habits. For example, if you are impulse buying to combat pandemic fatigue, or if you order takeout frequently, try doing something healthier for yourself. Not only do you amend a poor habit, but you stop wasting money unnecessarily. 

Consider landing a higher paying job. You may be able to find a job that is similar to the one you have right now but pays better. Even if it’s a few more dollars an hour, that extra money you make can be put away for your future home. Side hustle can also help. Dog walking; pet, baby, or house sitting; driving for a rideshare company; or doing some freelance work is also lucrative. 

Also plan to get your debt under control. Since the housing market is competitive right now, it may be wise to wait a little while and get any debt you have taken care of first. Keep in mind that when you look to get a mortgage, there is something called debt-to-income ratio. If you have too much debt, the lender is not going to consider you a good candidate and may turn you down—even if you have enough money saved up. 

Conclusion

Right now, the Canadian housing market is a difficult place to navigate. Though there is hope for the future, buyers are being challenged with a seller’s market, bidding wars, and low affordability throughout the country. If you are planning on buying a home some time soon, look for the more affordable regions that require far less of your income. Otherwise, it may be wise to wait for the market to balance to buy or sell.