Our Parents’ First Mortgage

Homeownership-cost-and-affordability81% of Ontarians say it’s more difficult to own a home now than it was for their parents. That comes from this Ipsos Reid/Ontario Real Estate Association survey.

That’s interesting because our parents had to put down 25% to purchase a home. Young buyers nowadays can get their foot in the door with just 5% down.

On the other hand, monthly payments are tougher to swallow today, even with longer amortizations. (We know RBC’s affordability report finds differently, but it assumes 25% down, which is a chore for today’s more indebted young buyers).

If you’re a twenty-something who’s home shopping, here’s a look at what your folks might have paid to buy their first house 25 years ago.

In 1984, the average minimum mortgage payment would have been roughly $628, or 18% of a married couple’s gross income, based on a:

  • $77,342 average house
  • $41,348 median couple’s income
  • 25% down payment
  • 12.74% five-year fixed rate
  • 25-year amortization

In 2011, the average minimum mortgage payment is about $1,622 or 25% of a married couple’s gross income, based on a:

  • $372,700 average house
  • $77,198 median couple’s income
  • 5% down payment
  • 3.69% five-year fixed rate
  • 30-year amortization

Mortgage-payments-to-incomeKeep in mind, the above is only meant to compare the “minimum” mortgage commitment required to buy the average house in 1984 vs. 2011.

It’s a different story if you’re a first-time buyer who has been diligent enough to save 25% of your purchase price. In that case:

1)  We’d like to shake your hand; and,
2)  Your payments would be only marginally less affordable than your parent’s payments 25 years ago (i.e., 20% of a couple’s income today, versus 18% in 1984—based on real income).

Regardless of how you slice and dice it, it is harder for many young people to afford a home today, as OREA’s survey suggests. That’s true despite drastically lower interest rates, smaller down payments, and longer amortizations.

Note, however, that we say “many” in the preceding paragraph and not “all.” That’s because affordability ultimately depends on where you’re buying. CREA’s current $372,700 average home price is materially skewed by Vancouver and Toronto. Young buyers who don’t live near a major downtown core may find mortgage carrying costs far more tolerable.

Date sources: Home prices: CREA. 1984 Median income (married couples): StatCan, deflated from 2009 dollars. 2011 Median income (married couples): StatCan, inflated from 2009 dollars using 2% annual wage growth estimate. Five-year fixed rate in 1984: Bank of Canada.

Rob McLister, CMT

  1. This clearly shows that low interest rates, longer amortizations, and smaller downpayments do NOT help affordability in the long term. All it does is rising the home prices to a level such that the mortgage payments would represent the same percentage of one’s income.
    Now that the above factors seem to start reversing, what will that do to the house prices?

    1. Can you imagine what’s going to happen once the interest rates rise even just 1% on all these young people who are completely maxed out on their payments already? They are going to Loose their Shirts!
      Seems that nowadays even 20 something year Olds Must have granite counters and stainless steel appliances + the largest house including an income suite. Do they really think that interest rates will stay Below 5% for the duration of their 30+ year term? Not to mention there are far too many income suites available (and empty) as all the renters Bought homes therefore leaving the rental market. And so many people are willing to risk it all. Just to show off to their friends!
      They will be crying the blues soon enough when the bank takes the house back and any equity is lost in the process.
      And all the savy investors are all waiting in the wings to lowball on the price.
      I see for too many homes being reposed as it is. I just shake my head as to why a young couple would max themselves out… and risk their futures because of it.
      But to each their own I suppose…
      Time will tell when/if history repeats itself. As it Always does. Anyone who knows anything knows that past history DOES repeat itself. I just hope they don’t have small children who will be homeless or have their college fund depleted because of their parents need to ‘show off’.
      Not smart!

  2. Regardless of how you slice and dice it, it is harder for many young people to afford a home today, as OREA’s survey suggests.
    A look at house prices relative to household income demonstrates this in spades. As Dom mentions, “affordability” factors like long amortizations and low interest rates just end up boosting prices in the long term.

    1. Yes I absolutely agree! And when those interest rates go up. Which they Will. House prices will absolutely drop!
      Nothing for them to do but be forced to sell at a huge loss! Either that or hand it straight over to the bank!

      Don’t get in over your head! Buy something that you can still afford should the interest rates suddenly soar! Keep a Close eye on it also, especially if you have an open mortgage or one with fluctuating rates! This could bite you Real hard.

      History has a habit of repeating itself. As Everything comes full circle!

  3. In terms of job prospects, an undergrad degree today is what a high school diploma was in 1984 and back then a post-secondary education was so cheap and heavily covered by bursaries that student debt was almost non existent. Not so today!

  4. Immigrants flooding into our major cites are also balooning prices, especial Asians in Vancouver.

  5. then – 20 some years ago – more like 25 years , dad was single earner 75,000 per year , 3 kids , and nice new home in the burbs was 65,000 , and he drove a used Pontiac sedan lol – backyard pool was vacation .
    now – wife and i , both earners , combined 141,000 , NO kids ( dinks ) nice new home in the burbs 430,000 , new VW’S in garage and cuba vacations . no debt pressure at all , but funny the extreme , i think alot of under 40 somethins can tell the same similiar story .
    Great site – if i dont get a daily fix i go nuts !

  6. CMHC is the primary cause of this affordability problem.
    Here’s an equation for you:
    Today’s prices – CMHC + normal interest rates = affordable homes

  7. 1.9 times yearly income versus 4.8 yearly income. Enough said. Houses cost twice as much as they did before. Times yearly income is the only useful metric because most of our parents didn’t carry a mortgage for the entire term (why would you if interest rates are 13%+) when they could sacrifice just 2 years income to pay it off. Saving 5 years income is just crazy.

  8. To Stats
    Here is something you might not know. You can’t control interest rates!
    You can’t control immigration either.
    For that matter you can’t control people demanding to live in great cities like Toronto and Vancouver.
    All these things drive up home prices. Down payment and amortization are only two of many things that affect values.
    When I see uninformed remarks about mortgage insurers I cringe. Removing government support for housing would immediately cause an asset collapse and force millions back into renting, thus driving up rents! If you can’t see that then may I suggest a basic course in economics?

  9. Price to income ratios are but one of the useful metrics of which you write. Without factoring interest rates into the equation, you are only revealing part of the story.

  10. To a buyer, the only thing that matters is the overall price of something unless the interest rates are at extortion levels where the buyer can’t make headway on the principle.
    Someone that lived at their parents for 2 years could buy a house for cash yesteryear. Would you want to do that for 5 years? What about living at your parents for one year (saving 50% downpayment), then paying off your mortgage in the second or third year.
    Price is all that matters. Interest rates are a much smaller part of the equation.
    It’s the borrowing that’s killing people on home ownership and this is directly linked to low borrowing costs. Time and again, this has been shown. What have easy access to student loans done to the cost of tuition? You just can’t meddle to make things cheaper without messing it up.

  11. This isn’t a post about rents – I’m referring to the price of houses. If you eliminate the CMHC-backed 5% down / 30-yr amortization buyers and have rates a few points higher, house prices would be lower.
    And – of course no one would expect CMHC to magically dissapear overnight.
    However, to bring house prices back a bit closer to the historical levels mentioned above, one key thing that should happen is a return to the CMHC standards of the past (pre-2006 changes to expand amortizations etc., and pre-2003 when the maximum mortgage limit was removed).
    Even Fannie and Freddie in the U.S. have maximum mortgage limits.

  12. Sorry, Chris, Appraiser is right and you are wrong.
    What matters for most buyers is the monthly payment (a mistake on their part, but so it is). The monthly payment is a function of interest rates and price.
    Comparing prices to incomes without factoring in interest rates is an essentially meaningless proposition–much like assessing prices or dividend yields on stocks without benchmarking them to bond yields. The cost of capital in the market is always the single most important determinant of the real value of an asset.
    What I find disturbing about this article is the IPSOS -Read OREA survey, which concludes that since young people are having rational difficulties with prices at these levels, the rational thing is for the government to step in and subsidize their first home purchases further.
    As a homeowner, I would like to see prices stabilise normally, even if that means a bit of a pullback as interest rates rise. We don’t need more government priming of an already overheated market. As our neighbours to the South found out, this will only end in tears…

  13. I never denied that buyers only look at the monthly cost.
    But so what, it’s not the monthly carrying cost that’s killing people. This article proves that; as costs are almost the same across generations.
    Most buyers aren’t rational and have no idea why they are worse off than their parents, or what to do about it, they just know they are.
    What is killing them is the overall price versus income. It’s the only metric that matters as a buyer (of anything).
    My tenants seem really happy lately…for the last few years they grew grumpy probably in response to not owning their own home. I think they realized just how screwed their friends are compared to them and turned a new leaf.

  14. But immigrants have “flooded” into our major cities in previous years, even as real estate fell. The HK influx into Toronto in the early 1990s comes to mind.

  15. …The monthly payment is a function of interest rates and price….
    … and down-payment size. The lowering of down-payment requirements has had a huge effect — first-time buyers in 2011 have much less “skin in the game” than their parents ever did.
    The numbers from Rob’s example are instructive. While the 1984 “median” couple needed to save six months of salary for the down-payment on a home costing 1.8 times their income, the 2011 “median” couple only needs to save three months of salary for a home costing 4.8 times their income.
    These are the fruits of a whole new attitude towards savings and debt.

  16. Is it because people actually can’t save anymore, or is it because they don’t want to save anymore.
    What if more people lived a 1984 lifestyle? This type of exercise amuses me. What did people really spend their money on in 1984 versus today? Do our trappings keep us down? Did they have two cars? Did they have all the toys we have now? What if we lived as our parents did, would we enjoy the same quality of life?
    I happen to think so…but without seeing how the numbers crunch down, it’s hard to say. I do know that if people can avoid spending on luxuries, they can afford to work about 1/3 as much as the next guy. It’s all the wants that are killing people. We live in very affluent times historically, but our greed puts us into slavery.
    Google “mr money moustache” and “extreme early retirement.”

  17. Is it because people actually can’t save anymore, or is it because they don’t want to save anymore.
    LOL… it’s kind of a chicken-and-egg question, isn’t it? The middle class has always aspired to luxury, but it’s really the wide availability of credit (which really kicked into gear after WW2) that has made luxury items accessible to them (and everyone else) In the process, our overall attitude to debt has changed.

  18. What the middle class is suffering from is their narrow view of their historical position in the world.
    We can easily live like Kings (historically), but we still aspire to something greater. It’s the disease of “more.” It never goes away either. And then everyone compares what they have to what people they know have, and it only gets worse.
    I bet if you had what your parents had, you’d be financially as comfortable. And yet you have two cars, garage full of crap, computers, entertainment centers and gadgets galore (replaced more than once a year now). Think back 25 years, imagine what you a person had then…aspire to that and be free.
    Do you know how many people tell me I need a cellphone? Ridiculous.

  19. “To a buyer, the only thing that matters is the overall price of something” – Quote from Chris L.
    I couldn’t disagree more. The overall price is secondary. The monthly payment is what matters to most people, especially younger buyers. If people could get a million dollar house for a $1,000/month mortgage payment we’d all be living in mansions.

  20. It’s not very smart to only look at monthly costs when you’re buying something. That’s what you call renting.
    Any amount borrowed must come from future consumption.
    I look at the principle amount, and so should you.

  21. It is the cost of borrowing (especially relative to inflation) that encourages or discourages debt accumulation.
    Currently, variable mortgage rates (2.15%)are the equivalent of borrowing for almost free.
    That’s why Mark Carney and Ben Bernanke describe current monetary policy in Canada and the U.S. as “stimulative.”
    The most recent core inflation figure for Canada was 1.3% – “shockingly low” as described by some economists.
    I’m beginning to sense that interest rates are going to stay very low by historical standards for quite some time.

  22. The monthly payment is what matters to most people, especially younger buyers.
    I’d be interested to know if this has always been the case. Were there similar attitudes to home ownership in, say, the 1980s?

  23. Re: “Is it because people actually can’t save anymore, or is it because they don’t want to save anymore?”
    A bit of both and a more. I know most of my cohort (late 20s) are saving furiously for retirement because they know they can’t count on pensions. Taking money away from that long-term savings to buy a house is a risk.
    It has also been made very easy to spend money, thanks to the internet, to make purchases that havign to exit the house, take money out the bank and go and buy would have discouraged. It is very easy to spend money in dribs and drabs without noticing until it all adds up.
    The falling cost of many consumer goods, particularly electronics and communication technologies, has driven many of these former toys from a luxury to a “need” –
    the total amount that many people spend on internet, cable and cell phones is surprising.

  24. There is nothing wrong with renting if the rent is affordable and you don’t plan to use your house as a nest egg.

  25. “current $372,700 average home price is materially skewed by Vancouver and Toronto”
    We’re livin’ the dream here in Prince George! The average house price is $250K and only 10 minutes to work. One income is more than enough and makes for a stress-free life!

  26. C’est bien! I will do one better. We in Saguenay, QC have houses at $179,000 average and we walk to work! :)

  27. Prince George, “Canada’s most dangerous City” Oct 2010 Maclean Magazine third annual crime survey.
    Stress-free life is not what immediately comes to mind!

  28. My first thought on reading this was related to survey methodology, specifically “why would OREB think that Ontarians (or any Canadian, for that matter) would have an accurate understanding of how difficult it was for their parents to afford a home?”
    I suppose they were simply trying to get at perception, and could possibly have been seeking support for their policy proposals, but I would think most respondents, if they were honest and thought about it, would fall into the “don’t know” category.

  29. Hi Rob,
    The comement…
    81% of Ontarians say it’s more difficult to own a home now than it was for their parents
    The comment…
    If we look back in history, RRSPs could not be used to buy a home. Later the amount went from $20K (RRSP withdrawal for a home) to $25K.
    Later, interest rates fell like a rock. Prices of homes went up like a rocket. Savings went negative. The old rules like 25% down was dropped to 20% real estate went higher. Interest rates continued to drop. Mortgages could be as long as 40 years…real estate prices moved ever higher. The common tread I see is is ever bigger mortgages.
    Unless the government prints more money for first time buyers, the rise of real estate must come down at some point…then it will be affordable again.

  30. Given all that’s happened in the US, what is the future of real estate in Canada? Are our fundamentals still sound compared to our southern neighbours and Europe (both of which have shaky real estate markets)?

  31. What would be interesting to compare is the term starter home. In 1985 I do not think that granite counter tops, soaker tubs, media rooms were part of a starter home.
    Now consumers want all the bells and whistles making the cost of building a “starter home” substantially more.
    The starter condo now has a gym, swimming pool, meeting rooms. In 1985 if a starter condo had a balcony we were happy.

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