The average selling price of a house in our nation’s capital has doubled in six years. How many people can say the same of their paycheques?

Most anyone who entered this period of over-exuberance in the housing market, whether in Ottawa or elsewhere, as an existing homeowner has an obvious advantage. If their existing home has appreciated in value at the same pace as the rest of the market, their current equity will be as equally extraordinary as the purchase price of their new home.

Of course, that’s assuming they don’t find themselves caught on the wrong end of an unexpected bidding war – something that is well within the realm of possibility in the current market.

First-time homebuyer’s burden

The real challenge confronts the first-time homebuyer.

The average house price in Ottawa is catching up with Toronto, which was once the runaway horse. Average house prices in relation to average household income are now up to a factor of almost eight times where not so long ago it was three to four times.

Add to this the additional stress test a new homebuyer must pass to qualify for a mortgage regardless of what mortgage rate they actually land with a lender.

Even a dual-income couple with respectable early- to mid-career salaries can easily find themselves frozen out of the current market. It’s enough to ask if the solution might be co-habitations that put three incomes on a mortgage.

A neighbour and veteran mortgage broker tells me he is not seeing any notable trend toward three income-earning adults sharing a roof and a mortgage to make home ownership affordable. But of course, who knows how many younger folks are living back home with their parents in lieu of taking a multires rental?

No fear of debt?

Six years ago, the average selling price of a home in Ottawa was about $370,000.

Before we even hit the full stride of this year’s spring buying season, prices are already up by brisk double digits from a year ago. Average condo prices passed $479,000 and average home prices reached $853,615 in March, according to the Ottawa Real Estate Board.

It remains to be seen what moderating effect rising interest rates and inflation may have on this momentum. But we can look to some recent stats that show Canadians, up until the new year at least, remained quite willing to continue extending their credit and piling on the debt.

On Statistics Canada’s national balance sheet and financial flow accounts for Q4 2021, mortgages remained the largest contributor to heightened borrowing, reaching $46.3 billion. (This does represent a pullback from the all-time record of $60.1 billion in the second quarter of 2021.)

How much can we bear and is debt the right focus?

The focus on debt may be looking at the wrong factor – the real question may be not how much debt Canadians have but how well can we continue to service that debt, mortgage and otherwise, relative to our income?

Reflecting on interest rates and carrying costs, current interest rates are around three per cent for mortgage debt compared to around 12 per cent circa the mid-1980s. So, the payments to carry the same amount of debt, i.e. – per $100,000 of mortgage – are way down from where they were about 35 years ago.

On the debt front, StatCan also reported that, on a seasonally adjusted basis, household credit market debt as a proportion of household disposable income jumped to 186.2 per cent in the fourth quarter.  This is the highest level on record, compared with an adjusted 180.4 per cent in the third quarter.

For every dollar of household disposable income, there was $1.86 in credit market debt (including mortgage). Compare that to the end of 2019, when the ratio stood at 181.1 per cent. (The previous record high was in the third quarter of 2018, at 184.7 per cent).

Households’ debt-to-income ratios did edge down over the past two years as “gains in real estate and financial instruments, frequently unrealized, have outstripped the growth in debt,” StatCan reported.

Umm … inflation

Pressures are building.

So too is speculation the Bank of Canada will continue raising interest rates sooner than previously expected after raising its benchmark interest rate for the first time in two years in March.

Then there is the horrid situation in Eastern Europe that is creating fresh fears and uncertainties that are rattling markets, and investment returns, the world over.

Short end of the stick

All in all, it’s not a great situation for many potential homebuyers, particularly single-income households.

We can also cite a number of contributing factors here at home – such as the apparent shortage of new housing stock, or homebuyers who increasingly want more square footage of more-costly-to-build houses.

Higher expectations for sure (look at how people got by with “strawberry box” homes following the Second World War).

New government intervention?

Maybe, but what? Past efforts have more often than not had the opposite from the intended effect.

Many years ago, a colleague who had worked for Canada Mortgage and Housing Corp. would joke to me that the only thing his agency accomplished was to make housing more expensive.

We certainly don’t need more of that and making it easier to borrow doesn’t always result in what was intended.

The coming year promises to be another interesting one. All we can do is wait and see.

I remember back to the time of my grandparents who bought their house at the top of a bull market in 1920 – another period of major societal disruptions, as now. When my father sold that house 30 years later, all he got was the same price his parents had paid for it three decades earlier.

To discuss this or any valuation topic in the context of your property, please contact me at jclark@regionalgroup.com. I am always interested in your feedback and suggestions for future articles.