How to Measure Affordability - Toronto & Vancouver v.s. Other Provinces in Canada


Canada needs 5.8 million new homes by 2030 to tackle affordability crisis!


It sounds like a very alarming headline.


But when you think about it, it actually doesn’t tell you much.


How do you measure affordability?


What number means a crisis?


What is the number that gives everyone affordability?


It says we need 5.8 million new homes, sounds like a huge number.


But how far are we from that target? 1 million? 2 million? 3 million?


Let’s answer all these questions before we decide whether the headline is indeed alarming.


The headline is actually a conclusion from a recent report by the Canada Mortgage and Housing Corporation.


The report says CMHC exists to make housing affordable for everyone in Canada.


So they did the research and analysis to see what our country needs to do to achieve their goal.


First off, let’s see how they measure affordability.


There are 2 numbers involved.


#1 The total housing costs. This includes mortgage payments, insurance, maintenance and so on.


They calculate this number based on an average home and it’s going to vary from province to province across Canada.


#2 Income. This will be average disposable income, the amount of money you actually get to spend after paying taxes.


Again, this number is going to be different depending on which province you’re looking at.


Now if we take total housing costs divided by disposable income, we know what percentage people’s income is spent on housing, on average.

This is called the affordability ratio.


Let’s take a look at Canada overall from 1990 to 2021.


Back in 1990, people spent more than 50% of their income on housing.


We complain about a 5% 5-year fixed mortgage rate now, do you know what the rate was back then?


13.25%


Then as the rate went down, the affordability ratio also went down to around 40% or so.


It started going up again after the Great Recession in 2009 and is now approaching the 50% mark again.


Let’s take a look at 3 different provinces separately.


British Columbia, primarily driven by home prices in Vancouver, as you can see, is quite significantly above the Canada line.


Ontario, primarily driven by home prices in the Greater Toronto Area, very interesting, notice how it had been tracking the Canada line until 2017.


A gap started opening up and it took off after the pandemic to almost meet that BC line.


Indeed, that’s what we have been seeing, right?


Toronto home prices used to be quite a bit cheaper than Vancouver.


But in recent years, you can feel that they’re almost the same.


What about Alberta?


It’s roughly 10% below the Canada line, meaning people only spend around 30 to 40% of their disposable income on housing.


You might have heard some investors moving some money over to Calgary because of the much lower prices.


You can decide whether that’s a smart move when we analyze the next set of data.


Now, let’s zoom into 2021.


In BC, the average home price in 2021 was $929,000 and people on average spent 60% of their income on housing costs.


In Ontario, average price, $871,000. Ratio, 59%.


In Alberta, average price, only $426,000. Ratio, 31%.


Here comes the big question.


What’s the ratio that we need to achieve so housing is affordable for everyone?


According to CMHC, 40% is a good target to achieve.


As we all know, prices go up because there’s more demand than supply.


So how much more supply do we need to create in order to get to that 40% affordability target?


CMHC did the calculations by estimating the demand for housing in 2030 based on projected incomes, population growth and interest rates.


Here are the magic numbers.


In BC, we would need to build an additional 0.62 million housing units, that’s 24% more than what we are planning to build by 2030, in order to reach that 40% affordability.


What about in Ontario?


We would need to build an additional 1.63 million housing units, also 24% more than what’s planned in the pipe.


It’s a very big question whether it’s even feasible at all to increase our construction labour and materials by 24% in 8 years’ time.


Let’s take a look at Alberta.


In 2021, the ratio was only at 31%.


If we just continue at the same rate we’re building today, the ratio will still remain at around 31% in 2030.


In basic economics, when supply and demand are in equilibrium, prices stay the same.


So if you’re looking for that big appreciation in Calgary, Alberta, it’s unlikely to happen.


Here’s the thing.


If 40% is the affordability target, then really only 2 out of the 10 provinces in Canada need attention.


British Columbia and Ontario.


You see, Vancouver and Toronto are 2 huge magnets attracting people into the 2 cities.


People can choose to go to other cities where affordability is readily available.


Yet, they still want to come to Vancouver and Toronto.


Big cities have their own charisma that people love, the job opportunities, the vibrant lifestyle, so on and so forth.


And if you really think about it, expensive housing is a problem that every big city has to face.


Can you think of a popular big city in the world where housing is so affordable?


None.


When a lot of people demand to live in the same city, prices go up.


If the popularity of all 10 provinces in Canada is not the same, then does it make sense to expect the same kind of affordability for all provinces?


We can argue about a lot of numbers in the CMHC report, but if there’s 1 general take away, it’s that demand will exceed supply all the way to 2030 and beyond for Toronto and Vancouver.


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