Our Parents’ First Mortgage

81% 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

Keep 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