Monday, September 7, 2015

Home Price Increase Covered by Family Income Growth


Searching for the source of the increase in the prices of residential real estate in Canada, we looked to the growth in home buying power that comes from increases in family income. We found that family income growth covers virtually all of the growth in home value in most major markets - find out how below.

Looking at the average after tax income for Canadians* and specifically tracking the middle 60% of the country, we have come up with a growth in buying power benchmark of 75.4% from 2005 to 2015.  This number was calculated using an inflation adjusted change in family income with the change in prime rate factored in. To arrive at the buying power number we used a mortgage affordability calculator like the one on TD's website (https://tools.td.com/calculators/mortgage-affordability/). Taking the prime rate as a relative borrowing cost bench mark in December of 2004 a 4.25%, and the current prime rate of 2.7%, we found that buying power growth very closely tracked the home price index (surprise surprise).

Toronto and Calgary are above the national home price index** for the 10 year period so it would make sense they are above the national buying power increase bench mark (Calgary has a much higher average family income than most other markets).  Vancouver is nearly equal with the buying power benchmark and most other urban real estate markets are below.  

It is amazing how much media coverage and how many sensational stories on the potential demise of the market ignore this primary benchmark for home affordability economics. If the buying power bench mark drops due to family income decreasing and the prime rate increasing they would would expect to see home prices go down. Otherwise, as inflation drives up family incomes the home price index will continue to appreciate right along with them.

*Source: ESDC calculations based on Statistics Canada. Table 202-0703 - Market, total and after-tax income, by economic family type and after-tax income quintiles, 2011 constant dollars, annual, CANSIM (database). These numbers were modified back to non-inflation adjusted with CPI to match the non-inflation adjusted home price index. Found by website link http://well-being.esdc.gc.ca/misme-iowb/.3ndic.1t.4r@-eng.jsp?iid=22