Honesty

Honesty

Pay attention. There’ll be a test later.

What does the average family in Toronto earn in a year? $96,040.

How much does the average home cost in the GTA? $481,548.

What portion of pre-tax household income is needed to own a house in Toronto? 52.1%

And what’s that called? ‘Affordable.’ Actually, this exactly how Royal Bank economist Craig Wright puts it in RBC’s latest study: “Housing affordability levels are quite good… and will pose little threat to overall housing demand.” In fact, adds the bank, even though house prices went up, jobs went down and household income atrophied in the last few months, owning a home in this desperate country just got ‘slightly more affordable.’

What does this mean? Are houses really getting easier to own? (If so, time for this pathetic blog to get bombed and go for a long, final Harley ride in the snow.)

First, here’s the way the bank determined this affordablility thing:

Our standard RBC Housing Affordability Measure captures the proportion of median pre-tax household income required to service the cost of a mortgage on an existing housing unit at going market prices, including principal and interest, property taxes and utilities; the modified measureused here includes the cost of servicing a mortgage, but excludes property taxes and utilities due to data constraint in the smaller CMAs. This measure is based on a 25% down payment, a 25-year mortgage loan at a five-year fixed rate and is estimated on a quarterly basis. The higher the measure, the more difficult it is to afford a house.

But wait. The average downpayment in Canada these days ain’t 25% – it’s actually one third that amount. So the average mortgage for a new buyer is more like 93% of a property’s value, not the 75% used here. And because of the higher assumed downpayment, the bank’s numbers do not include the cost of mortgage insurance, which almost all buyers add to the principal (and end up paying it three times over). Mitigating that a little is the use of a 25-year amortization, because nine out of 10 new mortgages today are lifers – the full thirty – which brings the monthly down a tad.

In any case, after paying tax on an income of $96,040, the average Toronto family would have $70,708 left. But wait, the RBC study calculated the cost of owning a house in pre-tax dollars. So, 52.1% of that is $50,036. And when we suck that amount from the money the family actually bring in, the difference is $20,672. This is $1,722 a month.

From this we need to deduct house and car insurance (I’ll estimate $3,000 total over a year), car payments and gas ($9,600) and food for a family of three ($6,000). That leaves $39 a week for clothing, medical expenses, vacations, entertainment, cable and net, Timmy’s and RBC bank service charges. And I forgot booze, stimulants and leopard print panties, which are obviously necessary in such a situation.

This is affordable? And let’s remember the study takes place in a Beaver Cleaver world where everyone has $100,000 to plop down on a home, where property taxes don’t go up (unlike Toronto), furnaces don’t croak, kids don’t covet Xboxes, dogs don’t need vets, nobody takes trips, mom knits your underwear and makes a great pine needle casserole, and you have absolutely no future need for savings, investments, retirement plans or a TFSA.

This, of course, describes the actual existence of the average RBC economist. You can spot them on Bay Street, walking funny.

In short, the bank should be ashamed of itself for publishing such crap. The media which ran the ‘Houses more affordable, study says’ headlines should be even more ashamed. We can excuse (sort of) RBC for wanting to keep its mortgage business robust, but not the reporters, paid to be our filters. Every young couple encouraged to buy into this – one of the most dangerous housing markets of a generation – by the bank’s words is being deceived, misled and failed. I expect more from the guys in the gold tower.

Finally, for comic relief, the same economists say it takes 90.6% of the average pre-tax income in Vancouver to carry a house.  That’s $75,315 a year. Sadly, the after-tax income of Van families is (on average) is $64,162. Add in food, a kid and a car and that household’s under water by $29,753. This is why BC has a negative savings rate and why Vancouver’s doomed.

Average Van house: $622,955

Average Van income: $83,130

RBC: Priceless.