Can Toronto Afford Million Dollar Homes?
By now you have probably heard that Toronto’s average price for a detached home was $1,040,000 in the month of February. This is the first time the average for a detached home held above $1M for an entire month.
One Million Dollars!
Does that line ever catch our attention and make great headlines. This milestone is certain to cause many to claim the housing market has gone insane and that Toronto Real Estate is drastically overvalued. While large price appreciation should cause people to question whether housing remains a good investment, don’t let sensationalism trump rational thinking, and ask instead: can Torontonians afford to spend $1M for a detached home?
Earlier this year many people wrote about how there was such a large increase, 38% to be exact, in the number of homes that sold for more than $1M in 2014. I was about to write about it myself until I realized it wasn’t that ground breaking. As homes in Toronto continue to show strong appreciation, it’s natural to see an increase in sales in higher price segments. If you look at how many homes were selling between $900,000-$999,999 in 2013, you could have predicted a 30% increase in sales over $1M in 2014, given Toronto’s recent appreciation rates. What this increase did confirm, is that Buyers’ have an appetite to purchase homes above $1M, and we are continuing to see it in 2015.
In order to be able to afford a $1M dollar home with a 20% down payment and a 3% interest rate, you need to have a pre tax annual household income of about $165,000 (based on 32% GDS ratio). For me, the potential rental income is not as important a factor because the majority of this price segment is made up of owner or owner/tenant occupancy. The big question is: are there enough households in Toronto making over $165,000 to justify the average price for a detached being above $1M? According to Statistics Canada, in 2010, 15.6% of households in the GTA and 12.6% in Toronto made above $150,000. In February 2015, the GTA had 628 sales above $1M dollars accounting for 9.9% of Toronto home sales. This is an important number in my mind; it shows that inventory selling above $1M is in line/below the percent of people in the City who can afford a $1M home in current economic conditions.
What I find interesting about our market is the disconnect between income and home sales in the segment just below the $1M mark. In 2010, 17.3% of the GTA and 13.4% of Toronto households had incomes between $100,000-$150,000. If your household income is $100,000 with a 20%down payment, you are likely to be approved for a purchase price in the neighbourhood of $600,000. But February sales in the $600,000-$999,999 price segment made up 25% of the GTA’s sales. So we are seeing the number of sales in this segment exceeding the number of households you would expect to be able to afford to purchase in this price range (based on 2010 incomes).
In saying that, I’m not sounding the alarm. There are several reasons why this particular comparison might have some holes in it. For example, maybe this segment is made up of more first-time buyers than we would think. Many people in this price segment could be singles who subsequently combine their incomes to make their $700K house purchase. Perhaps we have seen a large increase from 2010 in the number of households with income over $100,000. Or maybe a larger than expected portion of these purchasers are being gifted a generous down payment by Great Aunt Dot (sounds like rich aunt name, right?) making their monthly mortgage payments that much more affordable. This price segment also has more potential to attract a larger number of downsizers who bought with equity from their $1M sale, but don’t have a household income to support the purchase.
Some people have used this Million dollar news to highlight the price discrepancy between condos and detached houses, I think that this can be misguided. The average condo continues to shrink in size while the square footage of a detached home and the amount of renovations invested in them continue to increase. We often see smaller detached homes taken down and replaced with brand new monster-size homes, which has an impact on the average price for detached in the city. More can be done to increase the value of a detached home than to a condo, and that will always be true; therefore, detached values will continue to far exceed condo prices.
There is always the possibility that the average price for a detached home could become overvalued, especially if we continue to see aggressive price appreciation in a short period of time. However, based on current interest rates and 2010 income levels, the average price for detached home is in line with the percentage of Torontonians who can afford them. If we see big changes in income levels, employment, interest rates, inventory, or strong price appreciation pushing too much of Toronto’s inventory above $1M, things could change. We should be keeping an eye on the number of Torontonians who can afford to spend $1M or more for a home and the number of sales in this price segment, but don’t expect us to see prices for a detached home in Toronto pull back in the immediate future. After all, Toronto should be a Million dollar city, right?!
