70% of Gross Income Needed for Vancouver Homes!

I was reading CBC news online the other day and an article caught my eye. The title was “70% of pre-tax income needed to buy home in Vancouver“. I had to take a double take because it said 70% of PRE-TAX income. I mean, after taxes, what does that leave you with? Another question is, how did these people get qualified in the first place? In my article, Qualifying for a Mortgage, banks require that your household expenses not exceed 32% of your gross income!

For our specific situation, we will have a Gross Debt Service Ratio (GDS) of around 17%-18% for our new home, and I’m already feeling the pinch! ;)

What I also found interesting about the article were the pre-tax income required stats for other parts of the country. 43% in Toronto, 40% in Calgary, 35.4% in Montreal and 30.5% in Ottawa.

I think it would be interesting to see some GDS stats and city of some of the home owner readers if you don’t mind posting them in the comments.

You can read snippets of the article below:

… If you can live on 30 per cent of your pre-tax household income, RBC Economics says you can afford to own a home in Vancouver.

… shows you’ll need most of the other 70 per cent just to pay the mortgage, utilities and taxes on a two-storey home in one of the country’s hottest real estate markets. The survey also shows that two-storey homes are comparatively more affordable in Vancouver, thanks to levelling prices. But the same can’t be said for the city’s bungalow, townhouse or condo markets.

… prices in those markets continue to rise as buyers focus on smaller properties as their only affordable option. And despite moderating prices for single detached homes, the survey reveals home ownership in Vancouver remains dramatically more expensive than anywhere else in Canada. RBC’s numbers show 43 per cent of pre-tax income is needed to meet mortgage payments, utilities and property taxes in Toronto, 40 per cent in Calgary, 35.4 per cent in Montreal and just 30.5 per cent in Ottawa.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Andrew
13 years ago

My wife and I live in Vancouver, and are currently scouting to buy a home. We’re very fortunate in that we have zero debt. On the other hand, we’re self-employed freelancers in the film/TV biz (writers), so our household income, well, let’s just say it tends to “sway”. It always shapes up to a decent haul at the end of the year, but sometimes nobody’s making a dime between contracts. Not for the faint of heart!

Our criteria is to try and pay the same mortgage-only amount that we’re already paying in rent ($1600 for the main floor of a house in central Vancouver). Doing this does seem quite feasable if we were to find a bungalow or small 2-level that has a basement suite rental (the vacancy rate here is quite low) in up-and-coming central neighborhoods. Decently-maintained homes like that, in those neighborhoods, are asking, very roughly, $580K – $715K.

I think it’s important to keep in mind that as an investor-slash-proud homeowner, one isn’t about to buy just anywhere in “Vancouver”, or in any city for that matter, but of course one tries to find the best potential value by buying in relatively underpriced micro locations that are likely to grow and become more desireable. My sense is that locations that are already very (okay, insanely) expensive–can you say, “Kitsilano”?–are in a way riskier. I mean, I’ve seen houses a few blocks west of Main that are comparable to ones a few blocks east of Main, yet their asking price is $100K more! Which side of the street would you buy on? I also have a sense that the condo market has pretty much reached a glut-level supply, and is looking vulnerable to a correction.

On the other hand, a great screenwriter once said about making successful movies, “Nobody knows anything”, and I think that’s probably applicable to making pronouncements about Vancouver real estate. I think a more accurate comparison than NY or London is San Francisco: we’re a peninsula, the climate’s mild, the growing season’s long, the outdoor pursuits are endless, the natural environment is stunning. Our realtor tells us that Albertans are investing in houses here, which is adding to demand. Who really knows what effect the Olympics will have on the market–the only thing certain is we’ll get a lot of new rec. facilities out of it.

Personal Finance Article Round Up! - Million Dollar Journey
13 years ago

[…] 70% of Gross Income Needed for Vancouver Homes! (29 comments) […]

Gates VP
13 years ago

Hey nobleea;

renting is usually a financial decision. Buying a home is usually only partly driven by financial considerations.

Couldn’t have put it better.

I’m seeing the same stuff in Edmonton, tons of new places, but I knew that it had to happen b/c the economy was going to burst. I don’t think that prices are going to suppress back down to 5 years ago, but they will drop 5% off January’s highs. We’ll see how long the madness lasts though. We may have solved the “home crisis” for this upcoming year, but the real issue here is getting rents that are affordable for “the masses”. Starting Tim Horton’s at $11/hour doesn’t do anything when the rents all cost 1000+.

With house prices where they are, rent will either go down (and be a bargain) or businesses will be forced to jack up prices ($2 for an XL double-double) to keep up with wage increases.

It sounds like Saskatchewan is already growing pretty strong, it’s definitely being advertised as a bargain, and Edmontonians who bought in the last few years just won the housing lottery, but only if they’re willing to move elsewhere and cash in their gains :)

mjw2005
13 years ago

We live in Vancouver. We are a working-class family and bring in an annual income of around $95,000 a year. I have run the numbers and there is just no way we can afford to buy any house in Vancouver and probably most condo’s in Vancouver and still save for Retirement or have any sort of life as almost all our income would be sucked into basic living and paying a monster mortgage.

Instead I have adopted the strategy of renting in a very nice downtown location for about $900.00 a month and saving and investing the difference that I would be paying in a mortage. Maybe one day there will be a market correction…that is when I will buy….

Why are prices so high….well it is not the wages…the average working person I would say earns from $35,000 – $65,000…I think it is because Vancouver is a nice place to live and I see a lot of wealthy foreign buyers buying up properties as a summer place or a secondary property. Vancouver prices are still reasonable when compared to New York or London. The only problem is that the average workers wages are stuck at levels more in-line with places like Winnipeg or Hamilton…

lrempel
13 years ago

My husband and I purchased a house in Richmond (suburb of Vancouver) in Feb 2006. We purchased it joint with my husband’s aunt because there was no way we could afford to buy a house ourselves. The house is ~2400sqft (and almost 40yrs old) and we purchased it for $533K (our portion was $266500). It could easily sell now for $600K+. Currently, our GDS is 26%, so I can’t imagine if we owned the whole place (GDS of 52%!!).

bootsie
13 years ago

Our GDS is ~10% (where does all our money go?!?! ;)). We live in Windsor, ON.

moneygardener
13 years ago

My GDS = 12% – Brantford, Ontario

nobleea
13 years ago

PS, my GDS is a shade over 18% in Edmonton (condo), but I bought a few months before the big runup last year.

Depending on the area and type of housing, it’s $320-$600/sqft here.

nobleea
13 years ago

Prices in Edmonton are going to slow down soon for most areas. There’s 3-4 times the amount of inventory for sale than there was a few months ago. Even now, some new condo developments are including buyers incentives to try and sell some units (like a free 46″ TV or hardwood) because they just aren’t selling (at least not at the inflated prices they were asking). I notice a lot more For Sale signs out these days. Rents should sort themselves out because renting is usually a financial decision. Buying a home is usually only partly driven by financial considerations.

Edmonton has been historically cheap and most of the price run up was a realignment to match the big city status. But speculators and emotions are running it up higher than it should be.

I also see a lot of ads for Saskatchewan extolling the virtues and cheap land.

Gates VP
13 years ago

Hey Qubikal and some others, I’m a new Edmontonian (last 6 months) and I can tell you that the housing prices are kind of crazy.

And you’re right about the oil money, but only somewhat. You see, we’re undergoing some massive growing pains right now. The Edmonton rental market is getting out of a decades-long slump and now apartments everywhere are full and the renters are jacking up the prices. One bedroom apartments in non-prime locations are going for 1000+ / month.

So even though every McWorker is bringing in $10/hour, they’re not doing much better than than those in Manitoba bringing in $8/hour and renting for $600/month. So wage increases are matching housing prices increases (and vice-versa) creating a kind of parity.

So Edmontonians home buyers are a little less crazy than Vancouverites home buyers, but the situation is still a little out of hand. Making 80k here instead of 65k in say Saskatchewan, doesn’t really justify the difference between the 300k Edmonton home vs. the 100k SK home. In fact, given the serious issues with build quality over the last few years in Edmonton, that SK home is probably a safer bet.

As to those Vancouverites? Well, they’re making a serious “lifestyle” decision to own a Vancouver home, b/c there is little inherent value to a Vancouver home that makes it worth 4 times as much :)