BUSINESS

Soaring out of reach

Home ownership is becoming more difficult

JOHN DeMONT June 26 1989
BUSINESS

Soaring out of reach

Home ownership is becoming more difficult

JOHN DeMONT June 26 1989

He grew up in a four-bedroom brick bungalow in North Bay, Ont. And, after he moved to Toronto in 1980, Gary Gauthier took it for granted that one day he would own his own house. But a decade later, Gauthier, a 30-year-old computer analyst, and his wife, Carole, an executive secretary, live in a two-bedroom $600-a-month apartment in the Toronto suburb of Scarborough. And, despite a combined family income of more than $55,000, Gauthier says that he now has little hope of buying a home. “It is out of reach,” he declared. “The only chance we have of owning a house in Toronto is if we win the lottery.”

Gauthier’s predicament has become commonplace in a number of cities across Canada, where four years of soaring housing and property values have pushed the price of a home beyond the means of thousands of Canadians. According to a report released last week by the Royal Bank of Canada, the average Canadian household spent 44 per cent of pretax household income to cover mortgages, property taxes and utilities to carry the cost of an average detached bungalow during the first quarter of 1989. That compares with 37 per cent of household income just three years earlier. Concluded the Royal Bank: “Escalating housing prices in the last three years, together with recent relatively high interest rates, have made housing affordability a serious problem for Canadians.”

The problem is most pronounced in Ontario—particularly in Toronto, where the average price of a detached three-bedroom bungalow has soared to $264,000 from $124,000 during the past three years. According to the bank, that has pushed the price of a starter home out of reach for 80 per cent of Toronto families. As well, Toronto’s high housing prices have pushed the cost of living in the Ontario capital even higher than in New York City, according to a recent survey by Toronto-based management consultants Runzheimer Canada Inc. Consumers are also being priced out of the market in Vancouver, where the price of an average bungalow on the city’s east side has climbed 67 per cent during the past three years to an average of $220,000—a level at which the Royal Bank said about 70 per cent of the city’s households could not qualify for a mortgage. Even so, there are still many cities where houses are affordable, particularly in the Atlantic and Prairie provinces.

But there is mounting evidence that Toronto’s real estate boom is over. The number of sales of new houses in May fell by 64.2 per cent from the record level during the same month last year, according to figures released last week by the Toronto Home Builders Association. At the same time, the number of Ontario apartment-building dwelling units started to the end of April this year—including condominiums—is down by 49 per cent from a year earlier. Explained Wayne King, vice-president of Brethour Research Associates Ltd., a Toronto-based real estate research company: “Wages simply have not kept up with housing prices, and people are being forced to stay on the sidelines.”

There is wide disagreement on where Toronto real estate prices are headed. Among the most pessimistic observers is Jeffrey Rubin, an economist with Toronto-based brokerage firm Wood Gundy Inc. In a report released on May 31, he predicted that high interest rates and a slowing economy would dry up demand, forcing housing prices to drop by 17 per cent nationally and by 25 per cent in Toronto over the next 12 months. Rubin added that the downturn will slow consumer spending and weaken the country’s economy. “As households adjust their savings rate to a decline in net wealth,” his report declared, “we are likely to see a major retrenchment in consumer spending in southern Ontario, setting the stage for a national recession by early 1990.” The Royal Bank report was less startling but even it forecast a modest price drop in Toronto home prices over the next 12 months as the pace of economic activity eases and the flow of newcomers into the city slows. Some analysts also predict that condominium prices, which have also increased sharply in recent years, could drop by as much as 20 per cent in Toronto during the same period.

For their part, spokesmen for the Toronto real estate industry, which has a vested interest in keeping prices high, dispute any suggestion that Toronto’s bull market has finally ended. David Higgins, a senior vice-president at Royal LePage Real Estate Services Ltd., the country’s largest full-service real estate broker, predicts prices will weaken over the rest of the summer but recover enough to register a small overall 12-month gain by year’s end. He added that prices would continue to increase during 1990 because of a continuing influx of newcomers into the city. Added real estate analyst Wayne King: “Anyone who expects housing prices to crash in Toronto will be waiting a long time.”

First-time home buyers in Vancouver can also expect little, if any, relief from high prices. Experts say that, although the dramatic rise in the city’s real estate prices may slow, there is little chance of an actual decline. The main reason: strong employment growth will continue to attract people to Vancouver. At the same time, large numbers of Hong Kong immigrants are moving to Vancouver because of concern about what will happen when Hong Kong reverts to Beijing’s control in 1997. Analysts say that, if anything, the recent upheaval in China will cause the exodus from Asia to Vancouver to gather speed. Said Brian Calder, president of the Greater Vancouver Real Estate Board: “The dynamics of Vancouver’s real estate market are totally different from anywhere else in the country.”

Even so, Vancouver’s supercharged market may not withstand a further increase in interest rates. Bank of Canada governor John Crow is showing no signs of abandoning his inflation-fighting program, which is based on keeping interest rates high. Indeed, last week, Statistics Canada reported that the annual inflation rate was five per cent in May, its highest level in five years. And analysts say that further interest-rate increases would make mortgage costs prohibitively high for potential homeowners. For the Gauthiers and thousands of other Canadians like them, the dream of home ownership will likely remain just that for years to come.