Historical article note: This article was originally published on 2018-07-24. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
As early as February 2018, CMHC released a report claiming that it had been commissioned by the federal government to conduct a special study on the problem of high housing prices in Canada's major cities. The 225-page report is available online for free and is titled Examining Escalating House Prices in Large Canadian Metropolitan Centres. The report analyzed factors such as population, income, land supply, financial policy, and non-resident housing purchases. For Toronto, the final conclusion is that high-income households have pushed up housing prices in Toronto.
This conclusion and this report did not attract any attention in the Chinese Canadian community, and no so-called media reported it. I guess the reason for this is: the conclusion is too depressing. Why is it not the real estate speculators who push up the house prices, why is it not the non-residents who push up the house prices, but income pushes up the house prices? How embarrassing is this for low-income families and families who are still waiting for house prices to be cut in half before buying a house? According to my long-term observation, no matter which country the media is from or what era the news is from, things that are incomprehensible to the people who write the press releases are usually distorted into situations they can understand and then presented to the readers. Things that are really incomprehensible and the facts are embarrassing, simply don’t write them and pretend that they never happened. Since the advent of radio, public attention has become a product of the media. The institutions that produce news only care about how many people listen to watch or click to read. As for the content, haha, it is just a tool to generate attention. The business model of the media is to sell attention to advertisers. Therefore, if you want to know the truth about something, you cannot read media reports. Instead, you must actively search for academic articles on related topics, otherwise you will be fooled by attention merchants.
Opinion surveys show that citizens divide the reasons for high housing prices into two categories: complacency and anger. 62.3% of people believe that the reason for high housing prices is that the city where they live is more attractive, which is a sign of complacency. 52.12% of people believe that non-residents have pushed up housing prices, which is a sign of anger. 37.7% of people believe that real estate speculators have pushed up housing prices, which is a sign of anger. Only 27.74% of people believe that high housing prices are driven by job growth and income growth. Complacency and anger are precisely two important elements in the news produced by attention merchants, specifically catering to the two types of readers who feel good about themselves and those who "are always someone else's fault." Information such as "The main reason for high housing prices is the improvement in income and employment" does not have the necessary "newsiness" such as shock and prejudice, so it will not be disseminated. In the information age, the cost of understanding the truth is to filter out 99% of the noise and find 1% of the signals to use as the basis for judgment. What are the truths and signals? 3.4% of those who own real estate in Toronto are non-residents; the Golden Horseshoe region has a population of 7.14 million, and 120,000 people own more than one residential home. The proportion of local real estate investors accounts for 1.7% of the population. These people do not have the ability to push up housing prices because there are not enough people. Having mentioned so many issues with the media, I mainly want to remind everyone: You don’t need to read real estate information every day. Reading it once a month is too frequent. The most basic data on the real estate market will not appear in the “news” because the people who make the news now have neither the interest nor the ability to read professional reports, let alone pass professional signals to those who really need it.
There are two high-income industries with "agglomeration effect". These two industries are finance and high technology. The agglomeration effect refers to the super economic effect caused by clustering together. There is a branch of urban economics, Agglomeration Economics, which talks about a similar phenomenon: the bigger the city, the more it attracts financial and high-tech talents. Talents in these two fields can only perform at their best and earn the highest income in very large cities. The related services that depend on these two industries must also reside in the megacities where these two industries are most concentrated. For example, few people close a $5 million life insurance transaction over the phone or email. Seeing body language face-to-face is the key to closing the deal. Housing prices in Silicon Valley are getting more and more expensive because geniuses need to get together to communicate with each other and create sparks. Simply put, growing businesses will attract businesses that help them grow; the more developed social media is, the more precious face-to-face communication between people becomes. In addition, the "self-selection effect"/Selection effect, that is, "what kind of choices determine what kind of life", strengthens the agglomeration of high-income people in cities. For example, if an insurance consultant working in a small town chooses to challenge himself and develop in the Greater Toronto Area, he will need to withstand the housing prices in the metropolitan area and the competition from other insurance consultants in the city. Also, after the dentist obtained his medical license, he found that the competition in the Greater Toronto Area was too fierce and wanted to develop in a small town. However, he found that his spoken English was not good enough and he could only serve the Chinese community in the Greater Toronto Area. Since there were not so many Chinese patients in the small town, he could not go there and had to squeeze in the Greater Toronto Area. No matter what the reason is, what kind of life you choose is what kind of pressure and living conditions you choose. If you choose to live in Toronto, praying every day in the hope that housing prices will fall within your affordability range will have no effect. You should just work hard to make money. Over time, the social Darwin effect in big cities has emerged: citizens with the highest quality of life in the city are the winners in the competition; latecomers with higher skills or excellent innovation capabilities have more opportunities to gain a foothold in the metropolis and eliminate the indigenous people; residents whose industries have been eliminated by competition, because they bought a house early, Even with a low income, one can make a living in the city by relying on the retirement security income of the old industrial era; the gap between the income and living conditions of citizens in cities, especially megacities, is the widest, and the gap in personal assets far exceeds the gap in income, because personal assets can not only be accumulated, but also passed down. After the new Chinese immigrants came to Toronto, most of them still had a very strong sense of urgency in buying a house, and they quickly integrated with the locals in terms of housing conditions. Only a few skilled immigrants who immigrated to Canada before 2010 had the embarrassing situation of not being able to catch up at every step.
The biggest feature of Toronto's income distribution is that it is very polarized. In Toronto, 10.5% of people have an annual income of more than 100,000, compared with 9.2% in Ontario, and 8.7% of the national population have an annual income of more than 100,000. Among the top 1% of earners, the average income in Toronto is $300,000, ranking second among cities in the country. On the other hand, the proportion of low-income people in Toronto is quite large, with 20.2% of people in low-income status, while the proportion of low-income people in Ontario is only 14.4%, and the national average is 14.2%. The concept of "low income" is: if the income of a family of one person is less than $22,133, the income of a family of two people is less than $31,304, and the income of a family of three people is less than $44,266. Low-income earners are mainly young people and part-time workers. The reason is that it is more difficult for young people in small cities to find jobs than in Toronto, and it is easy for retired older people to find temporary jobs in Toronto. Affected by the huge number of low-income people, Toronto's median household income is very low, only $65,829, Ontario's median household income is $74,287, and the national median household income is $70,336. Median family income means that when the sample number is 100 families, the income of the 51st family is the median family income of these 100 families. At least 20% of families in Toronto have no ability to buy houses, and low-income families have basically no impact on housing prices. Therefore, the determinant of housing prices lies in the purchasing power of high-income families.
The changes in the income of Toronto residents from 2010 to 2016 are as follows: the income growth rate of finance, insurance, real estate, rental and other industries was 20%, while that of other industries was only 10%. Among the people who immigrated to Toronto from other provinces and cities, those with academic qualifications and certain professional skills have higher incomes than in their places of origin. The relationship between housing prices and income is: whether to buy a house or rent a house, and what kind of house to buy depends on the expectation of future income; real estate has income elasticity, that is, as income increases, the demand for houses increases; for people with high incomes, time is more precious, and the convenience of living place is superior to price considerations. High-income people are most concerned about productivity/Productivity, that is, they would rather spend money on houses than spend time on transportation. Toronto is the most productive of all Canadian cities. From 2010 to 2016, Toronto’s house prices increased by 67% (more than Vancouver’s 60% increase). Among them, the median house price increased by 69%, while the apartment building price increased by only 26%. It can be seen that the increase in Toronto's house prices comes from detached houses, and most of the increase in detached house prices comes from properties with a price of more than 1 million. In 2016, the transaction volume of properties above 1 million in the Greater Toronto Area accounted for 17% of the total. Between 2010 and 2016, the price of these high-end properties increased by 70%, with an annual increase of 12%, while the average annual increase of all properties was only 7%. The purchase of high-priced real estate by high-income families has greatly boosted the average housing price in Toronto. This trend will continue to drive up Toronto housing prices with the cohesion effect of the city's economy.
Another powerful tool for high-income people to easily get a loan to buy a house is "Mortgage Helpers"/Mortgage helpers. One-third of the houses in Toronto are occupied by tenants. Who buys the house and rents it to them? Of course, they are still high-income people. Investors use rental income to support larger loan applications; they withdraw cash from the property rights through additional mortgages to use as down payments to purchase larger properties; they withdraw cash from additional mortgages on houses that have appreciated in value to help their children buy homes. . . These are called "mortgage helpers." Wealthy families, high-income people, and inheritance from one generation to the next are also supporting housing prices. 30% of first-time homebuyers in Toronto need down payment support from their parents to realize their dream of buying a house. If your parents don’t own a house, it may be difficult to help.
Echoing the above-mentioned CMHC report, there is also a report on Torontonians' ability to afford housing, which is RBC Bank's Housing Trends and Affordability report. The latest issue is July 2018. This report uses Torontonians' median household income of 66,000, a loan ratio of 75%, and an average house price of 848,000. It uses a 25-year repayment period and a 5-year fixed interest rate to calculate affordability. The result of this recent report is that the debt repayment ratio of people in Toronto is 74.2%. That is, according to this calculation, when buying a house now, a family with a median income will spend 74.2% of their income on living expenses. Banks require this ratio to be below 39% before approving a loan, so the report implies that there is no way the median household can afford an average house. When we break down the data, it becomes clear: the average house price is 1.028 million, with a debt service ratio of 89.3%, and the average apartment price is 495,000, with a debt service ratio of 44.6%. This result once again proves CMHC’s conclusion that the average housing price in Toronto is determined by properties over 1 million; there are too many low-income people, resulting in a low median income and a weak representation; the horse racing system has led to an excessive income gap, and the two groups separated by income can hardly understand each other; low-end apartment buildings are still within the affordability range, and public The residential value of apartment buildings was severely underestimated from 2010 to 2016. After the macroeconomic regulation and control by the federal and provincial governments, the residential value finally showed up; from 2016 to 2018, the increase in apartment buildings has exceeded 20%. People who need to buy a car should hurry up and not be misled by the rise and fall of the average house price, because the average house price is determined by high-income people.
Buying a house is not a necessity in any country at any time. Whether you can buy a house and whether you are willing to buy a house is most affected by income, especially the expectation of future income. Judging from the situation in Toronto, it is now difficult for nearly 20% of the population to afford housing. The government should be more concerned about the rental problems of this group of citizens. Houses are a necessity for people who rent houses and are used to live in; for people who buy houses, houses are high-end consumer goods or investment products. Buying a house is a horse racing system. The winner in the competition for income gets a good and big house. The results of the CMHC report are cruel to citizens who have delayed buying a house and missed the opportunity. If you come to a new city and have confidence in the city's future development, don't be affected by interest rate fluctuations and policy changes, and try to "buy early." Let me reiterate, in today’s media “news”, there are 99% more noise than signals. If your decision to buy a house is based on noise, you may never buy it.