The affordability horse

Back in June I went on an affordability bent and concluded that based on the idea of an affordability cycle, our peak to trough correction in real dollars might be relatively mild at 15%.  Of course there a many factors not accounted for which might distort the picture over time (such as a change in levels of unreported income which would make affordability look worse than it is, or the increased debt load of Canadians, which would make it look better).

The latest update of that original affordability chart is here:

These things are tough to take into account, so I figured I'd revisit the issue and try to improve the model in other ways.  First I took out the variable amortization again, as the data was just too sketchy.  This keeps the comparison consistent across the range, with the only variables being income, house prices, and interest rates.

As we know average prices are more easily distorted by outliers, so I switched to the median SFH price (which only goes back to 1988, but on the plus side it is monthly data) and median incomes.  Interest rates is the StatCan table V122497, "Average Residential Mortgage Lending Rate: 5 year".

Last time I used the household income for all families.  This perhaps unfairly boosts mortgage payments relative to income, since it includes unattached individuals that are not likely to be buying houses. So this time I used data for economic families only (economic family refers to a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law or adoption).  With an ownership rate of 70%, I think we can be fairly confident in saying that these kinds of families are buying single family homes in Victoria.

Long story short: Does the picture look any different?

Mortgage payments are now operating in a more realistic range.  The generally accepted threshold for affordability is 30% of your income.  Mortgage payments relative to income are still significantly above the levels of the 90s at this point, even with our incredibly low interest rates.  So far the improvement in affordability since about 2008 has come primarily from dropping interest rates, increasing incomes, and inflation.

So just for fun we can project forward assuming that we will correct back to approximately the recent low.  This is where accuracy goes out the window, since I'm assuming rates will remain at their current lows and incomes will increase with inflation.   Here's what that would look like:

That scenario would mean another 10% nominal decline from here, for a total nominal decline from peak of about 22%.  And that prediction is worth exactly what you paid for it.

Update:  Info points out that using economic families is discarding a large number of potential buyers and distorts the affordability picture.   Fair enough, it seems it is more common to use the overall median, so let's add a chart for that.   I don't think it's a good idea to get hung up about the exact value of the measure though.  There are several reasons why it might appear elevated in Victoria.  More importantly I think is where we have been in our last slump, which gives us an indication of what can happen in Victoria.  Using the overall median shifts the measure up, but doesn't change my conclusion.

Update 2: For the more bearish amongst our readers, here's an alternate theory.  If the times of worse than normal affordability are over, and Victoria will become like those other ordinary cities that make do with cheaper houses then we should look at how much a house would cost to be affordable using 30% of gross income.  Here's how that looks: