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How ridiculous are Toronto home prices?

So ridiculous that even the top 1% of earners are now priced out of the market.

Don’t believe it? Douglas Porter, chief economist at BMO Capital Markets, may convert you.

Home prices in Toronto rose almost 24% year-over-year in February (using data from the MLS home price index). But Porter’s estimates boost that increase to 40% in the past two years when adjusted for inflation. That’s because price inflation and wages in Toronto are barely above 2% increases.

To illustrate the absurd situation faced by Toronto homebuyers, he offers the example of a hypothetical professional couple looking to buy a home in the city in a forthcoming economic note.

The couple has saved $100,000 for a down payment. With a baby on the way, one spouse will stay home while the other continues to earn $225,000 a year. That income puts them in the top 1% of Canadian income earners — and at the highest marginal tax rate of 53.53%.

The analysis

Any home more than $500,000 requires mortgage insurance, because above that price point, their down payment becomes less than 20%, observes Porter. Subsequently, they’ll have to qualify for a mortgage at the posted five-year rate of 4.84%. Further, any house more than $1 million is off limits because it won’t qualify for insurance, per CMHC requirements.

Taking the above into account, as well as such things as a 25-year amortization period, property taxes and heating costs, Porter calculates that the maximum home price they qualify for is about $987, 000.

And that’s not enough, considering the average price of a detached home in Toronto is now $1.57 million.

Read: Average home price in GTA surpasses $1 million

Would accepting a longer commute help? Nope — the average price of detached homes in the surrounding regions is $1.11 million.

The only option: a semi-detached home in the suburbs, which averages $700,000. However, those types of homes aren’t common, says Porter.

Policymakers to the rescue?

Clamping down on insurance eligibility hasn’t worked to cool the market in Toronto, he says. He thinks a tax on non-resident buyers, shown to be effective in Vancouver, is a good starting point.

“The Ontario Real Estate Association frets about the possibility that a foreign student won’t be able to afford a house with the tax,” says Porter. “But we wonder why they are not equally concerned about [a high-earning couple’s] inability to buy a home under current circumstances. It will be incredibly tough to attract talented folks […] if they will struggle to buy a home and yet still pay taxes of over 50%.”

Also read:

Foreign buyer tax wouldn’t work, says Toronto real estate board

The solution to Canada’s housing crisis

Originally published on Advisor.ca
See all commentsRecent Comments

CEMIL(JIM).OTAR.7

Tax foreign buyers or if the purchased home is left vacant, use this revenue to pay for metrolinks.

Thursday, March 16 @ 1:47 pm //////

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