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