BMO Housing Affordability Report Fails To Capture First Time Buyers Properly

This week, I will be doing a bunch of affordability posts.  .

On Friday, BMO came out with a housing affordability study for Canada.   And of course, everything was hunky dory with Canadian housing.  Here is a chart on how median family income compares to the average house price for select cities.

According to BMO, housing affordability is only a problem in three cities in Canada.  Vancouver, Victoria and Toronto.

So then, what's the problem?

I have calculated that median family income is generally higher than average household income. So this skews the ratio BMO uses in the chart downward.  For example, I have in my data base that the median family income in Saskatoon is near $85,000, the average household income is near $81,000 and the median household income is near $67,000 for 2012 data.

Affordability is not a problem for anybody who bought before the boom ( at least it shouldn't be).  Affordability is a problem for young buyers.  So by using a high income number such as median family income, a report like this skews the affordability numbers, so much so that affordability is not a big deal even if interest rates rise 2 points.

Think about it.  The average ages of first time buyers is probably something like 25 or so.  And think about all the jobs that these people are working.  These buyers are not at the same pay scale that someone who is 30 or 40 years old in the same field.  RBC uses median household income because many unattached individuals are entering the housing market.  But the problem with RBC's affordability report is that it states a down payment of 25%.  BMO uses 10%.

Young first time buyers generally have lower incomes, small down payments and more debt than the overall average buyer.

So tomorrow I will post my own first time time affordability index for Saskatoon.