1. Salary versus house price

1.      With the current house prices going up 12% a year for many years in a row, we couldn’t catch up with down payment and qualify for a mortgage.

Using the web site at http://mortgagecalculatorcanada.com/en/calculators/maximum-mortgage-calculator/

For $500,000 houses in Toronto areas

* Family income must be at least $130,000
- Property tax $3,500
- Monthly heating $350
- Minimum monthly loan/credit payment: $2,000
- Monthly Secondary Financing Payment: $0
- Interest rate: 3.2%

Maximum mortgage: $394,636.74
Monthly payment: $1,908.33

The minimum down payment is 10%, i.e. $50,000.

Their salary is in the middle range, thus it’s likely that they would get an annual increase to match inflation. Let’s be generous, they got 5% annual increase in salary, i.e. family gross income was $136,500/year.

Unfortunately the house prices have been up around 12% a year for many years in a row. Thus the second year, their target house would be asked for $560,000, i.e. an increase of $60,000. 10% down payment would be $56,000.

This family has an increase of $6,500/year in gross income assuming 5% of salary increase. However the house price has gone up $60,000 after a year. The gap is wider and wider as time goes. To buy a house at higher price would result in higher debts and mortgage payment.

How many Canadian families have $130,000 annual income would be another story? I heard that around 5% of Canadian families have income higher than $100,000 a year, i.e. the current situation is really serious.

2.      Consider another case, where this family could save 10% of gross income a year

Let assume that this family have spent most of the money in luxuries items such as furniture, vacation trips, and expensive cars; therefore they didn’t save enough for $50,000 down payment. Let’s assume that they could save up to 10% of their gross income, i.e. $13,000 a year. They have $20,000 cash in their account with fix come rate of return of 5%. The difference between down payment and their saving was $30,000 in the first year of shopping for a house. They need $30,000 more toward a down payment with saving by annual gross income.

It would take this family 2.31 years to save required $30,000 for down payment with the same gross income and house prices flat.

Unfortunately the house prices have been up around 12% a year for many years in a row. Thus the second year, their target house would be asked for $560,000, i.e. an increase of $60,000. 10% down payment would be $56,000.

Their salary is in the middle range, thus it’s likely that they would get an annual increase to match inflation. Let’s be generous, they got 5% annual increase in salary, i.e. family gross income was $136,500/year. Their 10% saving would be $13,650 for the second year. Their first year saving with fix income investment would be $20,000 * 1.05 = $21,000. The total increase of their cash saving toward a down payment would be $13,650 + $1000 = $14,650 for the second year. Their cash in saving account was $21,000 + $13,650 = $34,650.

The difference between down payment and their saving was $56,000 - $34,650 = $21,350 in the end of second year for shopping of a house. The required gap has decreased by $30,000 - $21,350 = $8,650.

è The issue was if this family could save 10% of their annual gross income for a house purchase, and incur higher debt and higher mortgage payment due to house price increased.

It would take this family 1.57 years to save required $21,350 for down payment with the same second year gross income and house prices flat at $560,000. If we compared the remaining year was not 1.31 as expected, i.e. it’s increased.

The house price versus gross income increase’s gap would be bigger and bigger as time goes, because their salary increase wouldn’t match up with house price’s increase.