I mentioned in my last post about the old adage regarding not spending more than 2-3 times gross salary on a house. This rule of thumb was not one that was set by the banks, but it was a belief held by many frugal home buyers who did not want to over-extend themselves. But is it realistic anymore in today’s environment? Let’s take a look at some numbers:
According to the MLS, the national average home price in Canada was just over $330,000 in September 2010. In order to purchase the average Canadian house, a family would need to earn $132,000 per year if they only wanted to spend 2.5 times their gross salary.
According to Statistics Canada in a June 2010 report, the average annual income for Canadian families is just over $70,000. If the average Canadian family only spent 2.5 times their gross salary on a house, they could only spend $175,000 on their home.
If the average Canadian family is earning $70,000 per year and the average Canadian house costs $330,000 that means Canadians are spending 4.7 times their gross salary on their houses. And it would take $66,000 to make a 20 percent down payment on the average Canadian house and avoid CMHC fees.
Are houses too expensive? Maybe in certain markets, but the average price across the country still seems reasonable if you look at the growth of real estate over time. Perhaps it’s wages that have stagnated and not kept up with inflation? I think there is a case to be made for this point. And what about the low interest rate environment that we currently live in? Larger mortgages seem more affordable when you’re only paying 2 percent interest.
Personally I don’t believe that spending only 2.5 times your gross salary on a house is even close to being realistic anymore. Even 2.5 times gross salary on your mortgage seems like a stretch. I would feel comfortable with a mortgage as high as 4 times our gross salary, provided that we didn’t have any other debt (including car payments). And I strongly believe in paying a minimum of 20 percent down payment on your house and amortizing over a maximum of 25 years.
Do you have any rules of thumb when it comes to your housing expenses? Is it time to change the way we think about mortgages?