Ontario home prices need to drop more than $300,000 to be affordable for millennials

In order for Ontario’s housing market to become affordable for young Canadians, their average income needs to hit well above $100,000 a year. That’s not good. 

A new study by Generation Squeeze in Vancouver found average home prices in Canada need to drop by nearly 50% for a typical 25-34 year-old (let’s call them millennials) to afford an 80% mortgage on an average priced home. Or, their earnings need to double. Unfortunately, neither is likely. 

In Ontario, the average price of a home needs to fall $307,000 to be affordable for millennials, or their household income must be $109,000 a year, which is double the current average. In the Greater Toronto Area, the average price would have to fall $523,000 - that’s two-thirds the current average! Alternatively, millennials can start averaging $150,000 a year in earnings to afford the average home in the GTA, but this is triple their current average income. 

Around 40 years ago, it would have taken someone in this age group approximately five years to save a 20% down payment on the average home in Canada. Today, it would take 13 years for a millennial to save a 20% down payment for the average priced home in Canada. Looking at just Ontario, it would take 15 years, and a whopping 21 years in the GTA. 

So what’s the solution? Prices aren’t going to fall by hundreds of thousands and incomes aren’t going to double or triple anytime soon. 

Generation Squeeze has a few policy recommendations, one of which is to increase supply, including more purpose-built rental. One potential solution that doesn’t get discussed enough in our opinion is to reduce other costs for young Canadians, like those related to child care, student debt, tuition, transit, etc. Reducing these costs would help young Canadians save for their futures.

One recommendation is to tax capital gains on principal residences. The study doesn’t come right out and say that’s what they are suggesting, but it implies this policy change by saying that “annual revenue from municipal property taxation is down $4.4 billion (measured as a share of gross domestic product) by comparison with 1976, despite the $2.6 trillion in additional net wealth accumulated in principal residences over that time period. Similarly, federal estimates show that that (sic) non-taxation of capital gains from principal residences will cost the federal coffer around $6 billion in 2019.” 

We suppose if the federal government had an additional $6 billion, it could in theory go towards funding more affordable housing across the country. 

The study also suggests that Canada needs to “de-risk” the real estate market in order to prepare for a drop in home prices. We’re not exactly sure what this means. No one who currently owns property wants the average home price to drop by hundreds of thousands, and we’re not sure what kind of policy would help property owners feel good about the level of price drops the study is reporting.

The housing market is a delicate balancing act. How do we make homes more affordable without causing prices to plummet? We feel like there has to be a combination of methods, including increasing supply, easing mortgage lending rules, and building a wider variety of housing types like laneway suites, coliving suites, and more mid-density in low-rise areas.