When the expenses of home ownership are high relative to incomes, housing affordability is low. Poor affordability becomes a problem as people in an area struggle to sustain a reasonable standard of living. When a large portion of income is spent on housing, less disposable income is available for families to enjoy and serves as a limit to further price appreciation. When investing in real estate, we want to look for areas demonstrating the right balance in affordability.
What Is Housing Affordability?
Housing affordability refers to the proportion of median pre-tax household income required to cover the basic costs of homeownership of a typical property. The associated home ownership costs include the mortgage payments, property taxes, and utilities on an ordinary home.
Is Affordability Good or Bad for Investors?
When housing affordability is low, it will be harder to purchase property. This is bad news for landlords looking to buy, but can be good news for landlords currently holding properties. With poor housing affordability, fewer tenants make the leap to homeownership and vacancies tend to be lower.
Look for Sustainability
In markets where homeownership costs are high, the prospects for future growth are reduced. If people are already spending a significant portion of their incomes on housing, there is less room for them to pay even more and drive prices higher.
The key as an investor is to find areas with a sustainable level of housing affordability. Finding that sustainable level of housing affordability means locating the sweet spot between high and low affordability. The Real Estate Investment Network (REIN) suggests looking for areas that score in the “Hot Zone” of 25-39% on the housing affordability index.
To learn more about housing affordability in Canada, or see how cities across the country compare, keep an eye on the Housing Trends and Affordability report from RBC Economics. You can even subscribe to updates and receive an email each time the quarterly report is updated.
photo credit: subewl
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