Household incomes not keeping pace with home price surge

By OwnerQuiz

The continuous trend of people moving to big cities lifted home prices in urban areas to record highs over the past several years. Less available land in urban centers, costs for infrastructure, higher building standards and favorable interest rates added to an unchecked price increase.

Did average household incomes meet the surge in home prices?

Maybe we earned more 10 years ago, or even 50 years ago in relation to home prices; let's find out: The average annual household income in the US 1960 was $ 6,691 and climbed 8.45 times to $ 56,526 in 2016. The average house price in the US 1960 was $ 12,700, but was 16.83 times higher in 2016 at $ 213,700. 1960 a buyer needed 1.90 household incomes to buy a home while in 2016 the same buyer had to pay 3.78 household incomes to afford a home.These numbers are very general and home prices did not climb as much in rural areas as they did in urban centers. Larger homes and higher building qualities must also be considered.

Average home prices in large urban centers surged excessively compared to average household incomes.

We selected Toronto, a poster city of urban growth and compared average home prices to household incomes of 2005 in relation to 2015 when census data were available. In 2005 (census 2006) the average household income in Toronto was $ 64,128CAD and the average home cost $327,216. From 2005 to 2015, the median household income climbed a lowly 2.6 % in Greater Toronto to $ 65,829 but the average home price rose to $ 632,792 according to the Toronto Real Estate Board. The lowest average household income in 2015 of all regions was recorded in the Greater Toronto Area. The highest household income was seen in Hamilton with $ 103,009 in 2015. The average mean household income for Toronto was also higher for home owners than it was for tenants. Despite the meagre increase of the Toronto household incomes in the past 10 years, average home prices almost doubled from December 2005 to December 2015 and stood at $ 775,546 in September 2017.

Population growth and the trend to urban centers have led to a massive rise in home prices over the past several years.

Although the massive price surge for urban homes did not happen in rural areas, the trend to move to bigger cities has not been broken. A loose monetary policy with record low interest rates made homes more affordable, and a drop in the exchange rate lured buyers from other countries to take advantage of the situation. In our public choice economy, private households incurred debts like governments and hope the future will take care of it. With almost no interest paid on your savings and a debt burden on homes much higher than what your parents had to carry, it will be difficult to see your investment in an urban apartment or house growing when interest rates rise. If there is a market correction, the portion of your own capital in your home will melt away first and lenders will ask for higher amortizations to make up for value losses in your home equity. Better be prepared.