ANDREW GLUM
News Writer

For many upcoming university graduates, a major step on the path to adulthood is purchasing their first home.

Unfortunately, Saskatoon’s current housing market is an uninviting place for first-time home-buyers.

The best way to understand what has happened to the local housing market since the boom began in 2005 is to examine the ratio of the cost of the average home to the average household income in the city. The result is what experts call the median multiple.

For example, a city in which the average household income is $50,000 and the average price of a house is $150,000 would have a median multiple of three.

According to Demographia’s International Housing Affordability Survey, Saskatoon’s median multiple in 2006 was 2.6. The average house costs $138,000 and median household income was $52,100.

In just four years, Saskatoon’s median multiple shot to 4.3, with the average house costing $277,000 versus an average household income of $63,900.

Demographia ranks international housing markets on a four-point scale that ranges from “affordable” to “moderately unaffordable,” “seriously unaffordable” and “severely unaffordable.” Saskatoon’s median multiple places it in the seriously unaffordable category.

In order to understand how this extreme price hike came about, it is important to first understand that this is not just a local, but a national and international problem.

A housing boom has been taking place nationally since 1999; Saskatoon is just an extreme case.

According to a February 2011 report by Capital Economics, an independent macroeconomic research consultancy, “The recent [national] housing boom has resulted in the largest rises in house prices ever seen in Canada.”

The two most prominent factors contributing to these astronomical prices are low interest rates and sub-prime mortgages.

A prime borrower would be someone with a credit rating close to 800 and enough money to start a mortgage off with a 20 per cent down payment. Sub-prime borrowers can’t afford to do that.

Far from discouraging sub-prime mortgages, the City of Saskatoon recently implemented a program where first-time homebuyers can borrow their minimum five per cent down payment on a separate loan — essentially saying, “Buy your first house with no money down!”

Low interest rates and sub-prime lending mean banks are allowing people who cannot afford a $277,000 house to borrow enough to buy one anyway.

According to the Capital Economics report, the housing party will be over very soon for Canada: “nominal house prices are likely to decline by a cumulative 25 per cent over the next few years, in the same ball-park as the recorded declines in the U.S. and other countries. Growth in future personal disposable income per worker will not close the large gap between house prices and income within any reasonable length of time.”

While this may sound like a blessing to those letting the cash for their down payment sit unused until the market cools, the effects of a bursting bubble in one sector can stretch across the whole economy.

“If house prices do decline as we predict, let alone more sharply, the knock-on effects to consumer spending and housing investment could be significant and perhaps even strong enough to push the economy into another recession,” the Capital Economics report says.

As far as the present state of Saskatoon housing prices are concerned, the proverbial writing is on the wall: prospective first-time homebuyers should wait out the storm, then buy what they can actually afford.

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image: Danielle Siemens