The Middle Class Dream is Fading in Toronto

Toronto has become an unaffordable city for the average Canadian. There are still many reasons to live here, but unless one comes from money, or has a significant income, to live and thrive here one needs to think outside the box.

The Re/Max Realtors say that 1 in 3 Canadians are considering “workarounds” to buy a home amidst declining affordability. Fifty-four percent of these are millennials and Gen Z. They are considering renting-out a portion of a primary residence (21%), pooling with friends or family to purchase a home (13%), or living with like-minded neighbours in a co-op or shared living arrangement (7%).

See: https://blog.remax.ca/housing-affordability-in-canada/ 

The new houses pictured here are listed for sale starting at $2,475,000.

The surrounding community is one of 1-storey and 2-storey brick homes built in the early 1950’s, after World War II. It was, essentially a middle-class community. However, due to its location – a peninsula of land jutting out from St Clair and O’Connor towards the Don Valley, surrounded by Toronto’s ravines, it is desirable property. As the original homes come up for sale, they are being re-developed. For the most part, the old houses are being torn down, and new homes are being built to replace them. Until recently, these have been what may be called “monster” homes – substantially larger than the ones that they replaced, on large lots. However, that is no longer the case.

These homes are a six-house development built on land sold by the United Church when it decided to close its Parkview Hills location. The lots are small. The houses occupy most of the lot. Moreover, they are priced far outside the reach of the middle class. Even two teachers at top category would have difficulty affording these homes without substantial capital behind them. Traditionally, a conventional mortgage – one without the requirement of purchasing mortgage default insurance from the CMHC – would require a down payment of 25%, or $618,750 in the case of the lowest-priced home. The resulting mortgage of $1,856,250 (5-year term, 25-year amortization at the Bank of Montreal’s current mortgage of 4.29% ) would carry for $10,058 per month – that’s $120,696 per year. In order to afford that home the Bank would be looking for family income of $402,320 per year, based on the affordability rule of 30% of annual family income allocated to accommodation.

Since these homes have been selling, the price of existing homes in the neighbourhood has risen commensurately. Small 1950’s bungalows, once regarded as either a starter home or a ”downsizer”  are listing for around $949,000, and are expected to sell above the asking price. A semi-detached home in the area recently sold for $1,306,000, $306,000 over asking. A 2-storey listed for $1,899,000 recently sold for $2,250,000, or $351,000 over asking. Both houses appear to have been sold within 2 days by blind auction.

So, what is a young person to do – or someone moving to the Greater Toronto Area (GTA) from regions where the average house sale prices in February 2022 were substantially less; say, Newfoundland ($324,900), Prince Edward Island ($322,800), Nova Scotia (367,200), New Brunswick ($291,100), Quebec ($ 498,688), Manitoba ($363,660), Saskatchewan ($284,100), or Alberta ($482,255). Only Ontarians ($1,086,493) and British Columbians ($1,104,098) would appear to have a reasonable chance of coming up with a sufficient down payment without benefitting from a substantial inheritance, financial support from their extended family, or winning the Lottery.

Housing Alternatives Reflect the Market for Detached Homes

According to the National Bank’s latest Housing Affordability monitor, someone would need annual household income of $196,913 to afford the average detached house ($ 1,146,667) in Toronto. They would also need to save up for 318 months (26.5 years) at 10 percent of this annual income to come up with a down payment.

For condos, the situation would be slightly better. To buy an average condo ($653,308) someone would need annual household income of about $131,387. It would take 56 months (about 4.5 years) to save the down-payment.

The National Bank commented that Monthly mortgage payments now amount to 61.3 percent of median pre-tax household income in Toronto, more than double what the Canada Mortgage and Housing Corporation currently classifies as “affordable” (less than 30 percent of a household’s pre-tax income).

See: https://www.blogto.com/real-estate-toronto/2021/08/how-much-money-make-afford-house-toronto/

Renters are also facing an affordability crisis. According to the Rentals.ca April 2022 Rent Report, the average rent for a 1-bedroom apartment in Toronto is $2,023 per month. The average 2-bedroom costs $2,776.

See: https://rentals.ca/national-rent-report

Using the affordability calculation of 30% of income spent on accommodation, someone renting a 1-bedroom apartment would need an annual income of $80,920 to qualify. A 2-bedroom apartment would require $111,040.

These figures are averages. What about someone just starting out, or re-locating. Certainly, someone earning the minimum wage would have significant difficulty. In fact, someone working full-time and earning $42 per hour ($81,900 a year) would just qualify for the average 1-bedroom apartment.

How Did We Get Here?

According to a recent article on Global News Digital, we were told that following the rules and getting life right would provide a stable, successful career and a comfortable retirement. It would also allow us to own a middle-class home, like the one we grew up in. Sadly, that has not proven to be the case. How did it all go so wrong?

In the 1960s and early ‘70s, as high school students, we were told that post-secondary education would put us on the fast track to the middle-class dream. This was shattered in the late ’70s when large corporations flattened their structures and eliminated many middle managers, and clerical and secretarial staff. This was further exacerbated in the 80s when acquisitions and mergers became the corporate model to increase profitability, followed by the recession and increasing globalization. Corporate management “discovered” that all costs are variable in the long-term and realized that the largest component in their cost-of-goods-sold was labour. Consequently, they largely exported our manufacturing sector to areas of the world with a lower labour cost. In the process, high-wage manufacturing jobs, that supported a middle-class lifestyle, were lost.

From the late ‘80s to the early 2000s our economy was sustained by jobs in the growing service sector, and the momentum of a long wave of economic growth. However, during the last decade the dream has faded fast. Government jobs, education, the professions, and the retail and service sectors do not “add value” in the same way that manufacturing does. As a result, the margins are thinner, and cannot support a living wage and group benefits for those in support and service roles. For the first time, housing affordability has become the top concern for Canadians, especially in fast-growing metropolitan areas.

Young, employment-precarious, and low-income Canadians are the most concerned about the future.  Although baby boomers and high-income earners are still feeling economically safe, even they are starting to worry about being able to continue making ends meet. Those most resistant to change are older, high-income, and pensioned Canadians looking to protect their advantages.

See: https://www.msn.com/en-ca/news/other/commentary-the-danger-of-the-fading-middle-class-dream/ar-AAVUYH3?li=AAggXBV

We Are Losing Affordable Rental Housing Faster Than It’s Being Built

In a Fifth Estate article, the CBC notes it is not just that new rental units are not being built fast enough. The shortage of supply has been aggravated by the loss of existing affordable units – i.e. those with monthly rents below $750, manageable for households earning less than $30,000 per year. Between 2011 and 2016, for example, the supply of such units declined by 322,600. Declines of that magnitude are forcing some renters out of the homes and communities they know.

A recent CMHC report said that 2-bedroom apartment rental is beyond the reach of the average person working full time in such cities as Vancouver, Victoria, Winnipeg, Peterborough, London, Kingston, Toronto and Halifax.

The cause has been the “financialization” of housing. According to the Bank of Canada, one in five people buying a house is doing so as an investment. Moreover, large investors have brought industrial standardization and a financial focus to the landlord business. Twenty to Thirty percent of Canada’s rental apartment market is owned by institutional landlords, Real estate investment trusts (REITs) own nearly 200,000 rental units.

The business model tries to extract as much value as possible out of those buildings. REITs are obviously having some success. According to annual reports published by the four largest Canadian real estate investment trusts, they disbursed more than $2 billion in profits to their investors between 2015 and 2020.

In the current rental environment, there is a tremendous incentive to remove a sitting tenant. Because many provinces control how much rents can be raised for tenants who stay in the same unit, most of these increases occur when the unit turns over. However, when landlords do renovations, they can apply to increase the rent above the guideline, in what is called an above guideline increase (AGI). Those increases are critical for the landlord to be able to get a return on the extra costs incurred to upgrade the building. They also allow the landlord to increase profitability by raising rents significantly for new tenants after the renovations are complete.

Increasing the supply of affordable accommodation is not easy. Since 2020, the Federal Government’s Rapid Housing Initiative has provided funding for 10,250 affordable housing units. At that pace it would take It would take 31.5 years just to replace the loss of affordable units referred to above. Moreover, it takes up to three years to complete an affordable housing project.

See: https://www.cbc.ca/news/canada/financialization-and-canadian-renters-1.6378257

The Global Pandemic Has Made the Situation Even Worse

To compound matters, we are not yet fully done with the Covid Pandemic which disproportionately burdened the middle and working classes. Many small business owners, and workers in the retail and service sectors, lost their livelihoods and life savings during the pandemic. There were simply too many enforced periods of closure for some to be able to carry on. Certainly, those who have faced recent financial disasters are in no position to compete for housing, whether purchase or rental. That situation has yet to be adequately addressed by governments.

While government intervention may sound like the solution, its financial resources are already strained to an uncomfortable level.

What Can Be Done Now?

Unless and until the economy recovers to pre-pandemic levels, the self-employed, small business owners, and the vast retail and service class can expect to have difficulty obtaining mortgage financing from financial institutions. Their alternative will be to follow the example of the millennials and Gen Z. Frankly, for most, the practical options may be to pool with friends to purchase a home – co-ownership, or live with like-minded neighbours in a co-op or shared living arrangement. Not everyone has family with deep pockets. For those who practice the Christian faith, the latter may hold some appeal. It is difficult to hold on to faith in the midst of a strongly articulated secular society that does not subscribe to the basic tenets of our belief. Living in community may be essential for our faith to survive and flourish.

Perhaps as Churches are sold because congregations have grown old and tired, consideration could be given to forming co-operatives where people of faith could come together in community for their mutual benefit. The New Monasticism can provide the framework to support such endeavours. After all, the church has many centuries of experience with living in community.