First National Financial LP

Market Memo: Driving 'til you qualify might not go the economic distance

  • First National Financial LP

The statistics tell us that the national average price of a home is falling in Canada.  Despite that, housing affordability is still a significant challenge for buyers, especially in the country’s bigger markets.

Affordability to remain a challenge

The latest report from one of the big banks projects prices will rise in all six of Canada’s major metropolitan areas this year.  The increases – on top of already inflated prices and coupled with rising interest rates – are expected to have the cost of ownership outpacing (what has been until recently) stagnant wage growth.

Drive ‘til you qualify

These upward cost pressures suggest the trend known as “drive until you qualify” is likely to continue – if not increase – especially in the regions around Vancouver, Toronto, Montreal and Ottawa.  But the idea of leaving town to save money on the cost of a home is not without its drawbacks.

Moving out of the city almost always requires commuting back into town for work, school or other activities.  Late last year Canada Mortgage and Housing Corporation released a report that examines the trade-off between location costs and commuting costs.

Unfortunately the study was confined to the Greater Toronto Area, which is probably the most extreme case in the country.  However the methodology can be applied to any metropolitan area and the findings are likely to be proportional, with the costs and drawbacks being relative to the commuting situation in any local market.

Commuting can drive away your savings

What the CMHC report found is that, in many instances, commuting costs can completely offset the savings of moving to a more affordable location.  Not surprisingly the report finds that commuting costs rise as the distance from the urban centre increases.  This negative relationship is well known and was first formalized by a German economist in the 19th century.  In several cases the CMHC research found that when the carrying costs of the lower priced suburban or exurban home were combined with commuting costs the amount matched or even exceeded the cost of buying in the city.

Your time is worth something

On a somewhat more abstract level there is also the consideration of what a person’s time is worth to them.  In a separate study, based on the 2016 census, Statistics Canada found that commutes of an hour or more each way are becoming more common.

Nearly 60% of these so-called “long commutes” are travelled in cars and take an average of 74 minutes.  That amounts to more than 12 hours being added to the work week.  At a rate of $27.36 an hour, which is the average wage in Canada, it amounts to $330.00 a week in unpaid, unproductive time.

There have also been several studies done on the negative effects of commuting on health and wellbeing.

There are good reasons to leave town

Of course there are reasons other than price for wanting to get out of the city: a quieter environment, more space, bigger home, bigger property.  These are genuine and legitimate considerations and desires.  But if the goal is to simply get a home at the lowest cost, buyers may be better served by staying in town and considering options like a smaller down payment or a longer amortization period.