Rising rent prices. High inflation. Is the 30% income-to-housing rule still realistic for renters?

While 10 million Canadians own a home, homeownership is on the decline. In fact, Canadians are now less likely to own a home in comparison to a decade ago, according to the 2021 Canadian Housing Survey. And rental households have grown at more than twice the pace of owner households in the past decade, particularly among millennials aged 25 to 40.  

Other data, like the tenant rate (40.4% — the highest it’s been since the 1960s) and a rising trend of condominium construction, all point to an increased demand for rental dwellings across Canada’s large cities. 

However, average rent for all property types across Canada is $2,043 per month, representing an annual increase of 15.4% and a monthly increase of 4.3% from September to October of this year. And while inflation has eased from the 39-year peak we witnessed in June, it’s still well above the Bank of Canada’s target, at 6.9%. 

Given rising rent prices and rising costs of living, is the 30% income-to-housing rule still feasible for renters? 

The shelter-cost-to-income ratio 

In the 1980s, the Canadian Mortgage and Housing Corporation (CMHC) adopted a “shelter-cost-to-income” ratio that recommends occupants spend no more than 30% of their gross monthly income on housing. The metric determines housing affordability and anything above the 30% threshold is deemed unaffordable. 

For someone earning $3,000 per month, the 30% suggestion amounts to $900 a month on rent alone. 

CMHC’s rule has also been widely adopted by landlords as a standard guideline to screen tenants. Prospective tenants should have an income that is high enough that their rent eats up no more than 25-35% of that monthly income. 

How much should you be spending on rent? 

“Rules of thumb are just that,” says Morgan Ulmer, a certified financial planner with Caring for Clients, a financial planning firm based in Toronto. “They are general suggestions and cannot really capture someone’s full financial structure. It really requires a deep-dive into their own affordability metrics, and it’s worthwhile to be methodical about figuring out what you can afford.” 

There are several factors to consider when looking at affordability, and Ulmer cites an example of how debt can impact the 30% recommendation. “If you compare someone who has absolutely no debt with someone who has a sizeable student or credit card debt, the person with no debt will be in a better position to take on perhaps even more than 30% of their gross income on rent.” 

Similarly, she advises that people examine their habits when it comes to discretionary spending. For some, their discretionary spending on travel, entertainment, groceries, may be lower than others. 

Creating an “affordability plan” 

“A better option would be to create a personalised budget that factors in all their saving and spending goals,” says Ulmer. 

This might include fixed monthly payments like rent and utilities, tenant insurance, car insurance, groceries, phone, and credit card bills.  

“If those are the anchors, you can see what concessions you have to make with your living arrangements,” she says, which could mean living with roommates or moving back with your parents until you can build up some savings.  

“There is almost a cultural shift in the way we are looking at accommodations, both on the mortgage and renting side,” says Ulmer. “We are in a transition stage of figuring out what is tenable for people.” 

While it might be difficult to provide a “number on affordability,” Ulmer recommends carving out some time to focus on an “affordability plan” for yourself before committing to anything — whether that be renting or buying.
 

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