With housing costs rising, some financial analysts recommend abolishing the 30% rule

If you’ve ever applied for social housing or a mortgage, or even tried to calculate your budget, you’ve probably come across this figure: 30 percent.

That’s the oft-touted maximum percentage of your income you should spend on a home. But at a time when the average one-bedroom apartment in Vancouver rents for $2,787 per monthis that number realistic?

It depends who you ask. But in general, the answer is: sort of.

“The benchmark no longer applies,” Bruce Sellery, CEO of Credit Canada, said by email.

“Housing costs have increased dramatically everywhere. And so individuals need to look at their own particular situation and determine how best to allocate limited resources.”

‘A handy benchmark’

The Canadian Mortgage and Housing Corporation began adopting the rule in 1986.

“The 30 percent threshold remains a useful metric to consistently measure housing affordability in Canada and other parts of the world, including the United States and Australia,” CMHC said in an email.

However, the company says it is the “housing hardship conceptin 2020 to recognize that for some households, keeping housing costs at 30 percent of their budget is still not enough to meet all their essential needs.

Cracking the numbers

Let’s take a moment to look at some numbers.

If you were single and living on your own in Vancouver, you’d need a salary of $9,000 a month or $108,000 a year to afford a one-bedroom average and keep it at 30 percent of your pre-tax income.

Meanwhile, according to Statistics Canada, the median income for those age 15 and older is $62,250. That number is a bit irrelevant since not everyone needs or wants to rent a one-bedroom apartment, but it gives a sense of the discrepancy.

So what should middle and lower income earners do to avoid overspending on housing?

Not always feasible

The answer, according to financial specialists like Anne Arbour, director of strategic partnerships and education at the Credit Counseling Society, is to do away with the 30 percent rule.

“It’s a really hard song and has been for quite some time, to be honest,” Arbor said.

“In the current era of inflation and … very high housing costs, that is not always feasible.”

Arbor says the 30 percent rule was the 25 percent rule when she first studied economics “a thousand years ago.” And she wouldn’t be surprised if it kept creeping higher.

‘We all have different needs’

Instead, Arbor suggests people look at their budget as a whole and determine their needs and obligations — a task that probably doesn’t look the same for all households.

“It’s easy to focus on just one number. But you have to look at everything in balance,” she said.

“We all have different needs. We all have different priorities and different obligations.”

For some families, that might mean spending more on groceries. For others, a higher percentage of the household budget may go toward student loans.

And if anyone is really struggling to put the puzzle pieces together, Arbor suggests reaching out to organizations like the Credit Counseling Society to take a fresh look at their budget.

‘A good ambitious rule’

Steve Bridge, a Vancouver-based financial planner at Money Coaches Canada, agrees, but says the 30 percent rule is a good benchmark to start with.

“It may not be an appropriate rule for a lot of people, but I think it’s still a good ambitious rule,” Bridge said. “It allows us to pay for everything else in our lives.”

Like Arbour, Bridge suggests looking at the big picture when setting a budget and prioritizing.

For those struggling to keep their budget in order, he recommends examining their spending. Usually the first things to do are discretionary things like going out to dinner.

Expenses like rent aren’t as flexible, Bridge says, though it’s possible to cut costs by getting a roommate or make more money by getting a second job.