Is the Bidding Lust Over?
Posted by Gail | Filed under Economics 101, In the News
Over the past year, the average home in Vancouver has risen in price to almost $1 million. Yup, you can get a nice little 2000 square foot place for a cool mil. That should make some people stop and scratch their heads. Sure, the good news is that the prices went up 14%, but the bad news is who can afford that?
Assuming you had $100,000 to put down and got the mortgage at 3.7% (the lowest available at a major bank at the time I wrote this) and amortized your mortgage for 35 years (the longest available), your mortgage payment would be $3,809.75.
If the mortgage payment alone was to hit the 35% suggested in the Life Pie for what housing should cost (assuming you had no taxes, utilities, insurance and maintenance costs), you’d have to NET almost $11,000 a month to pull it off.
Okay, so the real estate market is a little overheated. What’s a body to do? You have to live somewhere, right?
I just wonder how those folks are going to cope with the rising interest rates when it comes time to renew. So I went back to the same bank I used for the mortgage quote (I used the one-year closed rate) to see how the payment changes. Their five-year closed rate is at 5.79% and that takes the monthly payment up to $4,964.42. This takes the percentage of your net income used for housing up to 45%, without taxes, utilities, insurance and maintenance costs. Ouch! Betcha that home-buyer will be putting those fees on her line of credit and her groceries on her credit card.
One of the reasons I chose the five-year rate is that new rules came into effect earlier this year that are designed to stop people for over-extending themselves. Now borrowers must meet the standards for a five-year, fixed-rate mortgage, even if they choose another term with a lower rate. (Anyone want to take bets on how long it’ll take for lenders to offer “special five year rates” so they can help customers get around this little mole-hill?)
While nobody seems very flustered by the fact that the Bank of Canada raised it’s rate another ¼% — hey, let’s not scare off the borrowers – if you’re carrying debt or planning to renegotiate a mortgage at some point in the future, you should be paying close attention.
But that’s just Vancouver, right? Elsewhere things are saner. Well, maybe. Calgary watched it’s home prices slip 8% at the beginning of the summer. If that happened in Vancouver, $80K of that $100K downpayment would be wiped out. Some people are under the impression that the drop off is a result of rising bankruptcies in the hitherto spend-free city. But it was an over-supply in housing that was the real culprit.
Earlier this month, Stats Can reported a drop of 5.3% in Canadian residential construction permits. And this week a National Post article quoted home sales as down 20% in June compared to June last year. That’s a whisper in the wind that there may be an over-supply of housing in the future. That doesn’t bode well for people who find they can’t make their mortgage payments and decide to downsize to something they can actually afford to carry and have a life too.
So how do you know if you’re contemplating buying in a over-heated market? Check the “affordability index,” which measures home prices against gross household income for an area. Some pundits say you shouldn’t buy an area where the index is over 4, meaning that house prices are 4 times gross earnings. (When I was still just a kitten, the rule of thumb was under 2.5 times gross earnings. See how things change?) Vancouver’s index is sitting at almost 9.5. Toronto is at 4.93. The national average is just over 5.
Where do you find the affordability index? You’ll have to search the internet for it. And you have to look at the numbers and not so much at the yackety-yak that goes with ‘em. Since the numbers are often produced by banks, and banks are in the business of lending money, the “spin” is often designed to encourage borrowing. If a bank goes so far as to tell you that a market is actually overheated, take heed.
Keep in mind that the affordability index reports for an entire area. There may be pockets of very reasonably priced real estate within those areas, so don’t go getting all despondent and think you’ll never be able to afford anything. It will mean you’ll have to shop hard. And you’ll have to be patient. Someone else may be just about to bail and you’ll get your house on a sell-off at a considerable discount from the current “market” rate.
What you should not be doing is taking on more home than you can reasonably afford. If you do, don’t be surprised when you become “just another statistic” in the housing drama.
July 29, 2010 at 6:52 am
And that is why I’m currently renting. I don’t want to over extend ourselves when we do buy a house, so we rent, while we save up for a down payment large enough to keep housing costs low.
If everyone made sure they weren’t over extending themselves when entering into the housing market, prices wouldn’t be sky rocketing like this.
regards,
Jason
July 29, 2010 at 7:07 am
We’ve just closed the deal on a house in Scotland. We are paying about 3X our gross annual income, that is to say, when we are both working. But the DH is currently on a short (3 month) contract, and it’s likely he’ll continue to have periods of unemployment between contracts over the next few years. So we chose to qualify for the mortgage based only on my salary. In combination with a 40% down payment, the mortgage is easily manageable on only my income, up to interest rates of 7% (as opposed to our current 3.2%). After that, we’d definitely both need to be working, or have to work out some kind of income smoothing. But for now, we plan to pay the basic payment on months when only I am working, and double the payments on months when we are both working. We have our 6 month emergency fund sitting in the UK equivalent of a TFSA, and (big if) if we start a family, I am lucky that my employer gives 6 months maternity leave at full pay. We also have a good amount set aside for furniture and appliances (have been renting furnished flats for the last 5 years).
It’s not a big house, just a 2 bedroom semi-detached, near the edge of a less than nice neighbourhood, walking distance from the hospital where I work. But it’s going to be home, our very first one, and I want to do this right. I have learned so much from reading Gail’s blog about how to plan for this kind of life transition, and I am very grateful that we are going into this with our eyes wide open, lots of money in the bank, and all the information we need.
We could not afford to buy anything in Vancouver, where we used to live. I hope that, in 5 or 10 years, when we want to move back, it won’t be so crazy, and that maybe our equity in this house and the currency exchange will be in our favour. If it’s still nuts, we will have to seriously consider looking for alternative work in a smaller city (for me in particular, there are only 3 places in Canada where I could do what I am trained for, and only Vancouver is close enough to our families to be worth considering).
July 29, 2010 at 7:30 am
We’ve been ‘building up’ to the house we now have. On my own at age 26, I bought a semi detached house for $116K – then sold it a year later for $144. The my fiance and I bought a detached 3 bedroom brick house in downtown Toronto. It was advertised as a ‘handy person’s haven’ – and being both handy, we bought it for $180K (when the average house like ours was going for $200K). We fixed it up over 15 yrs – then sold it for $360K. Took the $ and bought a larger, more beautiful house for $589 – again which needed work. We immediately finished the bsmnt and have been renting it out for 7 yrs – now getting $970/month in rental income. We continue to chip away at renovations – mostly ourselves. Today the house is it’s worth $950. We won’t quite pay off the mortgage by the time we retire – but plan to sell it then and downsize. The house has been a good investment plus we enjoy living here and ‘renos R us’!
July 29, 2010 at 7:40 am
Jason you have it well planned out. When it is time for you to buy you will be able to get the home you want. Alison, congratulations on your new home in Scotland.
Sats Can really does have great info hopefully it won’t be srapped. Thanks Gail. As nice as Vancouver is I certainly wouldn’t want to live there with those kind of prices- not in my budget
July 29, 2010 at 7:51 am
Doreen, you have done so well! Congrats
July 29, 2010 at 8:22 am
Mortgage free thank goodness, and no plans to sell, buy and move until the house gets too much for my future elderly bones.
July 29, 2010 at 8:54 am
Vancouver’s index is sitting at almost 9.5. Toronto is at 4.93. The national average is just over 5.
So Toronto is more affordable than the national average? Umm a confused Geoff says what? What?
July 29, 2010 at 9:47 am
The Toronto market, at least in my neighbourhood, seems to have settled quite a bit. For a long time, a home would be listed mid-week, open house was scheduled for the weekend, offers early the following week, and the SOLD sign gets plastered up.
Now, I see properties that have been for sale for months. Unheard of a year or more ago.
Hopefully things will get more reasonable for those wanting into the market. From where I sit in my expensive piece of Toronto real estate, I’m just aiming to sit tight, live within my means, and stick it out.
July 29, 2010 at 9:52 am
@ Geoff – Toronto’s affordability is lower than the national average because the average salary of a Toronto resident is higher than the national average. In terms of absolute housing cost, Toronto is up there.
July 29, 2010 at 9:55 am
I have to agree, those stats for T.O. can’t be quite right.
July 29, 2010 at 10:08 am
Sometimes people who buy million-dollar homes can actually afford it. They’re not putting down the minimum down payment; they’re not getting the cheapest interest rate possible no matter the term; they’re not only taking the short-term view; and they’re not worried about the market fluctuations because they’re buying their “final” home.
Some of us plan on putting down 60% and don’t care about life pies and rules of thumbs and such because we have an excellent handle on our finances.
I hate it when posts like this one make sweeping generalizations because sometimes it feels like the underlying message is aim low.
July 29, 2010 at 10:23 am
We’re moving back into the Industrial Revolution’s housing problem, streets and streets of slum housing because no one can afford a house in the city. But they flock to the city to try and make some money and have to work 3 jobs just to float by another month.
July 29, 2010 at 11:02 am
Ann I think the ’sweeping generalization’ is based on the affordability index. Its not that nobody can afford a million dollar house, its that most people can’t.
I looked into a more expensive home last year and even though I could put a significant amount down (as you say around 60% of a million dollar home) I was not comfortable with a 400k mortgage. We make a great salary but if something happened it is just a lot to carry.
July 29, 2010 at 11:44 am
@ Middleclass mom – where’s your hood? My central TO (Don Mills) neighbourhood is still cooking strong. Even last year though we had a couple jokers who listed their houses at $800K that wouldn’t move (my neighbourhood is more like 450 – 700K).
@ Jay – interesting. Wouldn’t that mean that Toronto salaries are significantly outside the curve of national average? I don’t know if tha’ts true or not.
July 29, 2010 at 12:15 pm
@Ann – A sweeping generalization is just that – a generalization. Yes, some people can afford a million dollar home, but most people cannot. And I think the audience Gail is talking to are not people who bring home $11,000 a month.
July 29, 2010 at 12:46 pm
stunning news, yet not unexpected. i used to live in reno, where the housing market crashed earlier than most other areas here in the states. now, living in the northern bay area (60 miles from san francisco), i see that the market here is a disaster, while reno’s hasn’t even begun to recover over the past 6 years since i moved. nor is it expected to; with too many overprices houses on the market, tourism (& therefore the economy) down, unemployment magnificently high…it all adds up to what gail is saying…tread with care.
that being said, ann, as you are prepared to make a whopping down payment (good for you!) and can comfortably live while paying for that house, i say more power to ya! i continue to rent as i am uncertain where my future will take me & i don’t want to even begin to look at houses in this lousy market. if your ideal is that million dollar baby, live & live happily.
July 29, 2010 at 12:46 pm
I have to say as someone who has always lived near Vancouver and earned in BC doing a skilled/educated job/profession. I was shocked in recent years to hear about a colleague’s daughter and her “straight out of college” wage in TO vs. Vancouver. Buying over an hour’s drive outside Vancouver and it’s still over $300K for a modest 30 year old SFH needing fix-its…trust me…I’m thinking the “generalizations” about ON earnings vs. expenses are correct…especially when looking at BC earnings vs. expenses…most can’t afford to live anywhere near the thriving metropolis…and our transportation options STINK! We may have wow’d the world during the Olympics but many BC people took vacation time, worked from home or extended travel hours for extremely long days…all so people could get around.
The weather might be better most of the time but the grass isn’t always greener. My caveat…this is my opinion and generalization.
July 29, 2010 at 1:06 pm
@ Pepgirl
All true, all good points.
But Vancouver kicks serious butt. (And I’m a homegrown Toronto cityboy and proud of it, but yeah… Vancouver is redunk-u-lously expensive but worth every penny I think.
July 29, 2010 at 1:33 pm
Bottom line is: no matter where you live, you have to be able to afford it…
We bought lower than what the banks said we could afford, calculated on the “old” 2.5 times your income scenario… we knew there would be rough roads ahead — foreseeing intermittent lay-offs, and also wanting to be able to afford furniture, vacations, and children… As I was shredding way old paystubs today, hard to believe that 14 years ago, when my daughter was born, my DH was bringing home under $300/week, and I was bringing home even less…
Now we are just a couple of years away from being mortgage-free, and I am proud of all that we accomplished, at what we DON’T owe, and how much savings we have… It could be better, but considering some of the years we’ve had, I think we’ve done pretty good… And if we had bought in the price range that we were suggested at, it would have been a lot more of a struggle than what we already had…
July 29, 2010 at 1:38 pm
@Pepgirl – you are completely correct. I was born and raised in BC, but have made Toronto my home. I must say that I am stunned by the cost of living differences between Vancouver and Toronto. If we moved to Vancouver, my husband and I would each earn approx 60% less for the same work, pay substantially more for food, and have to pay almost 100% more for a home similar to the one we have now in downtown Toronto. It is just crazy. I don’t know how people out there, especially those starting out, are managing.
I must add, there are many more reasons other than COL to love Toronto. We have so many wonderful things to see and do, great city services, parks, and best of all, the people here.
Although my birth certificate is from BC, my home (and my heart) will always be in Toronto. Now I just need to convince my mother of this. She refuses to move out here from Vancouver Island. She keeps saying something about year round gardening, year round outdoor sports and great people.
July 29, 2010 at 1:45 pm
You should buy what you can comfortably afford – it’s different for everybody. If you carry debt it’s not wise to add a mortgage. If you don’t have a sizable down payment and will have to scrimp to play the mortgage you really shouldn’t be buying a house. That’s how people end up in foreclosure or bankruptcy.
July 29, 2010 at 1:56 pm
Thanks for this post, Gail. My parents keep wanting me to buy a home. They keep saying that they will make the down payment and that I can get afford a 35 year amortization. It’s true that I could afford it, even at higher than current interest rates, but I do NOT want a 35yr amortization. If I encounter troubles know for a fact that selling a home is often not a simple matter. Until and unless I have a 20% down payment saved up of my own money, and I can afford a 25yr amortization, I will not be purchasing a home.
Right now, I’m living frugally and putting as much of my income into RRSPs as I can afford. I am building security for my future. If I rent my whole life, I’ll still be financially safe.
July 29, 2010 at 2:25 pm
Our young friends have decided to look for a house and were pre-approved for a mortgage – $470,000. They are thrilled and I am nervous for them. They only have a $20,000 downpayment (?how do they even get approval?) and of course this mortgage approval is based on two salaries. In January they moved into a new rental house for which they are paying $1200 a month – up $400 from their apartment. They complained about that huge change to their finances but bought a puppy so had no choice since they were not allowed a dog in the apartment. So I can just imagine how a $450,000 mortgage is going to shock them. They earn good money and are saving for retirement but spend big – lots of vacations and only brand name goods. They seem to think their life style is not going to change. Surprise!
I live in the Yukon and about 6 years ago the prices for houses quadrupled – still less than down south but expensive non-the-less. Our prices are actually going to keep going up because all the land is owned by the territorial government and they only release so much every year for the land lotteries and private people are bidding against contractors.
The young uns asked my husband and I what we thought they should do. We kind of hesitated but I have no control when someone actually ASKS for my advice so this is what we told them. Find out what the mortgage payment on the $450,000 would be. Stay in the rental for a couple more years and put the difference between the rent and mortgage into savings for a bigger down payment OR if desperate for a house buy one for approximately half what you have been approved for and put the difference between the two mortgages ($250,000 vesus $450,000) in the bank so that you can move up the property ladder in a few years.
They seemed disappointed with our advice and sadly have already seen the house of their dreams. Oh if only someone had told us to do this and have patience when we started out. Instead of course we went for broke (literally) and bought the house the bank said we could afford. Yes, we could afford the mortgage but basically nothing else. No house is worth being mortgage poor.
July 29, 2010 at 2:44 pm
I am thrilled that you guys actually responded to my post.
I should add that despite all the grumbling…we would only ever leave BC if my hubby’s national company transferred him to something much bigger and better. Otherwise, we’ll stay put! Being close to extended family is good for our young-ish family.
July 29, 2010 at 4:05 pm
A lot of good messages here. Just because the bank approves you for the moon, doesn’t mean you should buy it! My husband and I were approved for a decent mortgage (around $450K) but that would not have been enough money to buy a nice detached house with a nice sized lot in a nice part of Toronto. Where I was renting an apartment in Toronto, it was a nice neighbourhood but the detached homes were going for easily $700K. Yikes! Not what I would consider a “starter” home.
So, we looked for a city where we could both find jobs and that we could easily afford housing and a life of raising two kids. Voila! We moved near Niagara Falls. And we did it without breaking the bank.
We bought a lovely house in a great neighbourhood for much less than what we were apporoved for, saved for our 20% downpayment, had extra money for closing costs, moving expenses, and furnishings, and didn’t touch our retirement savings, nor our emergency funds, nor the kids’ RESPs. Yay for us!
@Jason — keep on saving! It’s worth it to be patient and to be able to afford where you live.
July 29, 2010 at 4:14 pm
When my husband and I were pre-approved for a 210K mortgage about 7 years ago, my husband thought the bank was crazy! When I called to say we found a great condo apt. for 130K, they said “Are you sure you don’t want to shop around and get something bigger or better?”. I laughed and said, “Nope, we like what we found, thanks” Our mortgage is lower than the rent we were paying, and we already knew about the condo fees, property taxes, etc. I will ALWAYS be thankful that we didn’t let ourselves be talked into getting a home that was fancier, flashier, and more “upscale”…. buying a home within our means has definitely the smart way to go!
July 29, 2010 at 7:25 pm
We bought a house very much within our means (60k) and I’m happy that our market allows us to have our wonderful home for such a reasonable price. With our student loan payments and me about to go on mat leave, we still don’t feel like we have a lot of money, even though we both have good jobs. In those expensive markets, I don’t know how people manage to afford a house and family until student loans are gone…
July 29, 2010 at 9:25 pm
I found this in a report from Wellesey Institute: “Eight of the ten least affordable rental areas in Canada are in Ontario. The worst rental zone in the country is Windsor, and other Ontario communities in the top ten are (in descending order): Ottawa, Toronto, London, Hamilton, Oshawa, Sudbury and Kitchener2.” These # from CMCH
I live in Sudbury, rent for a 1 bedroom averages around $800. Fortunately, We have a 2 bedroom, and the average for a 2 bedroom is $850. Our rent will $860 come September, but we’re still ahead of some of our neighbours who are 1k/month for the same apt size.
I am in the process of looking and buying my 1st home. Out city has a 1st homebuyer 2nd mortgage of 10% up to 15k, for a house up to a sale of a home for $203,809. Let me tell you, not many houses in that bracket anymore.
I think there was analyst from the CIBC a couple weeks ago said the Canadian housing market was overpriced by 14%. This was driven by a booming economy, and the need for greedy. Who needs the biggest house on the block.
July 30, 2010 at 12:18 am
@Cynthia – Where I am, one million dollars will buy a two-bedroom, apartment-style condo that’s approximately 1200 square feet. It’s not size that matters. In real estate, it’s about location. And the view.
July 30, 2010 at 6:26 am
[...] Is the Bidding Lust Over? « gailvazoxlade.com [...]
July 30, 2010 at 9:16 am
[...] Gail Vaz-Oxlade Making Money Make Sense. Is the bidding lust over? “Over the past year, the average home in Vancouver has risen in price to almost $1 million. Yup, you can get a nice little 2000 square foot place for a cool mil.” [...]