Tuesday, May 01, 2007

May Day, Mayday! - homes are unaffordable!

I had a discussion with a friend this morning about how much people can afford in terms of a monthly payment, because after all that is all anyone ever seems to look at.

Here we go - the most "affordable" monthly payment is with a 40 year amortization. To buy the median Greater Vancouver townhouse without a downpayment, the prospective buyer needs a gross annual income of over $95,000.



With a more conservative amortization of 30 years the buyer needs an income of over $103,000.









And with the even more conservative 25 year amortization, the buyer needs an income of over $110,000 per year, to buy a townhouse, in Burnaby or Richmond.


When I look at the income required to purchase one of these median homes, I think back to my dreams and aspirations as a younger man and dreaming of what I would be able to afford if I made $100,000 per year, which by all accounts was and still is quite a bit of money - far above the average income.

I thought about the car I could drive and the home I could own if I earned that kind of income. The car certainly isn't a problem but I'll be honest, I didn't really expect the home I could afford to be a mediocre townhouse for the education and effort required for the position that the income came with.

26 comments:

dingus said...

"I didn't really expect the home I could afford to be a mediocre townhouse for the education and effort required for the position that the income came with."

Hear, hear.

Wifey and I have a grand total of 5 university degrees, professional qualifications, and intermediate experience and good career progression in our fields. We earn good money (at least what I thought would be good money when I was taking on that student debt). We should be nicely middle class. Yet homeownership is a luxury that eludes us. Strange, don't you think?

By renting, we do maintain a decent quality of life, but if we were to buy (the 40 yr mortgage, maxing out), we'd be strapped for cash pretty much forever, slaves to some stucco fixer upper on a small lot in a lousy location. Er, no, thanks.

But we go to open houses of modest little homes owned by retiring postal workers, plumbers and janitors whose wives stayed at home to raise the kids, and we think -- WTF? It takes 2 professional incomes to acquire what a single blue collar income could buy 25 years ago?

mohican said...

No doubt dingus - I am with you. The frustration level is high - really high.

Renting looks really attractive right now. I can live in a bigger and nicer place and pay less per month. Sign me up.

RentingSucks said...

We just decided to rent the basement suite that became vacant at our place to add space to our top floor suite. If it was even 3 years ago we would probably be able to make the leap to our own house for not too much more money.

Boy does this market suck. I would rather be putting the money towards my own mortgage but that would mean moving way out there and a crushing commute everyday. Hoping for some price relief in the next few years.

littlemanrenter said...

Yet according to this article on the Vancouver Sun

http://tinyurl.com/2pgdkw

BC leads in disposable income...

None of this makes real sense or I am missing the money train big time...

rentah said...

I'll be honest, I didn't really expect the home I could afford to be a mediocre townhouse for the education and effort required for the position that the income came with.

Excellently put, thanks.
Vancouver RE has drifted far from reality, but appears to have paused in preparation for the trip homeward.

RentingSucks said...

BC leads in disposable income...

None of this makes real sense or I am missing the money train big time...


I think it makes perfect sense. If you're forced to rent you have more disposable income. It was like that it Japan where you get to certain point and can't make the leap to owning well you got a lot of money to spend on other stuff. I know I do.

Warren said...

Man, bears whine about everything. :)

Being renters we are the smart ones, if you can't own... oh well, laugh all the way to the bank. Prices will come back down, don't worry.

There's absolutely nothing wrong with renting. Be sure to mark down everyone who has bought recently and makes fun of you... politely remind them of that when they are upside down in a payment and you are buying the place next to them for 30% less.

beta said...

Nice work!

I'm thrilled to learn that I can afford to buy out in the valley in some fugly townhouse development that will waste irreplaceable arable farmland. And no doubt my current commute time would increase by a factor of 8. Not to mention gas costs...time to trade in the 7.3 litre F350 crew cab on a Yaris...

Interesting that the difference between a 25 and a 40 yr mortgage payment on a Van townhouse is only 420/mth, but it adds up to another $76,000 over 15 years. That's a big chunk of change to give up in retirement.

On the other hand, the US market is now crashing like a celebrity in rehab...so it shouldn't be much longer before we see it up here.

the pope said...

You've been doing some great analysis mohican. It's astounding that people are still buying, I guess not everybody pays close attention to the market and sees the growing inventory and dropping sales as a warning sign.

Paul said...

LOL Beta!


We saw inventory spike and prices come down before the holidays last year. I hope this time it takes hold. This is supposed to be the strong market and it has been far less thasn stellar. If these listing numbers keep up for a couple more months.....well, its game over!

Grandpappy said...

Really! Blue collar workers used to be able to buy real estate. Well in the late 70's I was pulling lumber off a green chain and I bought a nice little house on a nice sized lot in a nice area of Greater Vancouver. Total price: two years of gross income!! not bad for no education. The government even had a nice $2500 first time homebuyer grant (not that I needed it).

Pondering said...

Working on a green chain drove me back to University.... :-)

Same thing in the town where I was. Now even the average house there is out of range for the average family. Apparently the boom is driven by equity vultures from Vancouver.

M- said...

In Winnipeg, a crappy small house in a crappy neighbourhood sells for $45K. A decent house in a decent area can be had for $120K. A brand-new house in a good area can be had for under $300K. If you can afford $400K, you're buying the upper end of their market.

I'll bet it even makes financial sense to own rental properties in Winnipeg!

I just sold a small townhouse here for over $400K. If my wife and I stretch ourselves into permanent servitude to the bank, we can afford a crappy Westside hovel on a main road. We'll wait for reason to return to the market before we buy another place.

freako said...

I don't totally understand the logic between required income and length of the term.

As we all know the present value of the debt is the same (less lender markup) regardless amortization period.

I think the logic that longer term means lower payment means lower required income is flawed. Since a buyer with a 25 year term amortizes more than a buyer with a 40 year term, it just includes more forced savings, which isn't all bad. As a lender, all else the same, I would NOT be inclined to lend more to a borrower if he opts for a longer term.

I think all this results from the oversimplifed lender criteria of payments as percentage of income

Ulsterman said...

Beautiful Mohican, just beautiful. It sums up my frustrations exactly. Two thoughts:

I have two choices. (1)I save like a bastard for years and buy a house, live cash poor for decades and raise my family. I will be so house poor that i won't be able to take my kids out to the movies, dinner, holidays etc. But they will have the pleasur eof living in a piece o' crap stucco in Burnaby or wherever. When i die, i leave them (hopefully when they're about 65) a juicey big asset.
or...(2) I choose to rent and have lots of disposable income. I take them out to do fun stuff, cool holidays etc etc. They have great memories of doing great stuff with their family. Downside, when they're 65, i leave them very little in my will. But i did leave them a sense that they did great stuff with their family.

On a different note but one related to the visiting open houses bought by plumbers etc 30 years ago. I teach in Burnaby and have the required degree and professional qualification. It's weird to know that students live in 800k houses. I see their parents in Safeway and say "hi", chat away about how well their kid is doing in class, on the rugby team etc. Did i say that the parent actually works in Safeway??? Yes, they stack shelves there, AND own that 800k house they bought 30 years ago. I'm just the dooofus with the two degrees that earns 50k, teaches their kid and rents a condo.

That makes me feel reeeaaal goooood.

casual observer said...

I've been trying to decide whether it is better to focus on building the biggest down payment possible, or to continue saving for retirement while building the down payment more slowly.

One part of me thinks that the upcoming expected downturn will offer a once in a lifetime buying opportunity, therefor concentrating on the DP is the best way to go.

The other side of that argument is that I don't know what the market is going to do, or how long and drawn out the downturn will be. However, I do know that I will eventually need to retire.

Consequently, a more balanced approach would be to continue to save for something I know is going to happen (retirement), while saving a smaller amount for something I hope will happen (RE price drop).

Anyone else with this dilemma?

freako said...

"I've been trying to decide whether it is better to focus on building the biggest down payment possible, or to continue saving for retirement while building the down payment more slowly."

I fail to see the mutual exclusion. What is the difference between building a downpayment and saving for retirement?

casual observer said...

What is the difference between building a downpayment and saving for retirement?

The difference being putting money into an RRSP with the goal of leaving it invested, vs. saving money in a short term account to be used to purchase a home.

mohican said...

"I think all this results from the oversimplifed lender criteria of payments as percentage of income."

Good point here freako. Lenders only look at three things when considering lending someone money. 1) past behaviour regarding bill payments and debt = credit score
2) collateral = house
3) debt service ratio = ratio of PAYMENTS to income

I think over-reliance or extreme relaxation of any one of these areas could lead to some serious problems. Witness the US subprime industry over reliance on collateral.

Personally, I think that the ability to save a downpayment might be a valuable way for a lender to evaluate the potential borrowers ability to repay. Hmmmm . . . .

freako said...

"The difference being putting money into an RRSP with the goal of leaving it invested, vs. saving money in a short term account to be used to purchase a home. "

1. Ignoring the RRSP aspect for a moment, I still don't really see a distinction, as just about any asset can be liquidated fairly quickly. Even if you are actively house hunting, you should only need the deposity liquid.

2. As for the RRSP, you probably know that you can use $20K of RRSP (without withdrawing) per spouse towards downpayment, as long as you qualify FTB. After two years are up, you are required to repay 1/15th a year into your RRSP. I guess 20K isn't much these days, but it will allow you to access all the RRSP's you could conceivably contribute over the next year or two while the market does its thing.

Other than the RRSP thing, the investment itself doesn't care if it gets used for retirement or downpayment.

casual observer said...

Freako:

I think I understand what you're saying, but I'm not sure we're talking about the same thing. What I'm talking about is putting all my cash into a home versus an RRSP.

Home's are not as liquid as other investments. At retirement, I would prefer not to have to sell it or borrow against it in order to fund my retirement.

Also, I don't want to "borrow" a DP from the RRSP once the money is in there as this would have a negative impact on the compound growth of the account.

With this in mind, I guess that is why I'm thinking a little longer about whether I want to put the money into the RRSP in the first place.

patriotz said...

BC leads in disposable income...

None of this makes real sense


Sure it does. You're forgetting that anyone who bought before this idiocy started a few years ago is in good shape because mortgage rates have come down. So are renters because real rents have been declining. The only people who are getting squeezed are first time buyers at the current ridiculous prices. And that money is going into someone else's pockets, right?

Also don't forget that a lot of the RE puchasers are out of province (or so they say, in the southern interior, Island, etc) and this boosts BC incomes although it lessens affordability for local buyers.

beta said...

casual observer: better to focus on building the biggest down payment possible, or to continue saving for retirement while building the down payment more slowly.

I'm in the same position, and I'm also considering this issue.

I think Freako's point is that you can either pay more money now (max DP) and save more later, or pay less now (max RRSP)and save less later. So, in that sense, it's a bit of a toss up which is better.

However, if you crunch the numbers, the difference could be significant. I haven't had the time, but I'm going to set up a spreadsheet soon with a bunch of different scenarios (estimated amounts, rates, tax benefits, etc) and see which of the two is more likely to give me the biggest savings by retirement.

My wife and I have more than $40k into RRSPs. We may or may not take $40k out as FTBs (both owned before but years ago), but it's there as an option. We should decide before next year if we want to add more into RRSPs, or put all $$ into savings for a bigger downpayment.

A simple way to consider it might be to decide how much you're willing to pay and when you're likely to buy at the earliest, then make sure you have 25% saved by that date (plus a contingency fund) and put everything else in RRSPs.

I suspect that when I do crunch the numbers, the best course will probably not be all of one and none of the other, but somewhere in between. When it comes to the far future, it's better to hedge your bets.

freako said...

"but I'm not sure we're talking about the same thing. What I'm talking about is putting all my cash into a home versus an RRSP.
"


"I think Freako's point is that you can either pay more money now (max DP) and save more later, or pay less now (max RRSP)and save less later. "

Actually, I was just pointing out that BEFORE a purchase is made, savings is savings. Other than the RRSP issue.

"Also, I don't want to "borrow" a DP from the RRSP once the money is in there as this would have a negative impact on the compound growth of the account. "

Yes, but so would not putting in there in the first place. Assuming that you save less than 20K over the next few years, the situations should be identical.

"With this in mind, I guess that is why I'm thinking a little longer about whether I want to put the money into the RRSP in the first place. "

Now that is a true dilemma, because it is mostly irreversible. As mentioned, you could "borrow" from it. Second, if your income doesn't change much, should you really withdraw from it, you do lose the contribution amount, but the world won't end. With the lower capital gains taxes, the incentives to use RRSP overall diminishes. It also depends on your tax rate, and retirement plans (or hiatus plans or what have you).

-\/- said...

Check out Chipman's. Interesting post on the incredibly tight rental market. I also think it is becoming almost impossible to find properties to rent, especially on the West Side.

Any idea what this might mean in general? How does it relate to the buying market?

the pope said...

..and it just got even less affordable. Just look at those numbers go:
http://vancouvercondo.info

I understand the reasonable thought is that the crash is imminent. I'm sure it will happen, but I wouldnt bet on any time frame - we're so far detached from reality that you can't base predictions on a realistic point of view.