One morning in the summer of 1995 we rolled Dorothy’s oil-burner to a stop in front of a skinny, 80-year-old red brick house a few miles north of Toronto’s downtown core. ‘This is it,’ George said, exiting the white Caddy parked behind us. The lot was two cars wide and the lawn a mess. Then I looked around and noticed that every other structure on the street was a skinny, 80-year-old red brick house. It was Leaside. At the time I did not understand I stood in paradise.
The reno couple living there had blown the back off and added a family room and nice kitchen. We gagged, and bought it for $550,000. Later I learned why people want to live here – drive downtown in 15 minutes, good schools, leafy streets, shopping and Beaver Cleaver permanence. But for this there’s a price. Anorexic lots, leaky basements, no garages, napkin backyards and the inability to exit your car without stepping on the neighbour’s lawn. Oh yeah, and money.
Three years later, tired of living on a postage stamp, we sold for $100,000 more after spending half of that on landscaping. Last week I saw George the realtor again and he happened to mention what the old place was selling for now: $1.75 million. “I know,” he said, watching my pupils dilate, “it’s absolutely crazy.”
By the way, that’s $58,300 per foot of frontage.
Leaside is not The Bridle Path, home to stars like felon millionaire Conrad Black and economist princess Sherry Cooper, where a house is currently for rent at $53,000 a month. It’s not Shaughnessy, Vancouver’s toniest hood, where $6 million buys a gut job. Instead, this is a place long known for middle-class families who drive Volvos and shop at Costco. And who now embrace debt like a drug.
This week every major media outlet in the country carried a similar headline: ‘Homes get more affordable.’ It was the result of the latest housing affordability survey done by the Royal Bank, which I hear makes mortgage loans. Radio and TV stations in delusional markets like Toronto and Vancouver ate it up, with several turning it into the lead story of the day. ‘This just in… good news about real estate!’ And it came just as the crazed lending dorks at Beemo were trying to ignite another 2.99 frenzy.
And why not? Apparently all this talk about people no longer being able to afford homes without massive dollops of debt is plain wrong. Said RBC’s economist: “At this point, housing in Canada is essentially as affordable as it was a year ago, and only slightly less affordable on average than it has been over the long term. All things considered, the housing market is sitting in a reasonably balanced position overall, despite some minor stress being exerted on housing demand.”
What does this mean?
Hmm. Well, RBC based its numbers on what it thinks is a standard downpayment – 25% of the purchase price. (In Leaside that would be $437,500.) Of course, 95% of all new mortgages taken today are high-ratio, which means less than 20% down. In fact, nine of ten are for 95% of the purchase price, with just 5% down. RBC knows this. They grant more mortgages than anyone.
So much for useful information. But even with a mama of a down, what does ‘affordable’ mean to the bankers?
To own a bung in Toronto, it says, now takes 52.2% of pre-tax household income. The average family makes $96,000 (gross), so 52.2% of that equals $50,112, leaving $46,000 on which to live. But wait. After-tax income (what you actually get) is $68,421 in Ontario, leaving just $18,421 a year to buy food, run the car, feed the dog, afford clothes, insurance and ammo, go to Orlando and own some beer. And did I mention bank service charges? Anyway, that’s $350 a week. This, of course, is real estate servitude. But the mortgage gets paid!
In Vancouver, the same bung (says the bank, celebrating enhanced affordability) now requires 86% of pre-tax income. That’s $71,491 out of the average gross household income of $83,130. And it’s $5,200 more than the $66,301 that family actually receives after tax. This leaves no money for alcohol or personal lubricant, and might explain why BC has a negative savings rate (and really needs that stuff).
See what I mean? It’s a bogus report. Meaningless, useless, dishonest information designed to fool the media (like that’s hard) and bombard people with a single message: it’s okay to be house horny. It’s all good. Borrow. Buy.
What would drive an esteemed bank to this level of propaganda?
The answer might be contained in a message coming out of RBC’s Capital Markets unit in Toronto, written by fixed-income specialist Ian Pollick to institutional bond clients. The bank is telling investors to expect a jump in the yields on government bonds of as much as 20 basis points because of an anticipated gush of house horniness across the land.
“There are reasons to expect huge volumes of mortgage applications this year, which will contribute to a very weak four- and five-year sector of the (yield) curve,” he said. That means home-buying could whack the bond market as people rush to lock into ‘more affordable’ homes at cheap interest rates that F is telling them won’t last. Of course, the bank will be protected, since it uses five-year interest rate swap contracts to offset the mortgages it writes.
But who protects families handing over 52% or 86% of their gross incomes to own houses with mortgages in place for three-quarters of their values, destined to reset to higher rates at a time homes will likely be worth less?
Now let’s figure out how much income you’d need with 25% down to buy my old place. The first three correct answers win a signed book and an RBC sucker.