It was 2004. Three years after Nine Eleven, four years past the dot-com bust. Nobody in Miami or Vegas or northern California could have imagined that in three dozen months the value of their homes would collapse by half. Interest rates were decent, the economy chugging along, credit plentiful, mortgages swelling and everybody wanted to live here. Wherever that was.
That year, at the height of house lust, the American home ownership rate touched a record high – 69.4%. Minimal down payments were the norm, as were teaser mortgage rates and jumbo loans. There was only one thing young couples wanted to do, and that was to grab a hunk of the national dream, no matter the size of debt that came with it.
The latest RBC survey of housing intentions found this:
“A majority of Canadians (84 per cent) believe that a house or condominium is a good investment. Just over half of Canadians think that now is the time to get into the housing market (52 per cent), while fewer Canadians believe house prices will be higher at this time next year (43 per cent, down from 47 per cent in 2012).”
Home ownership in Canada is also at a record high – just a hair under 70%. Almost half of all real estate purchases in the last five years were executed by first-timers, most with high-ratio mortgages and microscopic down payments.
I mention this for good reason. If we’re now on a similar path to that taken by the Yanks (we are), it’s worth knowing how things turned out down there. This week the US home ownership rate fell to a 15-year low. At 65% it’s back near Bill Clinton levels. Despite recent rebounds, prices are still 30% lower than they were in 2006. The median asking price for a house is $133,700, the lowest since 2005.
In total, about $6 trillion in wealth, mostly the net worth of middle class households, went poof. Millions of families now live in homes worth less than the mortgages placed upon them. And a cascading property market helped whack an economy that had become far too dependent upon it.
But you know all that. But did you realize what’s happening with the kids?
The home ownership rate among those under 35 is now just 36.8%, the lowest in twenty years. Yes, welcome to Generation Homeless. A slow economy’s forced an army of over-educated, under-employed twentysomethings back into their parent’s basements. That’s right – just like here.
But a key difference is that in Canada you need cough up only 5% of a property’s value to buy it. In most of the States these days, the minimum required is 20%. That’s created a massive gulf between the kids (one in three owns) and their Boomer parents (eight in 10 own).
Imagine if this were the case here. We’d not need mortgage insurance (it clicks in on sales where equity is less than 20%). Few people would buy homes they couldn’t actually afford. First-time buyers would no longer be the market’s driving force. Mortgage debt would decrease. And, yes, prices would fall. A lot. Maybe even revert to the mean, which is roughly 60% of where they sit today.
This should lead us to simple conclusions. Our housing market’s now being supported by stupid-cheap money and lending practices other countries have dumped. Policies like 5% down and state insurance protecting lenders routinely put 26-year-olds into unrepayable debt to buy assets at inflated prices. Many will never recover. We’ve allowed real estate to become a dangerous, unstable mainstay of the entire economy. And when 70% of families own homes, who do they sell to?
It took a financial crisis to wake the Americans up.
So glad I now rent.
Maria & BF, 29, rent a condo and lust for a semi. “I want us to get a semi together in Toronto under $600,000 over the next year or two in a good area, like the Danforth, with transit, parks, schools, etc.,” she says. Maria claims this blog is “addictive and funny,” but apparently she doesn’t take me seriously (it’s a common affliction). “I am concerned about missing out on a few years of affordable interest rates, if we don’t buy now.”
We’ll come back to the young hormones in a moment. First let’s talk about those cheap rates.
For all intents and purposes, those 2.99% five-year deals are gone, quietly squished after F had a hissy fit and muttered bad things about a race to the bottom. Yes, yes, you can still get a five-year closed loan for as little as 2.74%, but for that you’ll have to deal with a company that also pumps septics and fixes lawnmowers.
Mainstream lenders are all north of 3% again, with BMO the cheapest at 3.09%, Scotia at 4.99% and TD, CIBC and Royal at 5.14%. Yikes! But these are ‘posted’ rates. There are in-branch specials, online discounts and four-year fixed loans still at 2.99%. Speaking of Scotia, the five-year there is now 3.19%, which means the bank heeded F’s rant, even thought CEO Rick Waugh did some tough talking to reporters.
“As a minister of finance, he’s obviously concerned about the well-being of the country. However, to price products for businesses — whether it be banks or manufacturers — is not what I would have expected,” he said. “I understand why the finance minister is concerned about the Canadian economy, but I just philosophically don’t think government should be setting product pricing.”
On one hand, Waugh has a point. If left to their own competitive devices, the bankers would compete viciously for a dwindling mortgage market with the lowest-possible rates. But, on the other hand, we have Maria. She believes debt is good, so long as it gets her what she wants.
The two of them make a combined $120,000 and have a hundred grand in savings (good), all in GICs and savings accounts (not good), “because both of us are plain vanilla and like things safe.” Despite that, they want a $600,000 semi, instead of the condo they now pay $1,475 for. So, does a $500,000 mortgage bother her, especially given the likelihood of mortgage rates being far higher when the first renewal arrives?
Nope. Not if she get the house. “I am also concerned about prices for houses never falling in Toronto, and prices for more affordable houses in good areas shooting through the roof (which is already happening with all semi-detached homes in the 416). I want us to settle down and have a place to call our own.” Aren’t twenty-somethings cute?
At the same time, Maria can see the market shows distress. One-bedroom condos in her complex average $325,000, with $500 in monthly fees. “There are 21 units listed for sale in our building alone right now,” she admits.
This is what cheap debt does. It builds immunity to risk. Maria and her squeeze are so risk-averse they keep their money in cadaverous GICs and comedic bank accounts, and yet think nothing of taking on a half-million in loans for half a house, at a cost which will only increase. Besides, what happens when they have a kid, drop one salary for a year, and add $1,500 a month for daycare?
It’s ironic without end that F was the guy who fathered 0% down and 40-year loans while telling everyone it was safe to buy, and now bullies banks into raising rates. More than anyone, he instilled in Maria a belief that no amount of debt is too much when it yields a house. So now that a credit bubble’s replacing the real estate gasbag, his legacy has blossomed. Houses people can’t afford. Debt they can’t repay.
Of course, the little pecker’s right to mash the bankers. Teaser-rate mortgages helped destroy the US housing market. Why should it be any different here? The economic cost of cheap loans is staggering.
Meanwhile Maria asks. “My question for you is, should we buy a house over the next one to three years? And if not, when do we know it’s time to buy?”
Buy when you can afford it. Buy when you understand the risk. Buy when you need a house.
Right now, lady, you’re zero for three.