“We do not have a bubble,” F said one night this week. “I think if we had failed to take some action we would have had a bubble.”
Well, that’s a relief.
In Vancouver the average household income is $83,330. The average bungalow costs $1,013,750. To buy it and not pay high-ratio mortgage insurance requires $223,025 in cash, and a mortgage of $811,000. At 3% that eats $3,850 a month. With insurance, property tax and a little maintenance, the nut climbs to about $4,500.
So, to buy the average Van bung with conventional financing you need a quarter million in cash, and then $54,000 a year. After-tax, an income of $83,330 in BC yields $64,568. This means the average family buying the average bungalow is left with $830 a month for food, clothing, transportation, utilities, medical expenses and as much alcohol as possible. There’s no money left for investing, retirement or saving. Which probably means the average family could never save $223,025 for a down payment.
But, says F, no bubble.
I wonder if he’s read the latest RBC housing affordability report. The bank figures it takes 82% of a family’s gross income to pay for all aspects of owning that Van bungalow. In Toronto, where people earn more and houses cost less, families need to devote 54% of gross income to real estate. Across the country, says economist Craig Wright, owning a standard two-storey house will absorb an average of 48% of a household’s gross income.
Now this is meaningful, since banks (and CMHC, which F oversees) have a rule that all home-related expenses should not exceed 32% of a family’s gross income. It’s called the GDS ratio – gross debt service. Plus, total debts of all kinds are not to exceed 40%.
Here are the actual CMHC guidelines:
Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating. If you are thinking of buying a condominium or leasehold tenure, PITH also includes half of the monthly condominium fees. For leasehold tenure, PITH also includes the entire annual site lease.
Lenders add up your housing costs and figure out what percentage they are of your gross monthly income. This figure is called your Gross Debt Service (GDS) ratio. To be considered for a mortgage, your GDS must be 32% or less of your gross household monthly income.
Affordability Rule 2
The second rule is that your entire monthly debt load should not be more than 40% of your gross monthly income. Your entire monthly debt load includes your housing costs (PITH) plus all your other debt payments (car loans or leases, credit card payments, lines of credit payments, etc.). You have calculated these on the Monthly Debt Payments form. This figure is called your Total Debt Service (TDS) ratio.
This raises a few questions. Like, if banks (and the government) have strict ratios to determine who qualifies for a mortgage, how is anyone in Vancouver (or Toronto) buying houses? If the average Canadian family can’t meet the criteria to afford the average home, how can we not have a bubble? How can anyone be surprised the saving rate’s collapsed, that a quarter of families have never saved anything or a third say they have ‘no wealth’?
And how could Craig Wright therefore state (as he just did): “A significant nationwide price correction isn’t imminent as long as affordability stays within the current range”?
The only reasonable conclusion is the longer this artifice endures, the more that F and the bankers fib on, the slimmer the odds of a happy landing for the hemorrhaging housing gasbag.
This week mortgage brokers warned 150,000 jobs will be lost as housing and construction crater. “Some people thought the market would come back (this spring),” says head broker Jim Murphy. “Well it hasn’t come back. It is a definite trend.” New housing starts will be 25% lower within a year or two, he adds, and in Toronto a drop of 50% will erase 35,000 jobs.
Don’t you just hate being treated like morons? I thought that’s what the Senate was for.