When my father bought a house in the Toronto burbs for $18,000 in the mid-1950s, it was about average. So was his salary as a school principal – just under nine grand. The prevailing mortgage rate was the same as now, about 3%, and my parents had to meet the minimum down payment to get one. That was 25%.
I’m sure it was tough to find five grand. After all, that would buy three new cars. But big down payments helped keep house prices reasonable, so that property cost just two times my old man’s gross.
By the 1980s, down payments had dropped to about 10%, and the average Toronto house was $109,000. The average income by the end of the decade was $58,700, so a house was about as affordable as it had been thirty years earlier.
In 1999, the feds started to allow 5% down payments. The average house cost $230,000, and it took three years of income to get one. Today, with financing incentives, down payments are even less and the average GTA home is $583,700. Family income has grown to just under $70,000, and it takes 8.5 years of average before-tax income to get the average house.
Obviously this sucks. Something is seriously out of whack. Income growth has stagnated while real estate has bloated. Low interest rates play a role, but there’s a strong argument for saying miniscule down payments are also responsible.
Ditto the US experience.
Thirty years ago the average US down was 20%, the homeownership rate was the same today (64%), but nine of ten houses were affordable. By 2011, despite the crash in American house prices, only 50% were affordable. Now the number has dwindled to 36%, with many American lenders adopting Canadian-style 5% down payments.
If a young couple in Vancouver can scrape together $50,000, they can buy a beater house for $1 million. If the minimum insurance down payment was 10%, they could afford a $500,000 home. And if that were the case, guess what would happen to real estate values?
Actually, we already have some evidence. In June of 2012, dearly-departed elfin deity F erased CHMC insurance for all listings of more than $1,000,000. Two years later the fastest-swelling price category in Toronto and Vancouver was the $700,000 to a million range. Houses listed for $1.25 million in North Toronto in the Spring of ’12, which routinely sold for 15% over list, one year later were worth less. Today they trade at 2012 prices, while CHMC-insurable semis have jumped 8-10% annually.
So, obviously, cheap down payments make for expensive houses. They penalize people with less wealth and income, and they encourage the virgins to take on vastly more risk. That risk is accentuated because we have the same mortgage rates as my parents paid in 1954. And we all know that won’t last.
Lilliputian downs have also skewed the real estate market as a whole, creating massively more demand and leading directly to the demise of the starter home. These days nobody wants a 750-square-foot bung with two bedrooms and one bathroom, unfinished basement and sheet flooring. So, no developer builds houses like that. Today first-time buyers often get a better-appointed, larger and way more expensive set of digs than their parents own, and think that’s normal. More debt. More risk.
Homebuilders and real estate agents love this. They’ve benefitted massively from the unprecedented inflation in real estate costs. The bankers and lenders are also juiced. They have long-term assets on their books that will throw off income for the next two or three decades, resetting at higher rates every few years, secured by real property plus a government guarantee.
This is how we got to the extremely unhealthy point of having close to a third of the entire economy dependent on residential real estate – building it, selling it and financing it. That whole structure rests on an historic mountain of debt owed by millions of people whose incomes have stagnated. By the way, did you get a raise this year?
Well, there’s absolutely no point to this post. There’s not a single politician in Canada with the stones to suggest the 5% down payment that CMHC requires be raised to 7% or 10%. Nobody is going to turn the clock back, even though that would give the best chance of restoring affordability. Today millions of families are so invested in their houses, shouldering a collective $1.1 trillion in mortgage debt, that any overall price decline would be utterly devastating.
They would destroy the political party suggesting it. Just as they’ve voted for the guys promising more breaks. It’s too bad a worse event, therefore, is brewing.
I remember how it felt when, as a Conservative MP, I opposed the Harper government’s 0% down payment plan. I was ostracized, and ultimately punted. When real estate prices went out of control and F desperately tried to reverse things, I was already out on my ass. I’m still grateful.