Darren and his hot but encumbered wife live in Vancouver and credit this blog for becoming second-class citizens. “This blog saved us from buying a house last year,” he says, “so I owe you some thanks, man.”
You may have heard that sales have just plopped 20% in VanCity, and on Friday listings hit a 10-year high. The price of a SFH is off a hundred grand. Cocker spaniels can predict what comes next. But not Darren’s inlaws. More on this in a moment.
On Tuesday the Royal Bank, whose stock is looking quite tasty, gave the world another of its awesome housing affordability reports, coming to the astonishing conclusion that it sucks. RBC said things have deteriorated sharply in Vancouver and to a lesser degree in Toronto, mostly because prices have swollen like a lonely gland. With a SFH in Van still over a million and hovering near $840,000 in 416, we should not need a report.
But here’s the latest score: In Toronto to afford a standard bungalow with a 25% down payment (stop laughing), requires 53.4% of a family’s pre-tax income. The average household earns $97,000, so fifty-three per cent of that is $51,264. The actual after-tax income of this family is $71,251, which means in the real world they devote 72% of their take-home pay to the house. That leaves $1,600 a month for everything else (and no money to invest or save).
In Vancouver, the same bung with the same down payment (about $250,000) now requires 88.9% of pre-tax income. This works out to be $9,684 more a year than the average family brings in the door. In other words, the house now costs 111.5% of what the household earns.
“It became a little tougher on household budgets to carry the costs of owning a home at market prices,” said the bank’s economist, Craig Wright, trying hard not to throw up on his suit. “Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years. Affordability headwinds are likely to increase next year, as interest rates make their way towards more normal levels.”
You can see easily how we passed the point of absurdity some time ago. This is a bank, for the love of Allah, which we all thought cut off your dangly bits when your gross debt service ratio snuck towards 35%. How anyone thinks we will avoid a reckoning is beyond me. Except Darren’s delusional inlaws.
And while we’re reflecting on the coming evisceration of greater fools, remember this? I wrote a post about le roi-des-condos, towering, Rolls-driving, Brad Lamb about a month ago, ripping the marketing for his new condo development in Calgary. Aimed squarely at flippers and speckers, it promised an unseemly “282% return on investment” to those brave enough to buy a one-bedroomer across the tracks from downtown and up the street from the recycling depot.
He’s at it again. This time in his native GTA. And being Toronto, the returns are even better – 287% for those snapping up a one-bedroom plus den unit at Spadina and Adelaide, the metrosexual scooter capital of North America. And how many virgin investors will fall for this math? Like counting mortgage equity as a “return on investment”? Or guaranteeing a 4% annual capital gain every year for the next decade? Or assuming 3.5% mortgages will never increase? Lots, probably. Brad’s a smart guy. Worth millions. This is how.
Now, back to Darren. He’s asked for our assistance in convincing his wife’s parents that they are courting real estate disaster. What should he say?
Was at my inlaws this weekend. They own a house in Surrey BC, no mortgage, are about to buy an estate-type retirement home and are totally sure there’s no reason to worry about real estate, convinced their place is worth about $500K. My father-in-law told me flat out, that a drop in prices in their neighborhood will “never happen.” (his words), because they’ve been there since 1978 and it’s never happened before.
Oh, and also, I think they’re starting to get worried about money. I know they lost a ton in 2008, and the other day my MiL mentioned casually that she wished they drove a car more like my 8-year old vw than the $60,000 Lexus they bought in 2009, brand-new, for cash, after inheriting some money. I know, I know.
To me, it seems like the only smart play is, sell, rent a nearly identical place for a grand or 2 a month, and if you really insist on home ownership, buy in a few years after prices fall. A total no-brainer. Like, if you can count past 21 without removing your shoes and your pants, this should be obvious, right?
Then today it clicked. They think that renters are second-class citizens. They were looking at possible locations to re-locate to, and my father-in-law basically vetoed any place that would have renters in the neighborhood. I swear to god, I’m not making that up. My question for you is, what if anything, should I say? You’ve been giving financial advice longer than I’ve been interested in the opposite sex. If you were in my position, what would you say?
Oh, and, of course, feel free to publish this on the blog, but keep my name out of it. Unless you’re advice on picking a divorce lawyer is as good as your advice on bank preferred shares was.
Oops. Sorry, man.