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April 15, 2018 | Tools

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Last April the weather was better in most places, mortgages were still around at 2%, there was no stress test (except for the low-downpayment crowd), stock markets were cavorting higher, volatility was low and average house prices in the Bubble Cities were jumping 33% year/year. It was, we now know, peak house.

As prices jumped so did buyer creativity. Bank of Mom loans exploded so newbies could avoid paying mortgage insurance – plus meeting higher income requirements – with a bigger deposit. If you could pony up 20%, you could flip CMHC the bird and cut the red tape. So that’s what happened. And soon the banks found more than half their home loan portfolios were uninsured, even though tons of those people were actually higher-risk. They’d bought homes, in other words, with other people’s money. If rates rose or the market choked and borrowers walked, the bankers would be exposed.

So, we got B20.

Now everyone, regardless of where they obtain the downpayment, must pass a test proving they can handle the payments even if rates pop 2% higher.

In a year, breathtaking change. Peak house passed. Prices are off 10% nationally, 14% in the GTA and 25-30% in McMansion-laced suburbia. The Dippers took over BC and are purposefully killing the market there. Mortgage rates have increased. Real estate sales have dropped by a third. What activity there is has been pushed down into the condo segment. As far as housing goes, this is the silent spring realtors have dreaded.

As detailed here recently, B20 is powerful, and it’s backfiring. By making detached houses less affordable, it’s driven demand elsewhere. Condo prices are up 25% in Van and 15% in Toronto since this time last year. Meanwhile SFH values in popular urban areas have not moved much at all, and the only ‘bargains’ are in the hinterland where $1.9 million suburban sprawls are now $1.3 million – still well outside the means of the average newbie buyer (and over 90% of the population).

The overall result has been to reduce affordability by trimming the fat on houses few people can buy and increasing the price on those that they can (or used to). Big fail. The BC tax assault will have an identical outcome. Politicians are such tools.

Anyway, in an astonishing development, Global News did something useful a couple of days ago. Those guys came up with some graphic evidence how B20 has massively penalized first-time buyers in a few select cities (you know which ones) compared to other places where people can actually raise a family and have a life.

Global produced a chart showing what income and downpayment are required to buy an average house in various places. The assumptions are generous – 20% down, 2.99% five-year mortgage and that the buyers must have no other debt of any kind (do you know anybody like this? Me neither.).

Remember the formula bankers use: total debts cannot take more than 42% of pre-tax income and housing costs must be less than 32% – and that’s based on a stress test of the current mortgage rate + 2%.

So here’s a sample of what you must earn and have saved, to buy a home, based on current average prices:

Down: $59,671
Income required: $55,000

Down: $75,318
Income required: $70,000

Down: $59,462
Income required: $60,000

Down: $93,121
Income required: $85,000

Down: $81,380
Income required: $75,000

Down: $163,528
Income required: $145,000

Down: $216,800
Income required: $175,000

Conclusions: (a) B20 has failed in YVR & 416. Buying detached is impossible for first or second-time purchasers. So condo prices have popped, and soon that option will be gone. (b) You need a damn good reason to stay in urban Toronto or Van – and that doesn’t include Sbux, Muttonhead or Robson Street. (c) Life in two of our major cities has been made worse by political interference and financial engineering. You elected them. (d) Buy now in Halifax.

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April 15th, 2018

Posted In: The Greater Fool

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