Sup, guys. I wrote the following (or most of it) in January of this year. Snarky commentary by October version of self in the brackets. Parentheses. Whatever. I am also editing this quickly after attending the Ward 8 forum, where this program was invoked several times.
So every six months or so I have an argument with parents and other interested parties about why we aren’t buying a house.
Warning: woefully self-indulgent post to follow, with absolutely no humour and dollops of privilege. Also assumes basic familiarity with affordability. If you don’t feel like reading it, here is a summary:
1. The Equity Building Program, as outlined by the City, promotes 0 down mortgages by providing a loan for your down payment
1. a) #1 is a bad idea, because we are subsidizing unaffordable mortgages (sometimes well over 4x household income) Full disclosure, I am a household who would qualify for this program.
2. I won’t be buying a house until interest rates go up, because obviously I don’t want to have any money. Ha ha! Trick question. I will likely never buy a house because I am too lazy. (And I am a Millennial and am too busy buying bikes and computers and iPhones. I think I am a Millennial anyways, they keep moving the stupid generational goalposts as it suits whatever frothy editorial they are trying to write, “they” being The Media, yes all of them)
3. This is a rather long summary.
3. a) Sorry.
4. Renting sucks but so does buying a house.
Of course, it is debatable whether we should be buying a house at this point in time – I’m only 28 (+7 for the S.O.) & we’re not quite sure what the next 10 years will bring. Lots of younger people in our age bracket have been snapping up properties in the last decade or so; low interest rates, an upwardly inclined economy, and rising rents have been driving this trend. (See, even I can talk like a dusty economist if I so choose!)
(deleted paragraph of vacuous debate over whether there is or isn’t a housing bubble here, as if I get to decide, what a pompous ass)
What remains to be seen is what will happen when interest rates go up.
(ATTENTION FAMILY AND FRIENDS) Which leads me to my next point. After watching the events unfold in the U.S., it seems prudent for me to assert the following criteria for buying (or not buying) real estate. (since you care sooo much)
1. Purchase price of house, including all associated fees (generally 10% of price) should ideally not exceed 3 times yearly gross household income. (3.5 at the absolute most.) For us, that’s around $200,000; I’m not comfortable assuming more debt than that.
2. Plan for mortgage rates to be at least 6% or more. Even fixed mortgages only have fixed rates for a max of 10 years. This may seem draconian, but I’d much rather be proven wrong on this than to lose the house after paying on it for several years.
3. Condo fees (and associations) should be regarded with a healthy amount of scrutiny. What good is an affordable mortgage if your condo fees keep increasing unreasonably? Not to mention, a bad condo association or high fees will hurt your resale value, if you decide to get out. Any major improvements or maintenance have to be approved by a majority of the condo association, so tight budgets can really affect the long-term viability of your building. Not to mention, if you have to sell the entire building, it’s much less than the sum of its parts. What I’m trying to say here, is that condos don’t hold their value as much as a house, since it’s easy to buy a house from a single owner and do whatever you want (within reason) to the building and/or land. It’s much harder to buy out dozens (if not hundreds) of individual owners. Of course, if you own a condo near Market Mall, you’re set for life, or at least for the next 30 years. (SUMMARY: CONDOS ARE OF THE DEVIL)
4. This is the big one: Down payment should be at least 20% of house price. If you have to borrow for the down payment, you can’t afford the house. Honestly. This is my massive beef with the program brought forward by the City of Saskatoon. You can get a loan for 5% of the down payment if you qualify. It’s an interest free loan. But only for a bit. You have to pay it back within 5 years. Oh, and the purchase price of your house has to be within $180,000 and $280,000. And your household income has to be between $44,500 and $70,000. And you have to pay back this loan on top of your mortgage, because I’m sure the bank isn’t going to sit idly by. Now, I’m not sure about you, but I’m seeing a disconnect here. $180,000/4 = 44,500. And that’s just the low end of the “approved” price range. 5% of 180K is $9,000. Let me tell you: it is not good to assume that you’ll come up with an extra 9K in five years. You are saddled with a house that, unless you are at the minimum approved price (or the maximum approved income) is above the 3x yearly household income rule. If your down payment is less than 20% you will most likely have to pay mortgage insurance premiums, which vary depending on what you buy and what your income is, but I would budget for at least five thousand dollars. (#DIDACTIC)
The international Demographia housing affordability survey has Saskatoon pegged at 4.3x median income (I vastly prefer the median metric over average). They rank anywhere from 4.1 to 5.0 times median yearly income as “Seriously Unaffordable”. (Affordable is 3.0 or less, Moderately Unaffordable is 3.0 to 4.0 and Severely Unaffordable is 5.0 and over.) So you see, 3x is a fairly high estimate. Especially if, like us, your current rental situation is comfortably below the 1/3rd monthly income cutoff. (HATERS TO THE LEFT)(Also I think this Demographia link is old, hang on, here is another one – PDF.)
Your monthly housing costs shouldn’t be more than 32% of your gross monthly income. (I really wish I didn’t have to use as many “shoulds” in this post, I really do.) This includes property tax, interest, and heating expenses. (Thank you, CMHC.) (So we’re under that, but I have to put up with my neighbours parking like assholes and random people stealing recyclables off the neighbour’s deck. (Unfortunately not the same neighbour, the arc is still bending towards justice. Not to mention a dearth of sidewalks. These are pretty trivial concerns when compared with other neighbourhoods, though. I’m not really sure where I’m going with this.)
(I deleted a whole puffy paragraph here full of vapid speculation about what happens when interest rates go up. We all know what happens, Baby Jesus cries, Mark Carney cries.)
I wrote this in January; things have changed a bit since then. We’re now hearing more talk about a “soft landing” or a “cooling” of the housing market; with the changes to mortgages and HELOCs sales have dropped 15% year-over-year; prices have risen 1.1%. Those are CREA’s numbers, and they like to make things as rosy as possible. I’ll finish this up by citing a realtor who shall remain anonymous (the best kind of realtor) who confided in me that the Equity Building Program was an awful idea and sure to promote inflationary tendencies in the housing market. We don’t have affordable housing in this case; it’s affordable financing. (thanks for the snappy quote, Ben Rabidoux.) Those are two very different things.