One day not so long ago, in a fabled city on the wet coast, 900 newbies packed a seminar room to learn why they should buy a house. Quite the sight. That it happened in Vancouver is testimony to the power of human delusion. And marketing.
The industry group behind the spectacle, the Greater Vancouver Home Builders, had a fabulously impartial lineup of speakers. There was the local analyst from CHMC, the guys who bring you 5/35. A vice-president from subprime insurer Genworth Financial. A mortgage hawker from the TD Bank. And the prez of the local real estate board. Now, how could you get a more balanced view of the market?
And while I’m all for investor education, it’s hard to imagine any advice for prospective new, young Vancouver buyers more constructive than this: “Run!” After all, the average detached house in Van now costs $741,632. In West Van it’s $1.4 million. And a 2-bedroom condo can easily set you back $600,000. This means anyone buying that ‘starter’ home (an 800-square foot box in the sky) will need about $42,000 in cash for a downpayment and closing costs and the stomach for a $570,000 mortgage.
And what does that cost? Man, just $1,900 a month with a super-cheap VRM of 2.25% and a 35-year amortization. Oh happy, day – and an income of merely $72,000.
But what happens in five years if, as central banker Mark Carney suggests, rates return to ‘more normal’ levels? After all, the average five-year mortgage rate over the past two decades is 8.2%.
Well, this happens: Monthly payments become $4,074 (even with a 35-year am), and you’d better be earning $146,000.
Hmmm. I wonder if they brought that up at the seminar?
Actually what’s happening now across the country as the real estate industry preys on the inexperienced and hormonal should have everyone’s attention. We all know mortgage rates are at the lowest point, and will rise. We know this will crash affordability. And we know as a result the real estate market will slow – perhaps dramatically – and valuations will fall. We know Ontario and BC are bringing in the HST next summer. We know it will make houses, commissions, legals, moving costs and lots else more expensive. We know that will crimp incomes and hurt housing. And this is just the start. Add in a post-Olympic flop, deficit-induced tax increases and rising energy bills, and any experience real estate junkie can see the result.
Which, I guess, is why they’re feasting on the kids.
CHMC sure is. They’ve got a new report showing 57% of all real estate action is coming from first-time buyers – about double from a year ago. And they’re ready, with heaps of bank-saving insurance.
CREA sure is. They’ve got a new ad campaign aimed at young couples. Says their spokesguy: “The focus of our messaging is around the value a realtor brings to the table and so in that context it offers value to first-time home buyers. Realtors know things you don’t stemming from their experience.” I’ll bet.
The banks are sure after the kids. Like BMO, which has podcasts for first-timers, and even a box full of ‘tools’ for $24.95 (rebated if you take a mortgage of, oh, $400,000).
And it’s all apparently working. TD Canada Trust’s latest survey found Canadians “aged 18 to 34” are more confident about buying a first home than their parents were. A full 51% claim they are “financially ready” to take the plunge.
Well, maybe they are – into 2.25% mortgages and a rising market in which equity gains blunt the pain of mortgage debt. But we all know this is an aberration. We know where this is going. The banks know. CMHC and CREA know. The Greater Vancouver Home Builders Association knows.
If the market declines by even 10%, all those new buyers with their 5% down and equityless monthly payments will be wiped out. They would have been far better off renting, since negative equity is a real possibility, especially in frothy places like Vancouver. The responsible thing would be to sell them homes they can afford to carry at mortgage rates which will exist at the time of renewal. If no such homes are out there, they should wait. It’ll come.
But where’s the fun in that?
Bring on the virgins.