My husband and I have started looking for a house. We love our current townhouse, but with a growing child and no backyard for her to play in, we want to see if we can afford the move up.
Last weekend was the first time we seriously did some house hunting in the GTA. Here are two things I observed: Real estate prices are very high, and non central-area homes that require renovations are going for hundreds of thousands more than the first time we bought a house in 2009. The same house we saw for $600,000 five years ago is now well over $1 million dollars. As well, home buyers are getting desperate. The number of people I saw at the open houses we visited was astonishing. Fear is setting in that home prices will continue to skyrocket out of reach for many Canadians and buyers want to get in as soon as possible.
The concern over buying frenzies isn’t just limited to open houses. Now, the IMF is sounding fresh alarm that the Canadian housing market is overheated by as much as 20 per cent and that recent rules to tighten mortgage lending standards have not done enough to prevent risky borrowing. In fact, homeowners desperate to make an offer are borrowing to afford the 20 per cent down payment in order to avoid paying mortgage insurance. This is a concern as there is no protection for banks if these homeowners can’t afford their home in the future. Uninsured home buyers now make up one third of all new mortgages. This is most rampant in Canada’s most expensive cities, like Toronto and Vancouver, where home prices have shoot up by 60 per cent in the past 15 years.
These concerns are also backed by new numbers from Statistics Canada that show Canada’s average debt-to-income ratio has reached a new high of 163.3 per cent in Q4 of 2014. Mortgage debt reportedly makes up two thirds of this amount. Record low mortgage rates are blamed for this uptick in debt – and what’s perhaps scariest is these numbers were collected before the Bank of Canada cut its Overnight Lending Rate in January by a quarter of a per cent. As well, disposable income grew by only 0.5 per cent in the same quarter, the third straight quarter in which debt growth outpaced disposable-income growth. Short story – we’re saving nothing and increasing our borrowing.
Not Enough Information
Another problem the IMF is noting is the lack of reliable data on the Canadian housing market. It wants the various bodies that regulate mortgages to be centralized. This includes the Department of Finance, the Office of the Superintendent of Financial Institutions, the Canada Mortgage and Housing Corporation and provincial governments. “Providing a mandate for macro-prudential oversight of the financial system as a whole to a single entity would strengthen accountability and reinforce policy makers’ ability to identify and respond to future potential crises,” IMF officials Hamid Faruqee and Andrea Pescatori wrote in an article posted on the IMF’s website. “Such a body should have participation broad enough to ‘connect the dots’ and form a complete and integrated view of systemic risks with powers to collect the required data.”
Oil’s Impact on Debt Levels
Oil’s price drop and its impact on the housing market is a major concern for the IMF. Oil is a major economic driver in Canada and with the spectacular slide in prices there’s concern Canada’s GDP will be affected as job losses mount and activity slows down.
The IMF says there needs to be more focus on insured mortgages and the CMHC can’t take on the leading role in that. It says, “ Canada would also benefit from reforming the government’s role in mortgage insurance and reducing taxpayer’s exposure to the associated risks.” They want the private banks that lend the mortgage to step in and share the risk. “Given the system’s current reliance on insured mortgages.” It adds, “ changes would need to be gradual to steadily encourage the private sector’s role to expand as the public sector’s recedes.”
What Can Home Buyers Do?
I have to follow my own advice. If I can’t afford the house at a rate 2-3 percentage points higher than the bank is offering than I have no businesses putting in an offer. Homebuyers need to understand that home prices are at record highs and vulnerable to any economic news. A rise in interest rates in Canada or the U.S. would impact prices, as would a further weakening of oil prices. A colleague reminded me just yesterday that it wasn’t that long ago when interest rates were at 6 per cent. Think about that before you sign up for an $800,000 mortgage just so you can buy an average detached home in Toronto, for example. Even if you have the down payment, that mortgage will be with you for 25 years; can you afford to pay it down in that amount of time? The first five years at a low interest are will be fine but what happens when rates start to rise. These are the questions I’ve been asking myself as I start my house hunting journey and you should be doing the same.