Vancouver Real Estate

I have tried to keep my financial and economic rants to a minimum on this blog but sometimes the stupidity and lack of common sense I see is too great that I can no longer contain myself; sorry but today is one of those days.

Somehow a Vancouver mortgage broker got my work e-mail and has been sending me his monthly newsletter. I don’t mind the spam as I like to see what is going on out there so I usually check it out. One of his masterful pieces today was how to buy a house in Vancouver without a down payment. I show the article here as it is relatively short:




“The zero down payment option was abolished after the recent recession. Previously banks would offer zero down payment purchases with high fees. When this option was removed, a few banks found an expensive way around it. They would essentially give you a 5% down payment but the interest rate on the entire loan equated to about a 100% interest charge on the 5% down payment.


This is certainly not a good route to take. Furthermore if you cancelled the mortgage before term completion, you owed all that money back. Not good.


We have come up with an alternative strategy to a zero down payment. Obtain yourself an unsecured LOC (line of credit) for the amount required for down payment and closing costs. Then take these funds and deposit them into your bank account. After three months, those funds are considered yours and now you can use them for a 5% down payment. Of course you will pay interest on the LOC, however the rate will be significantly less. The only downside is you obviously must claim this liability which will hinder your purchasing potential and slightly decrease what you can afford.

This strategy is also suggested for those of you who find it hard to save up a down payment.”

I will refrain from mentioning the name of the Vancouver based mortgage broker who wrote this as there will be no way for him to defend his writing unless he reads this blog; which I highly doubt he does consider the main topics surround our family activities.

So what about buddies article got me mad? The problem is that Vancouver is clearly a real-estate bubble due to the influx of Chinese buyers into the market. The average home in Vancouver runs you 9.5x the average income, this compares to the national average of 4.6x and the U.S. average of 3.3x ; historically to be affordable the multiple runs around 3x income (Source). Let’s not forget that our housing is unaffordable in a period of historically low rates – see chart below of the Chartered Banks Prime Rate as an example.

 
So the Vancouver mortgage broker is recommending people leverage up at the height of the market with zero skin in the game to buy a house. To make matters worse he is suggesting some of that debt be an unsecured line-of-credit. Now correct me if I am wrong but most unsecured lines of credit are of the variable rate variety. So what happens to these people loaded with debt when interest rates go up? Let’s not forget that for the average 25 year Canadian mortgage every 1% rise in interest rates increases the monthly payment by 9%!

I have heard the housing cheerleaders say it does not matter that the Canadian debt is rising because so are the assets they are backing. Lets see about this…As of last summer Canadian debt to disposable income was at 148% (source) which was the same as our American neighbors. Since then our savings rate has dwindled, as shown in this chart:

so I would feel confident saying it is higher then that now. And as you can see from this chart

which was published with 2009 numbers Canadian’s debt to asset ratio hit a 35 year high then and I am sure they have kept pace since. But I would argue it doesn’t matter if your assets are keeping up with your debt if the assets are not generating the income to support the debts and, the last time I checked, that nice vehicle in your driveway and the crappy ass shack you overpaid for as your principal residence in Point Gray does not generate a whole lot of income.

As we can see here:

the average Canadian with a mortgage liability ratio greater then 20% was putting out 111% of their income in 2008. And as the two prior charts show, interest rates have fallen since then, savings rates have gone nowhere but our debt to disposable income has increased. So what will happen to the clients of Mr. Mortgage Broker from Vancouver when rates go up (which they will) and the Chinese stop buying Vancouver real estate (which is have no clue about).

Now if you want to take the American view that house prices always go up, and we know how well that worked, let us not forget that from 1981-1982 Vancouver real estate dropped by a cool 30%. Now that drop was precipitated by a spike in interest rates to a number north of 20%. While I do not see mortgage rates going to 20% a rise from 4%-8% is as much a 100% jump in rates as is a rise from 10% to 20%. Once again, looking back at the prior charts, Canadians had a much greater savings rate in the 80’s then they do now (a bigger cushion to fall back on) and much lower debt to disposable income then they do now.

To finish my rant I will say that the data is stacking against rising Vancouver real estate and for rising interest rates. So with that in mind should a mortgage “professional” like Mr. Mortgage Broker from Vancouver really be advocating buying a house with 0% down? Probably not! So much for fiduciary duty. Or I could be wrong and buddy is a genius.