Do you like stories?

Most people would say that I do.

Well, to be more specific, most people would say that I like telling stories but not necessarily listening to them.

Meh.

Forget those people!

Completely unrelated here…..but would you mind if I started today’s blog post with two stories?

Excellent, thank you…

Make Money; Have No Money

Mike and Jenny are 28 years old and are two years into their legal careers.

They racked up a lot of debt to pay their way through law school, but after tirelessly paying it off, they’ve managed to save a little bit of money.

Not a lot.  Certainly not by Toronto real estate standards.

Together, Mike and Jenny make just shy of $200,000 per year, and based on their marginal tax rate, they take home about $148,000 of that.

If they purchased a house for $1,000,000, with a 4.19% mortgage, amortized over twenty-five years, their monthly payment would be $5,222.

They can do that in their sleep!

But there’s a big problem, and this problem will prohibit Mike & Jenny from buying this house, even though they can afford the monthly payments with ease.

What’s the problem?

They don’t have a $200,000 down payment.

As I said, Mike & Jenny paid off their debt from law school and just started saving again.

They have $50,000 in savings but that’s clearly not enough to purchase a $1,000,000 home with the required 20% down payment, or $200,000.

However, if Mike & Jenny paid $999,999 for a home, then they would only have to make a 5% down payment, or $50,000, which they do have.

This is a true story.

And if you read the above and said, “Wait, don’t you need 7.5% down to buy for $999,999?” then not only are you up-to-speed on mortgage down payment requirements, but you’ve also helped to point out that this story took place several years ago.

This was in February of 2019.  It’s a true story.

My clients had $50,000 in savings and could buy a house for $999,999, with a 5% down payment, and easily afford the monthly payments, but couldn’t go a single dollar over that amount.

Now, notice that when I told you about the $5,222 monthly payment above, I didn’t spell out how much they were putting down.  Now you know why.

But this is a real scenario that I encountered many times over the years when the difference between buying for $1,000,000 versus only $999,999 necessitated a down payment four times as large!

It was June of 2020 when the CMHC increased the down payment requirement for properties under $1,000,000.

Previously, buyers could make a 5% down payment on a home of any value from $1 up to $999,999.

In June of 2020, the CMHC increased the down payment requirement on the portion from $500,000 to $999,999 from 5% to 10%.

Hence the blended 7.5% for a property purchased for $999,999.

Either way, there are a lot of buyers out there who have excellent incomes but lack the 20% down payment to get over the $1,000,000 purchase threshold.

For every Mike & Jenny, there’s a Bob & Sally too.  And then some.

–

Now, the second story…

Have Money; Make No Money

Francois and Josephine are lucky.

Lucky?  Or fortunate?

I’m not sure.  But when I tell you that their parents gave them $300,000 for a down payment on a house, you can tell me whether that’s luck or good fortune.

One might suggest that they can now go out and buy any home they like, but there’s a problem.

What’s the problem?

They can’t afford the monthly payments.

Oh, sure, they have a massive down payment thanks to Mom & Dad.

But when it comes to servicing the mortgage, they’re operating on very thin margins.

Let’s say that Francois & Josephine find a nice house in a subdivision just outside the city.

It’s a $1,000,000 home and they have a $300,000 down payment, which is fantastic!

On a 25-year amortization, with today’s five-year, fixed rate of 4.19%, their monthly payment on this mortgage would be $3,754.59

That might not sound like a lot to you, but this is just out of reach for them.

Too bad.

If only that payment were moderately lower.  Just a smidge.

Define “smidge,” you suggest?  Why, sure!

How about $350.28?

That might sound like a random number to you, but it’s not.

If Francois & Josephine could extend their amortization period from 25 years to 30 years, then their monthly mortgage payment would fall from $3,754.59 to $3,404.31.

Hence, $350.28.

That’s what an extended amortization period does; it lowers the monthly payments.

Yes, it also increases the proportion of interest paid within the mortgage payment, but for some buyers out there who have big down payments but don’t have the income to carry the monthly payments, an extended amortization can make all the difference.

Now, back to your regularly scheduled programming.

On Thursday of last week, I posted this blog:

Reading The Tea Leaves In The Mortgage Market

As I admitted in the blog post, I wrote this on Monday and planned to post it on Thursday, but boy-oh-boy was I surprised when I got this announcement from the federal government:

“Freeland Allowing More 30-Year Mortgages, Higher Values For Insured Mortgages”

That’s the National Post article we explored last week, and at the risk of taking on too much in one blog post, I promised we would return to it today.

From the article:

Freeland announced that starting on Dec. 15, the cap for insured mortgages will rise to $1.5 million from the $1-million cap today. This would allow buyers to qualify for larger mortgages without putting 20 per cent down.

On the same day, the government is also expanding the availability of 30-year mortgages. In the spring budget, the government expanded the eligibility of those long-term mortgages to new buyers who were purchasing new builds.

Well, the two “stories” that I told at the onset of today’s post are a good introduction to what the announcement last week means in practice out there for buyers who are having trouble getting into the market.

Some buyers, as noted in the first story, have excellent income and the ability to service mortgage payments, but lack the down payment needed to purchase over $1,000,000.

Other buyers, as noted in the second story, have a substantial down payment but can’t afford the monthly payments.

While Tuesday’s announcement and the analysis that followed seemed to primarily focus on the increase in the mortgage cap for insured mortgages from $1,000,000 to $1,500,000, don’t underestimate the importance of the extended amortizations either.

Combine them together, and affordability just increased dramatically for first-time buyers.

This, of course, forces us to ask an important question:

Should first-time buyers be taking on higher mortgages?

If we wanted to be critical of the government and ironic, we could argue:

The government just “helped” first-time buyers by allowing them to take on more debt!

But that’s how this country works, right?

It’s like how the solution to every problem is to create new taxes.  They never actually address the problem, but they allow the government to announce that they’re doing something.

Let’s look at a few other quotes from Ms. Freeland and notes in the National Post article:

But now the 30-year availability will apply to both new buyers and people buying new construction homes.

This is a very interesting one.

Previously, the government had announced that they would extend amortization periods from 25 years to 30 years but only for new construction.

This makes me want to put on my tin foil hat and come up with conspiracy theories.

There are two reasons why the government would only want to make new-construction more affordable:

1) Because the government has a massive housing crisis, needs homes built, and has to incentivize builders to build them.

2) Because the government gains more tax revenue on new-construction than any other type of real estate.

But wait!

Maybe I don’t need a tin foil hat for this one.

Because later in the article, we read:

The government has pledged to build four million homes by the end of the decade, but housing starts have been sluggish in recent years and are not happening at a pace that would reach that target. Freeland said offering looser mortgage terms is about encouraging builders to get more shovels in the ground.

“Canada needs to get more homes built faster. In order to get those homes built faster, more people need to be buying them,” she said.

Wow, it finally happened.

The government finally admitted that the way we build houses in this country is an absolute disaster and one that I’ve been lamenting for fifteen years.

We don’t build houses unless we first sell houses.

It seems counterintuitive, no?

In other areas of the world, we build houses and then sell them.  But not here!

Nope.  Here, we pre-sell everything and then build.  And this is never going to change because it’s the system we’ve had for as long as I’ve been in the business, and there’s no reason, and no way, for developers to do otherwise.

Freeland wants to “get more shovels in the ground” but she, nor the government, are going to do it.  They’re not equipped to, but it’s also not necessarily their job.

Sure, there are other countries around the world where the government has a larger hand in increasing the supply of housing, whether those homes are to be rented or owned.  But houses with a higher rate of home ownership and a lower cost of home ownership can trace their roots back to plans laid out in the 1950’s, or thereabouts, whereas major Canadian cities have only expanded well after they needed to.

Ms. Freeland wants “more” homes built, and “faster.”

The way to do this, apparently, is by having first-time buyers take on more debt and pay a higher percentage of their monthly mortgage payment as interest rather than principal.

Alright, I’m listening.

And I’m sure developers love this too, but I just cannot, for the life of me, believe that Ms. Freeland connected those dots above:

“In order to get those homes built faster, more people need to be buying them.”

In pre-sale.  That’s what she meant.  That’s what she acknowledged.

We only get homes built after people have bought them.

What a mess.

Another choice quote:

“We also spoke to a lot of economists. We spoke to a lot of housing specialists. We spoke to a lot of people in the financial sector. And really what this is all about is putting the dream of home ownership in reach for younger Canadians, giving first- time home buyers a leg up in the housing market,” she said.

This stinks to me.  It just reeks of politicking.

I’ve always hated the way that politicians speak, but that aside, “the dream of homeownership for younger Canadians” continues to be this insane quest that this government has us on, even though renting is a viable alternative in every other country on the planet.

Listen, I sell real estate for a living.  I would stand to benefit from a society where everybody can afford to buy a home, and yet here I am, continuing to take issue with this government’s obsession with a lie.

Telling everybody they can afford a home is cruel.

It’s unrealistic, first of all.

Canada’s rate of homeownership, according to this Wikipedia link, is 66.5%.

The United States has a homeownership rate of 65.9% and they would be our best comparable.

Who else do we compare to?

Poland at 86.8%?

Serbia at 89.4%?

As I mentioned above, countries that enacted housing plans a century ago typically sit atop the home ownership ranks, especially those in Eastern Europe.  Canada and the United States are essentially “new” countries comparatively speaking, and I don’t see any way for Canadians to believe it’s realistic to go from a 66.5% homeownership rate to 75%, 80%, 85%, or more.

91.7% in Hungary, you say?

Good for them.

But if Canada is going to admit 500,000 people per year and polish off 100,000 new units of housing, we don’t need the university math department to explain why homeownership rates aren’t increasing.

One last thought on the announcement, and that has to do with the timing.

There are no coincidences in politics, and this announcement was made just a short while after the NDP government pulled support from the Liberals, and the Conservatives began calling for an election.

The ill-fated “shared equity mortgage program” from the federal Liberals, which was canceled after its fantastic failure, was announced during an election.

No matter who makes the announcement, the promise, or offers the helping hand, I always question the timing.

If the Bank of Canada cuts interest rates by 200 basis points over the next six months, which is what every economist in Canada (and the United States…) is calling for, then that will help first-time buyers more than anything else.

Oh, and maybe stop adding 30% to the cost of new housing through taxes at all three levels of government – that would also help!

But as for 30-year amortizations and a $1.5 Million insured mortgage cap, well, I suppose the government needs to tell young people that they’re doing something.

While real estate agents, mortgage brokers, banks, and others may rejoice in the increase in affordability, my cynical side has taught be to question any new legislation, and that’s exactly what I’m doing here…