Spot Light On Home Prices In The Hollys
January 16, 2013
Our housing problem is not just in the Hollys
The Hollys is a neighborhood in North Steveston with mostly entry level single family homes. These homes in the Hollys’ are mostly built on smaller lots ranging in sizes from 3,800 to 5,500 sq ft with living areas between 1,800 to 2,200 sq ft. These small single family homes were good starter homes for small family years ago. But, with prices hovering just under $800,000, these homes are beyond the reach of moct home buyers.
What used to sell in the Hollys for $400,000 in 2004, ratcheted up to reach $800,000 in 2011.
Which way home prices are heading?
Home prices at current level in the Hollys at around $780,000 are just too high and unaffordable for the average family. Home buyers’ enthusiasm the past 10 years and easy credit had resulted in home prices being chased up to current level. Home sales are now down and prices are in decline. The era of easy credit is gone. Home buyers are staying on the sideline, waiting for home prices to come down further.
Prices will go down unless the lending rules are changed.
The lending guidelines from the Office of the Superintendent of Financial Institutions (OSFI) now require Canadian Banks to confirm borrowers’ ability to service theie mortgage payments. Home buyers are now routinely being turned due tnth sufficient income to debt service their loans. The guidelines for mortgage under-writing by Canadiab Banks have not changed. Gross Debt Service Ratio (GDSR) and Total Debt Service Ratio (TDSR) at 32% and 40% are the same. What has changed is that loan approval must now be supported by income proof. This effectively turn off the tap for easy money lending from Canadian Banks.
Now a borrower buying a $767,000 entry level home in the Hollys, needs to provide proof that the family has earned income of $120,000 for a loan of $613,000 (80%). The borrower has to provide $154,000 (20%) down payment to get the above loan, at 3% 5-year fixed term mortgage with 25 years amortization. The borrower’s monthly payment is $2,900, withnadditional annual outlay of $3,500 for property tax and utilities.
What’s wrong with the above picture?
How many buyers are there in the market making the above income and having $154,000 savings for down payments? Without willing and able home buyers, home prices have no where to go, but down… big time! Why? Because, there are just not that many home buyers who have that kind of income, nor the appetite to buy when the market is in decline.
Home ownership in Canada was reported to be at all time high, near to 70%!
An average household with gross annual income of $68,000 (without too much debts - credit cards and car loans) can only qualify for a mortgage of $350,000 with 10% down payment, at 3% interest rate with 25 years amortization. These home buyers cannot qualify or afford buying a home in the Hollys.
How we come to this situation?
The main cause for the runaway home prices the past 8 years is a result of “Equity Lending” with easy credit chasing up home prices. Canadian Banks in the past could provide financing to their “preferred customers” who could provide 25% to 35% down payments. Escalating home prices and easy profits encouraged more home buyers to join the “property gold rush”, buying up more homes than they can afford.
From under $350,000 in 2004, home prices in the Hollys took off and doubled in values by 2011.
The Government has a tough job to solve this runaway housing problem. Deflating current high home prices will cause great damage to the housing industry and the country’s economy. The Government is hoping that it can engineer a gradual and orderly decline in home prices. A total collapse is damaging and will be a disaster for Canada’s economy. It will be a great financial maneuver if the Government of Canada can engineer a soft landing to get home prices down to more affordable level. In any case, it will cause a lot of pains and sufferings should home prices drop 25%, 35% or more.
A whole new re-thinking of the Government’s housing policy is needed to solve the high home prices problem. Will an orderly freeing up of ALR lands around the fringes of the cities for housing be an answer? Or, will some combination of Housing Board initiative and taxation help to curb property speculations in Canada?