“She makes $60,000 a year. He earns $75,000. In their late twenties, they have $130,000 in the bank, a chunk of it a gift from his parents. Student debt is down to $18,000. They covet a house. In Vancouver.
“At least we did,” Lynne says, “until we met Malcolm.” He’s a mortgage broker, part of a national chain of brokers which (for now) will remain mercifully nameless. “We decided to go in and talk to a mortgage guy to at least find out what we could pre-qualify for,” the high school teacher (math) says. “Twenty minutes later he said that with our savings and our income he could qualify us to buy a $1 million house. We looked at each other and thought about an $800,000-plus mortgage, and got the hell out of there.”
So now they have lowered their sights. To $750,000. And given up. “That amount of money buys crap,” Lynne says. Then wisely, “Maybe we should think about moving away from here.”
This little tale is true. I tracked the broker down and confronted him. He admitted it. And defended it. Sadly, I think he believed he was actually helping a house-horny young couple who not conceive of having a family without a front porch.”
– relayed by Garth Turner at greaterfool.ca 18 Nov 2011
They can ‘afford’ to buy a Vancouver SFH, but they note the poor value they’d get, so they are thinking of moving elsewhere. – vreaa
Vancouver Real Estate Anecdote Archive 
They don’t tell us the savings but the most i can see them qualifying for after they pay their debt is $700k financed. That’s at more than the minimum VAR rate over 30 years. Of course, if we do it at 3% over 30 they can get away with $850k financed so maybe they have $150k in savings?
All the same… that financing is 5x their household income (as long as they both remain employed and take no mat leave/lose jobs). Risky! Good on them for saying No!
The anecdote states they have $130,000 in savings, largely a gift from his parents.
A (possibly daft) question to anyone who can fill me in on conventions, but when salaries are listed this way is it assumed that they have not yet had tax taken off? Thanks.
Royce, the salaries listed are before-tax, because that’s clearest.
For example, I know how much I make before tax, but I don’t really know how much I make after-tax. And would “after tax” mean after income tax, or after EI, or after EI and CPP, or pension plan/RRSP deductions… It gets confusing. So the clearest way is to give the before-tax figure.
I understand. I just think it’s interesting to consider vis-a-vis general rules regarding what max. % of your income should go to shelter costs (e.g. 1/3). I’ve always taken those rules to be based on post-tax income.
if you want to own a detached home in Vancouver you’re going to have to fight for one, it won’t come easy.
And 135K for a downpayment is small. There are move up buyers bringing a heck of a lot more equity when they buy…this couple is getting hammered by them.
If you want to own a detached home in Vancouver you’ll have to take massive risks.
you mean for yourself it means taking a massive risk. You have no idea WTF anyone else’s buying scenario is.
What’s bad for you is not necessarily bad for everyone…or are we that egocentric?
So taking a mortgage is no risk?
leverage = risk
leverage def’n: The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.
Most people are just buying homes for their family and care very little about increasing the return on their investment
Bubbly,
mortgage is risk, but not necessarily “massive” risk.
Mortgages are not a “massive” risk in cities where the prices of real estate are not totally out of whack in relation to incomes.
In Vancouver, a mortgage is a massive risk.
for you it would be bubbly…again, projecting your situation on an entire ownership group is “massively” egocentric
diablo, I am talking about Vancouver specifically. The home price to income ratio is totally out of whack. That is a general statement and a fact. You are probably too stupid to understand what that means.
My personal financial situation is actually better than many homeowners, because I can afford to buy some properties just with cash. However, most people can’t.
Here’s a question for everyone.. if you won $1million, would you spend it all on a house?
How much would you have to win in a lottery to justify buying into Vancouver?
You’d have to win enough to take your net-worth to three to four times the Nov 2011 market price of your target Vancouver house.
This is an excellent question. I would immediately retire and spend the rest of my days travelling and living in the world’s great cities. (By including my modest savings, I could afford to do this) OR, I could live in a vinyl and chipboard house in the exurbs of Vancouver while paying taxes, upkeep, and utilities. AND go to work to pay for this, if I could find a job nearby. The point is, the borrowed $800k under discussion is a ton of money and should be placed in context with other things it could buy. This couple was right to bolt.
But banks are prudent in Canada! Prudent! Sober! Cautious! err……
dude you are getting them all
i basically try the socratric method on anyone who says that to me
“oh we are more prudent? who told you that? oh, the news..”
It is not the imprudent banks or the nameless broker: it is CMHC. Everyone else is just “distributing”.
It’s the imprudent banks. This stuff is widespread and has been going on for years.
But I am sure that once it all blows up, there will be scapegoating and maybe one or two brokers will get blamed. 🙄
So there we have it.. they can score a cool $1m in housing as long as they don’t have to worry about that $870k mortgage and will maintain their earnings throughout the next 30 years and as long as interest rates don’t increase at all. Every 1% it increases over that 30 years would be about $500 per month in servicing. That’s $6k/year.
Now, how about looking it as a total service over the life of the debt? $3600/month over 30 years would work out to be about 1.3m. So they’re looking at a minimum of 1.3m for that home. Increase in interest rates and they’re paying 1.5m+. All that for an $850k debt… Then again… maybe prices will double in the next 10 years and they’ll be laughing all the way to the bank!
captures the essence of it, except add that there are far too many contingencies that need to work our favorably in order to for the buy option to be successful, ergo poor risk/reward. there is also the emotional burden of carrying a large debt load. cannot imagine ever doing it again – (but hey, i levered up on non-recourse). i know many here that still cannot cut loose despite massive losses – some are actually averaging in now thinking the worst is over. no matter what happens (in RE or otherwise) the ability to admit error, take the pain and suffer the consequences will save you. inability will condemn you.
ciao-out. enjoy the sun while it’s still out. vansters know what afterwards always comes.
Rob,
from strictly an investment side buying a house is a bad idea. Most take out mortgages and most for 20 years+. The interest in this debt is astonishing when you add it up. Even at discounted local prices the mortgage interest is outta this world.
Either you agree with the philosophy of home ownership and all the trappings or you don’t. I don’t think you get it..
That’s right Diablo. Either you believe home ownership is a bad idea, or you feel that a home is worth buying at any cost, no matter what the financial strain. There is no gray area or “middle ground” whatsoever.
You know what would really suck. And this is completely hypothetical. This family buys a condo and then decide to have children. They then decide that the condo lifestyle is nice with a young child but eventually they want to move to a place with more space, maybe somewhere not in Vancouver but still close enough to make the commute palatable.
Then say prices drop by 20% and inventory skyrockets. Family is close to zero equity and cannot afford to move.
All hypothetical of course. Hey, at least they have their health, in 99% of all scenarios, anyways.
So???
If they considered this scenario as realistic for them, they would simply rent.
I think they are renting. My situation was purely hypothetical 🙂
I think the veracity of the anecdote is questionable.
Why wouldnt they name the mortgage broker company sow we can all verify if it is true or not?
Fascinating, re: LeveringUp the Young&Restless… in related British news, Thatcher’sChildren have decided to tear a page from Harper’s/Flaherty’s book…
[UK Independent] – Government to underwrite mortgages
“The Government is set to underwrite mortgages for first-time buyers as part of efforts to “unstick” the housing market… The Government will underwrite the risk of some lending on newly built homes. It is hoped the move will help first-time buyers get on the property ladder by allowing deposits to drop from 20% to as little as 5%…”
http://tinyurl.com/c3dtx7x
And why now, you may well ask (apart from some minor ‘housekeeping’ re: campaign finance ‘PayToPlay’)???…
[BloomBerg] – Home Sellers in U.K. Cut Asking Prices Most in Year on Concern for Economy
“Average asking prices in England and Wales fell 3.1 percent from October to 232,144 pounds ($367,650), the biggest monthly drop since November 2010, the operator of Britain’s biggest property website said in a report published in London today.”…
http://tinyurl.com/8a2dhlp
lol @ thatchers children
and she a public disciple of hayek. something sure spoiled fast – or in fact never was
Cameron is like a guy who gets outfitted with a flamethrower but finds the earth already scorched.
If they really want a house, $750k is at the lower range in Burnaby, and with better options in tri-cities. Even $750k sounds like a lot with that income, and if they are thinking about a house, they are likely thinking about children as well…
a modern sage willing to go toe to toe with the cronies … it is beautiful to behold … americans get a bad rap because of what the crony masters get up to, imo … but many are more like this … you must understand, at least in principle, they can change things for us all. and that is why they’re kept doped up on the propaganda and other intoxicants. there is hope, not much, but the light on civilization has not been extinguished yet.
http://globaleconomicanalysis.blogspot.com/2011/11/ron-paul-smacks-bob-schieffer-on-face.html
There may be a bubble coming but how about long term when these people with these huge mortgages figure it out in their 50’s…oops!!..i need to work until i’m 70 so i can pay a mortgage off. Even now we are seeing people having to work well into their 60’s.
They don’t have to pay it off, they just have to sell exactly when they can’t afford the mortgage any more.
i’m trying to understand how much of a factor is cmhc, mortgage securitization, etc. in all this. anyone got some resources for study? oh yes, the song …
i swers to yooz i has seen them crony bankers hidin out in quebec now, but in the safely tightwad anglo part of mtl, were in a bar singing …
if you believe in peanut butter clap your hands
and say i believe! in making spam
repeat!
$75K to work 8 months of the year as a math teacher under 30? I should have gone into education instead of engineering, sheesh! Next time teachers complain about compensation I’ll think twice.
I think the teacher earns $60k. In Alberta it would be higher.
I guess the BMO bottom basement rate war just made this even crazier 😉