We all know how CMHC has enabled our housing bubble by standing behind our Canadian banks, taking away their risk in the case of default. Because banks have no reason not to give money to people they’d otherwise laugh out of the branch, the debt levels of Canadians have risen to record heights.
That analysis alone is startling.
Using CMHC's latest (Q2, 2011) report on Vancouver average SFH housing prices (for April, 2011) here is the qualifying income required to purchase a home based on that stable 20% down, 5 yr. rate, 25 yr. amortization (click on image to enlarge):
In the suburb of West Vancouver the qualifying income to purchase based on the average house price is $472,000.
In Burnaby it's $208,000.
And in New Westminster it's $138,000.
Wow. Let me ask you, what is your combined family income right now? Could you qualify to buy in these cities?
I guess Vancouver must be the Beverly Hills of Canada and our little hamlet an enclave home to the high income earners of the nation.
Surely Vancouver must have the strongest economy in Canada, then?
Curiously the Vancouver Sun ran an article last week. A CIBC study of the relative economic performance of Canadian cities showed that not only wasn't Vancouver #1.... it wasn't even in the top 5.
Vancouver ranked as the 7th best economy in Canada.
Perhaps high investment income allows us to reach the necessary lofty annual income levels?
So how do people qualify for loans to buy homes at the current bubble prices?
The real answer is that the majority of Vancouver residents are completely unable to qualify to purchase in Vancouver when putting 20% down on a 5 yr. rate with a 25 yr. amortization.
- "The market has run out of buyers and continually sweeps the edges for increasingly less qualified borderline customers. Possible signs are: Ignoring total debt load and qualifying entirely on monthly carrying costs, or cash back/ third party secondary loans to get around down payment requirements.. From the bank's side, it's a mortgage where the lien is issued solely on the value of the property (or the guarantee from the mortgage insurance scheme) and/or its expected gains, not on the ability for the borrower to comfortably live with the loan for 30 years."
You bet it is.
High leverage loans are a fact of life here.
Combine that with the fact that so many under the age of 40 seem completely perplexed when they hear the term 'correction in real estate'. Last week I had two young adults (one mid 30's and one mid 20's) ask me what 'correction' meant in respect to real estate. These people have no fear of high leverage because they have no conception of what a correction in the market can do to those leveraged to the max. As a result, the vast majority have made their way into the market in this fashion.
It's only a question of when.
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