Guest blog: Debt-To-Income Ratio; Real Or Imagined Threat?

If one were to stop a citizen on the street and ask them if they believe today's low interest rates have allowed Canadians to borrow more money than they should have, most will say yes.

If one were to stop a citizen on the street and ask them if they believe today's low interest rates have allowed housing prices to rise too high too fast, most will say yes.

If on the heels of these two questions you then asked one more: Should government step in and tighten regulations?

Most will say yes.

And these citizens would be inaccurate.

We have a journalistic climate less interested in one set of numbers and more interested in another, and the relentless reporting of specific numbers while ignoring others is a problem.

Nearly every news story on the topic of debt is framed in a negative light, and this is a problem.

We have endless reporting of the rising debt-to-income ratio, almost always with alarmist overtones. There is never any acceptance that debt is in fact not a bad thing in the majority of households. At least not when it relates to buying a home.

Returning to our citizen in the street, let’s ask a few more questions.

Would it sound reasonable to take on a $2,000 mortgage payment if your annual household income were $100,000?

Do you think it’s fair to say that the same household income could support a $2,600 monthly payment?

Likely we are going to get a ‘yes’ to both of these questions. Those numbers are quite reasonable in relation to one another.

Here’s where it gets a touch more interesting…

That $2,000 per month payment represents a monthly payment at today’s rates on a $500,000 mortgage balance.

The $2,600 per month payment represents a monthly payment at double of today’s rates when that mortgage balance come up for renewal.

(using 20 per cent down on a 30-year amortization with five-year fixed-rate products – for illustrative purposes)

Our readers quick with numbers may see where this is going.

   That aforementioned household debt-to -income number currently reported at 167 per cent and painted as an alarmingly high – a sky about to fall number – let’s look at it in the context of the above mortgage example.

That household with a $500,000 mortgage balance and a $100,000 household income, their debt to income ratio is in fact 500 per cent.

Are they freaking out?

Not at all, I mean they are a little bit – but only when they think about you and your debt to income number, not their own. Because they are concerned that today’s low rates have allowed you to borrow more than you should have – and as you know, you have not.

Canada enjoys 69 per cent home ownership, and when I say enjoys, I mean truly enjoys the benefits thereof. Home ownership provides stability to families, and thus stability to communities and by extension stability to our country. Home ownership is the thread with which the fabric of Canadian society has been woven. We are not a nomadic bunch at all, we like to stick close to our hometowns in many cases, or once we adopt a new hometown we tend to stay planted there for decades. The ability to purchase a home is a key part of that.

Half of Canada has no mortgage at all, the other half have bigger mortgages than their parents can even fathom, but then they also have larger paycheques than their parents would have fathomed.

The payments are more than manageable for the majority, even if rates were to double at renewal from today’s record lows.

So the suggestion that a household with a 167 per cent debt-to-income ratio is on the brink of disaster is hyperbole. If the bulk of that debt is mortgage debt, then our $100,000 per year household would have a $750 per month payment on the $167,000 mortgage.

More likely that $100,000 income household has a larger mortgage than $167,000, but not much larger than the above example, as current qualification standards limit such a household to $445,240 if they have less than 20 per cent down.

This is still a 445 per cent debt-to-income ratio.

But again, how concerned are we about a household with $8,333.00 gross monthly income making their $2,000 per month payment?

As the kids say 'Keep calm and carry on'.

Marianne Hobson
Mortgage Agent Lic#M08004925
Dominion Lending Centres Homestead Financial FSCO# 11711
 
Cell: 905-973-9266
Email:  mhobson@dominionlending.ca

Just how sure is a sure thing in real estate sales?

You've sold your house and it's a firm sale - no conditions.  So it's a sure thing, right?

Yes.

Well, as close as it gets anyways.  Because, really, how sure is a sure thing when people are involved?

You have a legally binding contract for the sale of the house, so in a sense it is a sure thing.  But we also know that contracts do get broken sometimes for a variety of reasons.

Even though the buyer may have made a firm offer, their bank or mortgage company may still want to do an appraisal.  If the bank's appraiser decides the property is worth less than the buyer was (legitimately) willing to pay, this could leave them in a position where they have to make up the difference.  Not all buyers are in a good enough financial position to cover this gap when the [appraisal goes "bad"].  They may find a way to make it work or they may walk away, breaching the contract - irresponsible as that is.  Fortunately, people generally follow through on their agreements.  Even if the appraisal is weaker than expected, well-informed and represented buyers don't make firm offers without being prepared and understanding what they are getting into.

But the lawyers could also turn up unexpected issues with the title search.  This could be a 50 year old mortgage that never got discharged properly, a minor encroachment, or even a more recent mortgage fraud on your title that you didn't even know about.  What is involved in correcting the issue can vary a fair bit from one situation to another, and some problems may get taken on and covered by title insurance.  It is often only a matter of time to get these problems fixed, but it can make deals go sideways quickly.

And even if there are no surprises directly related to the deal, life sometimes gets in the way of things.  The buyer's financial situation could change drastically if their spouse passes away unexpectedly through accident or illness, they could lose their job, or their current house could go up in flames and kill their sale and the expected cash proceeds they were counting on.

So we tend to move forward taking a firm sale as a sure thing... we just have to remember that when people are involved, a "sure thing" still means 99.99% at the most and never really a 100% guarantee. As with anything in life, we just deal with problems if they arise.

Report Urges Mixed Housing Choice, Complete Communities to Address Housing Prices

New report from Greenbelt Foundation puts Toronto region housing crunch in global context

A new report, [Global Cities: Housing Prices in Major Urban Centres], from the Friends of the Greenbelt Foundation finds that housing price increases in the Greater Golden Horseshoe are comparable to similar booming markets in major urban centres around the world. With 56% of the world’s population now living in cities, the report suggests that as globalization continues to bring more residents to cities, planning solutions to increase housing choice are needed.

“People are moving to where the jobs are, and municipalities need to plan for more density along transit corridors and in residential neighbourhoods,” said Burkhard Mausberg, CEO Friend of the Greenbelt Foundation. “The report shows this is happening around the world – and the regions that lead the way in planning to accommodate growth efficiently are going to see the greatest economic rewards while protecting our environment.”

The report encourages the Province and municipalities to ensure Growth Plan policies are used to encourage the development of more housing choice, including detached and semi-detached homes, townhouses, and mid-rise buildings with units large enough for families. These policies protect farmland and local food while delivering more affordable housing options to residents.

From 2005-2015, housing prices in Canada’s major cities have increased anywhere from 136% in Ottawa-Gatineau to 192% in Winnipeg. In Toronto, prices increased 165% over a decade. This echoes booms seen in international growth centers like Beijing, which in one year experienced a 31% increase in prices in 2016, and Amsterdam, which saw prices rise 14% that year. The same data set assessed Toronto’s increase at 16% in 2016.

“The solution is not to reverse policies like the Growth Plan that encourage city-building and discourage sprawl,” said Burkhard Mausberg. “We need to embrace a more sustainable future, not go back to low-density, car-dependent sprawl which is bad for our health, bad for our commutes, and bad for our environment.”

The Greater Golden Horseshoe (GGH) is already home to 25% of Canada’s population. By 2041, the GGH is expected to grow by 50% to reach 13.5 million. The report recommends that this growth be accommodated with a forward-looking approach that prioritizes integrated transit and smart growth, protecting farmland and building healthy communities.

Source: Friends of the Greenbelt Foundation
 
About the Greenbelt:
Ontario’s Greenbelt is the solution for fresh air, clean water, and a thriving economy with healthy local food and active outdoor recreation. At 2 million acres, it’s the world’s largest permanently protected greenbelt, keeping our farmlands, forests, and wetlands safe and secure. The Friends of the Greenbelt Foundation works to help keep farmers successful, strengthen local economies, protect natural features, and promote sustainable growth. Learn more at greenbelt.ca.

Hamilton's hot real estate market continues in February

The REALTORS® Association of Hamilton-Burlington (RAHB) reported 1,311 sales were processed through the RAHB Multiple Listing Service® (MLS®) System in February. Total property sales were 16.4 per cent higher than the same month last year and, for the second month in a row, set a new high for that month.

[CLICK HERE] to read the full report (external PDF, 150kb)