There’s a familiar joke in my province that “B.C.” stands for “bring cash”. The sentiment is fueled by the far-above average house prices in most of the major urban centres in British Columbia. According to the CBC the average house price in Canada is about $330 000 whereas Vancouver is about $610 000. Prices are above Canadian averages in smaller B.C. urban centres like Victoria, Kelowna and Kamloops as well. Affordability hits Canadians hard, especially in B.C. The joke is that average Canadians can not afford to buy houses. For example, Stats Canada lists the average wage in Canada as $22.21 as of September 2009 or approximately $40000 per year. According to the CMHC’s affordability calculator, a person making this wage can expect (with a 5% down payment; $100 per month heating cost; $250 dollar debt repayment; $150 property tax and assuming 4% over 30 year amortization) to be able to afford about a $200 000 house. I admit that I was generous with the numbers as often people have more than $250 debt especially with credit cards, line of credits, and car payments. With higher debt, the affordability drops significantly. This affordability is about $130 000 less than the average house price in Canada. Where I live, in Kamloops, $200 000 will usually buy you a small apartment or mobile home. This may be adequate for an individual but often these are too small for families who need 3 or more bedrooms. To make up for this both parents work usually work to buy a starter home or townhouse.

This is not new news to anyone. Most people are aware of the crunch and that two people need to work to pay a mortgage. However, are most people aware of how the government’s policy with CMHC may be contributing to this affordability crisis?

In Phoenix Arizona, a symbolic city of the American sub-prime collapse, one could expect to purchase a nice house for under $100 000. Phoenix is a great example because its unemployment number is nearly identical to Canada’s (8.6% in Phoenix according to the US Bureau of Labour and 8.4% in Canada according to Stats Canada). The major difference is that banks in Pheonix have clamped down on high-risk mortgages. Few banks are lending to people who are a high-ratio of debt to income and have small down payments. In Canada, you just need five percent down and an appropriate income. The math is more complicated obviously, but the CMHC will back a mortgage, through insurance premiums, for a bank in Canada. There is low risk because if one defaults, the CMHC will cover the mortgage. As a consequence, we haven’t seen the housing price collapse like in the USA. Housing prices did drop last year, but never to rock-bottom prices and house prices are already above levels before the recession.

Banks do not risk losing money because they know that defaults are covered by the CMHC. Banks are much more willing to lend Canadians money and as such housing prices have stayed relatively level compared against the USA. Many Canadians are stretched thin but still securing mortgages.

This problem, however, is complicated because without the minimal rules like 5% down and 35 year amortization few individuals could afford to buy. If we went back to rules like 25% down and 25 year amortization, the market would be completely shut down to many individuals. We are, in a way, stuck with the lax mortgage rules because if the government implemented tough rules (like 25% down) we would probably have a housing crisis like America because no one would be able to buy at current house prices. Prices would have to drop drastically.

When the government in 2007 directed the CMHC to allow 40 year amortization and zero down we committed ourselves to high house prices. The recent 5% down and 35 amortization is a start but it is still relatively easy. Furthermore, many banks offer “5% cash back” mortgages to ease those without 5% into the market.

For me back in B.C. I’ll be scouring the MLS for cheaper houses but probably will be saving up for a long time to come up with a down payment to buy into the market. Will this government work to make houses more affordable or are we committed to high house prices for the foreseeable future as long as the Government of Canada remains, arguably, one of the largest backer of risky mortgages in the world?

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Tags: BC, canada, CMHC, Housing, Housing Bubble, Mortgage, Sub-Prime

This entry was posted on Tuesday, October 27th, 2009 at 6:04 pm and is filed under Economy, Federal Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.