Baby, we got a bubble!?

[interested]

^^^
wow too many numbers this late at night. I will have to digest them. I do get the gist of what you are saying. I still think 4.5x is high and just because a 2% increase in 5 year mortgages would be manageable, I point out that 2% on 3.5% fixed now being quoted or thereabouts still only brings us to 5.5% for 5 year fixed and historically this is on the low end of historical rates. If the economy improves, expect quite quickly to see that. Even with the current economy not doing so great, you have all the bank economists agreeing that prime interest rate will likely be 2% or 0.75% up. this with all the problems. Imagine if things improve, I could see that 2% coming up very fast on the radar.
I do appreciate that I am talking about the bank rate and we should really be talking 5 year bond rates (as this is more appropriate to mortgages) but even these are at 50 year lows presently.

to the original point about the housing. I agree with your statements that banks should use fees to run the house in their calculations. I believe they do use some estimate of heating costs, taxes etc. but you are right that ongoing maintenance as in a condo is probably not as fully accounted for.

Again however, 2 wrongs don't make a right. So yes, have the banks account for a certain percentage of the price of purchase as a maintenance charge. I am all for it. It will be more difficult as you point out to figure out how much should be put aside but assuming a figure can be reached, it should be applied.

However, when speaking of condos, esp. entry level bachelor/1 bedroom and 1 bedroom /dens, because of the lower price point, this is appealing to the first time buyer, and yes, the investors and downsizers etc. and others, but my point is since this is the entry point for alot of people in the market at least in Toronto, I think it is reasonable to target that market.

Again Eug, I point out that in a house if the entranceway/lobby is tired, and I am short of cash, I don't update it to maintain value when I have cash flow problems but in a condo, I have to. I appreciate that necessary repairs are different. My point is that with shared ownership as in a condo, the individual has less control of his expenses, though they may well be more predictable. But I still can't see budgeting based on 75% of known 100% expenditures.

 

[Eug]

30-32% is a good gross debt service ratio

Again Eug, I point out that in a house if the entranceway/lobby is tired, and I am short of cash, I don't update it to maintain value when I have cash flow problems but in a condo, I have to. I appreciate that necessary repairs are different. My point is that with shared ownership as in a condo, the individual has less control of his expenses, though they may well be more predictable. But I still can't see budgeting based on 75% of known 100% expenditures.

Except these are all just partially arbitrary thresholds anyway.

Yeah, they could calculate 100% of condo fees, but they could just as easily change the gross debt service ratio too. Right now it's 32%.

My above numbers indicate that someone making $100000 per year can afford to pay $2080.67 per month for an 800 sq.ft. condo with high 60¢/sq.ft. condo fees:

$2080.67
$480 condo fees / 2 = $240
$346 property tax
-------------
$2666.67 = 32%

One might argue that 32% GDS already has a certain built-in cushion. Or at least I think so. Not a huge cushion though.

Would it really be different to say they calculated 100% of condo fees, but then increased the GDS to 35%? Nope, the result would be almost exactly the same. Who knows what they'll do. Personally I'd just be as happy to see them decrease the GDS slightly but keep condo calculated fees at 50%, as opposed to putting in some completely arbitrary estimate for freehold home owners.

EDIT:

I just ran my own numbers. Interestingly, I am right around that 32% mark, as a detached home owner and calculating no maintenance whatsoever, or even utilities besides heat. I just ran the numbers using my mortgage payment, property taxes, heat, and other loan payment. Any maintenance costs, water, garbage, electricity, etc. are all on top of that.

The difference with me though is that I don't need to be anywhere near that 32% mark. I'm just one of those "responsible homeowners" who is paying mortgage payments that high in order to shorten my effective amortization period (which at the current rate means my house will be paid off before 2020). It just turns out that in my case, I find it reasonably comfortable with a GDS of roughly 32% (using the banks' rather arbitrary calculation method). I was actually closer to 34% at one point, but although manageable, I found that money was tighter than I preferred.

I can't blow my cash frivolously at 32%, but I can afford the payments. A GDS of 30% would give me more ability to blow more money on luxuries, but I'm a cheap bastard so I'd probably save most of it up for a lump sum payment anyway.

BTW, if I were to use an all-inclusive method of calculations, including all utilities, but NOT general maintenance (or building a condo reserve fund), the numbers for me currently would come in at 34%, whereas when I was paying more and living more frugally, it would have been closer to 36%. OTOH, using this more inclusive calculation method, a 32% modded-GDS would allow me to be more free with my cash than I am now.

And to again bring in that hypothetical person who makes $100000 per year, that difference of 2% in GDS works out to $166.67 per month.

 

[interested]

^^^
Good morning Eugene.

Your arguments and statements make perfect sense. I agree that it could be managable.

One point though. I appreciate the $100K a year salary for its simplicity and illustration purposes but the people I would be most worried about are more likely making $50K or perhaps household of $75K. I bring up the difference not to be picky but to suggest that there is less discretionary absolute dollars left over to cover other expenses.

In your example, you state you are a cheap bastard but it is clear you are making a point and I appreciate the humour. If being a cheap bastard means you are being sensible then we need more cheap bastards in the world.

However the point I am striving to make is that you eat the same amount as the person making 50K, probably drive or spend on transportation a roughly comparable amount, certainly not likely 50% or 100% more. Clothing costs for you may be more but unlikely 50% or 100%. You get the picture.

At the $100K example, the residual 68-70% of your Gross debt service ratio is alot more money to buy the other things one needs than the person at $50-75K/year. And therefore you have room to cut in the residual 68-70% amount if for whatever reason the GDS increases on the house or you have an unexpected expense.

I am sure you would agree with this argument since you pointed out that at 34% "money was tighter than you perferred"

 

[interested]

http://torontocondos.wordpress.com/2011/01/12/toronto-condos-average-price-december/

Downtown Condos in the Toronto Real Estate District (C08) increased 2.57 per cent in average price, from one year ago. The Toronto Central Condo Districts below, showed lower results.

Luxury Toronto Condos are still in demand however and should increase in price for 2011.

The average home selling price for all Toronto Real Estate December transactions, including the GTA , was $431,463, up 9 per cent, from a year ago.

The average price of Toronto Condos in several Toronto Downtown and Central Real Estate Districts for December, 2010 were as follows:

District Dec.2009 Dec. 2010 Change %
C01 392,168 389,366 -o.oo7 shows a 0.7% decrease.
C07 321,157 308,888 -3.8
C08 381,238 391,048 +2.55
C14 356,810 351,756 -1.42
C15 342,188 304,447 -12.4



This is taken from Toronto condos website.

I post this not for the obvious spin and headline but to ask a question. Do people who believe that prices may stagnate or go up believe there will be a dichotomy in the market with the luxury condos increasing in price and if so will it be the same for the rest of the market in the core (mid range condos)?

 

[Eug]

^^^
Good morning Eugene.

Your arguments and statements make perfect sense. I agree that it could be managable.

One point though. I appreciate the $100K a year salary for its simplicity and illustration purposes but the people I would be most worried about are more likely making $50K or perhaps household of $75K. I bring up the difference not to be picky but to suggest that there is less discretionary absolute dollars left over to cover other expenses.

In your example, you state you are a cheap bastard but it is clear you are making a point and I appreciate the humour. If being a cheap bastard means you are being sensible then we need more cheap bastards in the world.

However the point I am striving to make is that you eat the same amount as the person making 50K, probably drive or spend on transportation a roughly comparable amount, certainly not likely 50% or 100% more. Clothing costs for you may be more but unlikely 50% or 100%. You get the picture.

At the $100K example, the residual 68-70% of your Gross debt service ratio is alot more money to buy the other things one needs than the person at $50-75K/year. And therefore you have room to cut in the residual 68-70% amount if for whatever reason the GDS increases on the house or you have an unexpected expense.

I am sure you would agree with this argument since you pointed out that at 34% "money was tighter than you perferred"

Yes and no.

When I made less money, I also spent a lot less money and not just on my mortgage. Now a night out may mean Globe Bistro or Adega and then to a play, but before it was pho and a cheap movie. I now drive a Prius with all the fixins. Before I drove a Ford Escort, or just took the TTC. Now I have multiple televisions, multiple PVRs, and lots of HD cable channels. Before I'd hem and haw about getting cable TV because of the monthly costs. Now I have an iPhone 4 and a data plan that allows me to tether my laptop. Before I had the most basic cell phone and very basic cell plan. Now I buy a top of the line iMac with an extended warranty, and have a store-bought Windows PC too, and use a laptop on the road. Before I myself used to rebuild and update my desktop PC, my only computer, to save money.

When I made $50000 a year, I rented. However, back then I still seriously considered buying a condo. The reason I didn't was back then I wasn't sure if I was going to stay in Toronto for more than a couple of years. In that context, buying a $200000 condo would not make sense, after all the fees and taxes. So I held off. However, if I knew I was going to stay in Toronto for 5 years or more, I most definitely would have bought. Several of my colleagues did. And they did fine on $50000 a year.

The difference back then is they just got much more space for the money. Back then $200000 would get you a nice 2 bedroom condo. Nowadays it's a much smaller studio suite, for say $215000 in a decent building. But then again, the condo fees are much lower too with those tiny condos than for a 2 bedroom place.

At $215000, the calculations go like this:

8% downpayment $17200
Condo fees $320
Property taxes $149
5% interest rate

--

Max purchase price $215248
Mortgage principal $198048
Insurance $6239
Total mortgage $204236
Monthly payments are $1024.09.
$191866 remains after 5 years.

This is a home 4.3X the yearly salary, with a mortgage 4.1% of yearly salary.

But that was at a 5% interest rate. A conservative real rate is more like 3.69% (or lower).
At 3.69%, it's only $863.37, with a principal remaining after 5 years of $184934.
However, if you play like the rate is 5%, then you add $160.72 onto the payment every month, for a total of $1024.09.
After 5 years, the principal remaining is $172015.

Even if the interest rate in 5 years were to jump to 7%, you could still set up a mortgage at that time with a $172015 principal giving you a monthly payment of $1086.90. That's only 6.1% more than what you were paying before, again representing an increase of less than inflation over 5 years.

Personally I think $1025 + $320 a month is quite manageable for someone grossing $4166.67 a month, esp. if s/he doesn't have a car.

 

[Eug]

With a $50000 salary, the take home pay is $38091. That's a tax rate of 23.8%.
With a $100000 salary, the take home pay is $71414. That's a tax rate of 28.6%.

For someone making $50000 a year, that means their take home pay is $3174.25 a month. With a monthly payment of $1025 + 320 = $1345, that represents 42% of the monthly net income, leaving behind $1829.25 per month for food, entertainment, clothes, etc.

I think that's actually pretty decent. The key here is the effective tax rate is much lower for someone with a $50000 salary as compared to someone with a 6-digit $ salary.

 

[interested]

We are in agreement.
The numbers you quote are managable by a very responsible individual like yourself.
True your expenses have gone up. But that is because you can afford it. And there is room for you to give up the discretionary items if necessary, eg. Globe Bistro and Adega. You would postpone buying another TV but already have multiple ones. You could eliminate the HD channels, get a cheaper cell phone plan, sell the PRIUS if absolutely necessary etc.

The individual at $50K can't eliminate non discretionary items (food, clothing, heating costs, basic phone service etc).

That said, we are basically saying the same thing.

Eug, if everyone approached issues as you have, I would have no fear for what may transpire even in a market correction (save an outright crash) because you have room to eliminate discretionary costs and tighten your belt. You are clearly not living to full extent of your salary (which by the way is the responsible thing to do). And to the extent that you spend, you do it because you are comfortable enough to do so.

My concern as always expressed is the guy who is stretched today at current valuations already. I think this is the concern when you hear 150% debt to income level in Canada and Mark Carney and Flaherty trying to raise awareness.

Just from your analysis of the numbers, it is clear you are an informed and intelligent individual who can make a rational decision, plan ahead and allow for reasonable unexpected adverse effects. It is the uninitiated younger people who have only seen an up market in real estate, watched everyone get rich, see TV shows on HGTV about how to make a fortune flipping real estate, how real estate only goes up according to the R/E industry, and who do not understand enough to delve behind the headline number conveniently chosen to paint everything in the best possible light who require a degree of protection and cannot overextend to 4x or 4.5x levels even with your numbers because even though they may survive, the setback could be easily robbing them of 5 to 10 future years of earnings and savings to makeup for the potential losses.

 

[interested]

With a $50000 salary, the take home pay is $38091. That's a tax rate of 23.8%.
With a $100000 salary, the take home pay is $71414. That's a tax rate of 28.6%.

For someone making $50000 a year, that means their take home pay is $3174.25 a month. With a monthly payment of $1025 + 320 = $1345, that represents 42% of the monthly net income, leaving behind $1829.25 per month for food, entertainment, clothes, etc.

I think that's actually pretty decent. The key here is the effective tax rate is much lower for someone with a $50000 salary as compared to someone with a 6-digit $ salary.

We agree.
Still, I am just a bit more conservative, I think that is all.
Of course, we great minds are basically just discussing nuances as we in principal are in agreement.

 

[Eug]

A relative had a decent paying union job with IIRC an hourly wage in the $20s, and a $100000 mortgage. That means a yearly salary somewhere around the mid $40s... and still managed to get the house foreclosed on. By most measures, a $100000 mortgage with a $43000 yearly salary should be pretty easily manageable.

Another person I know had a $300k condo and some other debts and then ran into financial trouble. However, he didn't get foreclosed on. He just sold the place and rented, that's all. No biggie.

Stuff like this is always going to happen.

Sure, someone weathering a downturn with a mortgage from a home purchase at 4-4.5X salary isn't going to be happy about it, but them's the breaks. As you suggest, my point here is that 4-4.5X isn't necessarily going to cause a crisis even with rising interest rates and a flat economy, if it's their primary home. It will be problematic if rates go north of 7% by 2015 or whatever, but quite honestly while I think that's possible, I don't think that's probable.

The real purpose of the reign-in should not really be to prevent people from buying at 4X salary IMO. The purpose of the reign-in is to get people to not buy at over 5X with 5% down or whatever, because there the numbers make a heluvalot less sense, even with people who can live otherwise frugally.

BTW, if they do go this direction of including 100% of condo fees, I think condo fees may actually change in response in a lot of new builds. No more included cable. No more electricity. Etc. Either that or condo builders will have even more incentive to artificially deflate condo fees, so they'll rise more once the owners take over. So it won't even really accomplish what it's aiming to do. A more effective method would be drop the GDS to 31%, but using the same calculation. In fact, using the 100% rule might have the unintended effect of screwing owners' finances over even more, because they'll be paying a lot more out of pocket for other expenses not included in condo fees, and their yearly condo fee increases for pre-builds will be higher than they were before.

P.S. Side issue. Going forward I don't think I'm going to get a 5-year term anymore. I had one with my first condo purchase, and then rates dropped. I had one with my home purchase, and then rates dropped. In both instances I refinanced to a lower rate. However, it turns out it's very common for people to cut their mortgage short before 5 years anyway, so it may not make a lot of sense to get 5-year terms in the first place. Going forward I'm just going to get 3 year terms or less. OTOH, my last refinance was very, very nice for me. The lender paid me 3% cash to get my business, and I refinanced again at just the right time so my IRD penalty was just 3 months' interest. However, in my case I already have a lot of equity in my home so I don't have to worry as much about rising interest rates anymore.

 

[cdr108]

With a $50000 salary, the take home pay is $38091. That's a tax rate of 23.8%.
With a $100000 salary, the take home pay is $71414. That's a tax rate of 28.6%.

For someone making $50000 a year, that means their take home pay is $3174.25 a month. With a monthly payment of $1025 + 320 = $1345, that represents 42% of the monthly net income, leaving behind $1829.25 per month for food, entertainment, clothes, etc.

I think that's actually pretty decent. The key here is the effective tax rate is much lower for someone with a $50000 salary as compared to someone with a 6-digit $ salary.

sorry to put a damper on everyones calculations, but i didn't notice anyone including property taxes on their GDS/TDS valuations.
for that $215K bachelor condo, that's an additional $175/m;
monthly payment of $1025 + 320 = $1345 + 175 = $1520/m, which brings it up to ~ 47% of monthly net income.

 

[Eug]

Oops you're right.

Still pretty reasonable though.

$1500 spending money after rent and taxes per month is pretty good, if you don't over spend. And if you don't have a car, it's almost downright easy to manage. Things get a lot tougher if you want to contribute a significant amount to an RRSP or TFSA, but I could see someone in this setup putting $250 a month to some sort of tax-deferred savings.

And remember, that $1025/mo payment I was talking about is accelerated payments, since that's using a calculation of a 5% interest rate. Current rates are more in the 3.5-3.8% range.

 

[avenirv]

pure comunism. congratulations guys !

 

[cdr108]

Oops you're right.

Still pretty reasonable though.

$1500 spending money after rent and taxes per month is pretty good, if you don't over spend. And if you don't have a car, it's almost downright easy to manage. Things get a lot tougher if you want to contribute a significant amount to an RRSP or TFSA, but I could see someone in this setup putting $250 a month to some sort of tax-deferred savings.

And remember, that $1025/mo payment I was talking about is accelerated payments, since that's using a calculation of a 5% interest rate. Current rates are more in the 3.5-3.8% range.

$1500+/m for mortgage, maintenance fees, taxes isn't bad; however, IMO it is quite high for a 400 SF bachelor.

for the same amount of money, one could rent a 600 SF 1b (or 1b + d) and not have to worry about annual increases in maintenance fees, property taxes, unexpected expenses needed, etc.

while i agree that your calculations make it seem affordable, it is based on the lowest historical interest rates.
in a prior post, you used 7% interest in a hypothetical, and at that rate the max should have been 3.5x income.
IIRC 7-8% is the historical long-term average, and i do believe we can see that within the next 5 years.

 

[Eug]

This place is $220000 (which means a property tax of $152 per month), and it's in a reasonable building.

http://www.realtor.ca/propertyDetails.aspx?propertyId=10246751&PidKey=1627714837

It'd be OK for someone working on the east side of downtown, as it'd probably be a half hour walk to Yonge & King, and it's on a streetcar line too for the winter.
I don't actually know the size, but my guess it's significantly bigger than 400 square feet since it's an older build.

Renting is definitely a good option, and I did that for many years in Toronto, until I got my finances a bit more stable and when I wasn't sure I was going to stay. However, I see no problem with someone making $50000 a year wanting to purchase something like the listing I showed in today's financial climate.

 

[interested]

^^^ Agree with you cdr that 7% is certainly not out of the realm of possilbe. That said, presumably the economy will be doing better barring staflation and salaries will at least go up somewhat to offset the increase costs.

Eug, I agree there might be unintended consequences of increasing the condo fees to 100% inclusion. My point is just when doing one's own math, one should count 100% and not 50% or 75% because the reality is it is 100%.

what is with the communism comment unless it is to refer to that everyone should have a home? I don't get that at all since I posted that I do not think everyone should have a home. That said, if I am a socialist because I believe we as a society have a moral obligation to not allow capitalism to run amock, witness subprime in the US, and that I believe we should provide for at least the possibility of home ownership with reasonable parameters applicable (what those parameters are are exactly what we are discussing), then I guess I am a communist by those standards. Otherwise, I just don't follow.
.