As of January 16th, 2017, British Columbia (B.C) residents will have access to some “free money”. By extending interest-free loans, of up to $37,500 or a maximum of 5% of the homes’ purchase cost, to first-time home buyers that may be sitting on the sidelines, the B.C government seems to be tempting high-risk individuals to throw their hat into the home buyers ring.
In effect, what this is doing is further inflating the already over heated housing bubble, and exacerbating its imminent pop!
THE HOUSING BUBBLE DEMYSTIFIED
Speaking about a pop – how about a Pop quiz:
After paying for monthly bus and subway passes, rent, groceries and other day-to-day living expenses, you barely manage to save $300 a month ($3,600 annually). If someone offered you an incredibly low-interest loan (say, 0.1%) to buy a new car – say a Subaru Forester or a Mazda6 – should you accept?
If you answered “Yes” – you’ve failed the quiz!
The euphoria of accessing “cheap money” is blinding you to two important facts:
- The annual maintenance cost of these vehicles can run anywhere between $12,200 and $12,700 – which is nearly 30% more than what you save each year!
- Even if you rationalized that you’ll be saving on transit costs, you’ll have additional costs to factor in, such as insurance, drivers license, license plate fees and parking
Add all of this up, and then factor in the “incredibly low” interest payment – and you’ll be bankrupt, but with a new car to your name (until the dealership repossesses)!
This situation is analogous to what’s happening in the housing market in B.C today.
A BUBBLE IN THE MAKING
Let’s be clear though: This B.C bubble won’t have been initiated on Jan 16th 2017 – it has been in the making long before. Canada’s former Prime Minister, Mr. Stephen Harper, had espoused similar sentiments back during the 2015 re-election campaign, by promising to allow Canadians to use more of their RRSP savings for down-payments. Bad idea! Revenue Canada data shows that once withdrawn, the funds aren’t re-contributed immediately, causing individuals to not only deplete retirement savings, but also to bear the burden of higher taxes.
Then there was the October 2016 declaration by Finance Minister Mr. Bill Morneau that he would use all tools available to him to deflate rising home prices in hot markets like Toronto and Vancouver. One of the measures, to increase the down-payment levels on homes priced at $500,000+, will have “minimal impact”, according to economist Robert Kavcic at BMO Capital Markets.
A TALE OF TWO BUBBLES
Mr. Harper, Mr. Morneau and Premier Christy Clark all profess aspirations of increasing homeownership amongst Canadians as a lofty goal. And so did Bill Clinton (targeting homeownership increase from 64% to 67.5%) and President George Bush – and look what happened. We had the worst residential mortgage default-related market crash in recent memory!
The parallels south of the border back then, and what’s transpiring here at home today, are eerily similar.
The Bank Of Canada’s data shows that household credit continues to rise. In simple terms, this means the average Canadian household already owes much more money than they earn. BOC figures show that two-thirds of that debt pertains to residential mortgages. As of November 2016, 71.6% of household debt (totalling C$ 1,994B) was for residential mortgage credit.
So, if you are already drowning in debt, barely able to save for your retirement or meet day-to-day living expenses, would it be wise for your government to lend you even more money (even at 0% interest!)?
B.C’s Home Owner Mortgage and Equity Partnership (BC HOME Partnership) program is nothing more than a pin prick to a housing bubble that’s ripe for a pop! No one benefits from it, other than the banks and mortgage financing institutions. Aspiring homeowners will be forced to declare bankruptcy, but with a home to their names – until the mortgage lenders foreclose!
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