Life lessons

Ah, what a tangled web we weave.

“My dad told me it was a great idea,” says Bethany, a third-year uni arts student. “And he gave me $5,000 to help get it done. Now I’m terrified.”

So B bought a pre-con condo in DT T.O. for $625,000 – about the going rate for a 520-square-foot one bedder with (supposedly) a glimpse of the CN Tower. She paid the deposit over a few months (like everyone) with the big money due on closing, next May. Two years ago when the offer was accepted, it looked like a sweet deal with prices romping 10-25% a year and loan rates in the ditch. Now it’s a looming disaster.

Of the 95,000 units currently under construction in the region, over 31,000 will be finished and ready for a closing date in 2023, two-thirds of them in the first six months of the year. When Beth bought, a variable-rate mortgage was about 2% so owning wasn’t far off renting. But at north of 5% now, combined with property taxes, insurance and condo fees, the cost of carrying the place is north of four grand a month for a place that can be leased for $2,300.

Anyway, it’s academic. She can’t pass the 7.5% stress test for a half-million mortgage. “I can’t close,” she says, “and my father bailed on me. He’s calling it a life lesson.”

By the way, she’s not alone….

Naturally, this is not just a Toronto problem. Mortgage rates at 6%, crashing sales, properties failing to meet bank appraisal targets, fading prices and buyers not showing up on closing day are national realities.

Here’s a snippet of the latest Kelowna Report:

Even though local house prices are down $189,447 in the past 7 months, the annual income requirement for a single detached home in Kelowna has not dropped and is sitting at record high levels. You need a $223,688 salary or an hourly wage of $107.54 to afford an average house in Kelowna at present.

The median household income in K-town is $68,600. So logic tells us local prices have not hit bottom. Not even close. In fact most of BC is running a few months behind the GTA and SW Ontario. But it’s coming.

Also tangled these days are the VRM victims. Taking a variable-rate home loan made sense historically, and when money was sub-2% it was, like, free. But now variable rates are more than 3% higher. Those whose loan payments adjust with each Bank of Canada hike have been impacted since March. But most borrowers have fixed monthlies. Only recently have they been hitting the ‘trigger rate’ at which point 100% of a payment is insufficient to cover the interest owing. So, this happens (as relayed on that swamp called Reddit)…

Hi everyone, I reached out to my bank in order to increase my mortgage payments in view of the most likely interest hike of December 2022. (I have a variable rate) After locking a meeting with them I receive an email from my bank (2days later) that I’ve hit my trigger rate and that they will impose a new amount to be paid to them ($1600 more/month).

More to come, by the way. After Friday’s massive job romp in Canada and robust numbers Stateside, it’s a slam-dunk that rates are rising twice more, maybe thrice – starting December 7th. The current chartered bank prime of 5.95%, Mr. Market says (implied by OIS), will not top out until it hits 6.7%. So, variable-rate loans have almost another full point to add – and there will be little or no retreat from that for all of 2023 and well into 2024.

So, what now?

Will Kelowna incomes double in the next year?

Where can folks with VRMs find an extra $1,600 a month?

What will thousands of pre-con owners do when they can’t flog their assignments to a greater fool?

How much will a stress test rate of 8% chop what people can borrow?

What possible reason is there to believe we’re not just starting this real estate descent?

All we really know is this: when Bethany can’t close, she’ll be sued. Thanks, dad.

About the picture: “As always we appreciate the daily dose of reality, as well as for managing our investments,” writes Raigan. “Our poor kitty Megatron passed away last week after 17 years of joy, and a valiant struggle with brain cancer; I was hoping you could share her picture with everyone so they could appreciate what a beautiful special creature she was.”