Bill Hulet Editor

Here's the thing. A lot of important local issues are really complex. And to understand them we need more than "sound bites" and knee-jerk ideology. The Guelph Back-Grounder is a place where people can read the background information that explains why things are the way they are, and, the complex issues that people have to negotiate if they want to make Guelph a better city. No anger, just the facts.


Wednesday, May 16, 2018

Affordable Housing in Guelph: Home Ownership

In my last blog post I tried to explain how the rental housing stock in the city has completely "decoupled" from the needs of the lower 26% income earning households in the city. I also showed how even lower-middle class people---like single working mothers with children in childcare---would find it extremely difficult to find an apartment that would be considered "affordable". This part of the article will deal with home ownership.

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According to the 2016 census, 70.2% of Guelph households own their own home. This is a decline from 72.1 in 2006. In addition, across Canada there seems to be a generational shift in ownership taking place, as in 2006 72.2% of seniors owned their homes, versus 74.6% in 2016. Conversely, every cohort under 65% saw it's percentage of home ownership decline. To understand this phenomenon, consider that in 1981 that 55.5% of people age 30 owned their own homes in Canada, versus only 50.2% in 2016.

One way of understanding this change is to look at the cost of home ownership broken down by year.

Cost of a single detached house in Guelph (click on image for bigger version),
from Guelph & District Association of REALTORS
fair use copyright provision.


As you can see, in 2001 ("Q1" just means "first quarter of the year") the median price of a home in Guelph was something like $160,000---now it appears to be over $540,000! And be careful to realize that this is a median price, not an average. That means half of the houses for sale were more than $540,000. It isn't the case of a small number of hyper-expensive mansions drawing up an average with a lot more much cheaper homes. Take note of the time frame between 2011 and 2016, this isn't an extension of the constant arithmetic progression between 2000 and 2015, it changes the curve and starts to look like an asymptote (think crazy exponential growth.)

Let's look at the same time frame for something generally considered cheaper:  townhouses.

Cost of a row house in Guelph (click on image for bigger version),
from Guelph & District Association of REALTORS
fair use copyright provision.
As you can see, almost exactly the same phenomenon is at work, only at a lower price:  the median cost for a row house in 2000 was about $125,000 and in 2018 it has risen to about $425,000!

It's important to compare the increase in house prices to household income. The median family income in Canada in 2000 was $50,080 and in 2015 it had risen to $80,940 ($81,480 in Ontario.) At the same time the median price of a single detached home in Guelph had risen from something like $160,000 to over $400,000! (And please notice that 2015 is the last year before the slope on the graph dramatically angles upwards.) Obviously, this wild growth in house prices is not being driven by an equally dramatic increases in people's wages. 

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Why has the cost of a house risen so dramatically? There are a variety of potential suspects. First, it could be that the cost of borrowing money has declined so much that people are just taking on bigger debts because it costs so much less to borrow. Second, it could be that the new restrictions on urban sprawl have cut access to land so competition has increased for space. Third, it could be that people are using real estate as an investment and we are currently in the middle of a financial "bubble".

What have the mortgage rates been like from 2000 to 2018?

Image from RateHub.ca, used under Fair Use provision.
Click for a larger size.
As you can see from the above chart for a five year mortgage, rates have been declining slightly, but mostly stable during the time that housing prices have been exploding. It's important to remember, that even with low rates the cost of borrowing can be quite high. Just looking at the Toronto Dominion Bank website I see that they are offering a 10 year fixed rate of 6.1% and a five year variable rate closed (you are limited about how much principle you can pay in a year) of 2.85%. Let's say a person borrows $100,000 at 6.1% for ten years, that means that if you pay it off over ten years, you would have to pay $256/week and at the end of that time you would have paid $33,112 in interest. At 2.85%, it is $221/week and $14,847 in interest.

Ten years is a rather fast pay down, though. So let's look at what happens if you expand the time of pay down to 25 years. Let's also look at the median price of a single detached home in Guelph, $540,000, with a 20% down payment, which cuts the mortgage down to $432,000. At that point, 6.1% translates to $643/week and the interest costs $403,297. And, at 2.85%, it comes to $464/week and $170,848 in interest. This means that at 6.1% over 25 years a $540,000 home in Guelph costs $943,297 and at 2.85%, $710,848. (I've been using the Canadian Mortgage and Housing Corporation's Mortgage interest calculator to come up with these numbers.)

Ever wonder why some people are upset about banks?
Image from Pixabay, registered public domain. 
Even at today's interest rates borrowing money for a mortgage is really expensive. So borrowing a huge amount of money at a slightly lower rate of interest is hardly any great cost saving over borrowing less at a higher rate. I think it is safe to say that house prices are not going up primarily because of low prime rates---although it might have some effect.

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Recently the leader of the Conservative Party of Ontario, Doug Ford, raised the idea that the big reason why housing prices have gone up is because land has been preserved in the Ontario Greenbelt.



It appears that when he made these statements, he was just parroting a line being promoted by developers. This is important to remember because even though Ford backed down under pressure from the public once the above video was leaked to the Toronto Star, readers should remember that this is one of those unique opportunities that ordinary people have to see what big business people really think---instead of what their public relations people tell us. Ford---in his usual ill-informed way---seems to think that land is just land, and we can easily trade off one "farmer's field" for another. But as I've pointed out in my article about the Greenbelt, the land being preserved by it mostly consists of unique types of geography that simply cannot be found anywhere else and which serves vital needs for the province's citizens: the Oak Ridges moraine, the Holland Marsh, and, the Niagara Tender Fruit Belt. 

Beyond this issue, the idea that we can just "build out" of the present situation misses the consensus among urban thinkers that suburban sprawl is just too expensive to service. Here's an interesting graphic that illustrates the differences in servicing costs per household that comes from Halifax. (Click on the image to get a larger version and read the fine print.)

From the Smart Prosperity Institute
Image used under Fair Use provision of copyright law.

The other thing to remember is that commuting back and forth to work by car is not a trivial expense. According to the CAA auto cost calculator, an annual commute between Guelph and Brampton (73 kilometers) in a new compact car will cost $7,730/year. If you live in the burbs, you'd better consider doubling that, as your spouse will probably need a car too---and unless you are very well off, you need a spouse's income to afford a house. So now we are at $15,460 or $297/week. If you don't remember, that's more than it cost to pay off a $100,000 mortgage over ten years according the calculations I mentioned in the section about the cost of borrowing money. The cost of commuting by car is now at the point where you simply cannot "drive your way out" of real estate costs.

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This leaves the question of whether or not we are in the midst of a housing bubble. An economic bubble is when the price of a commodity goes up beyond it's intrinsic value. Generally, this comes about because a consensus arises that the items in question will continue to go up in price, so people keep paying more and more for them on the expectation that prices will continue to rise. The classic historical example of this was the "tulip mania" that took place in Holland during the early 17th century. At it's height, one prized bulb could be sold for as much as 10 times the annual income of a skilled worker---which would be something like $1,000,000 in today's money. The thing to remember about bubbles is that they aren't strictly speaking irrational, because if someone gets into a bubble, they can make a lot of money---as long as they know when to get off the merry-go-round.

Tulip bulbs---each one worth $1,000,000!
Public domain image c/o Wiki Commons

Consider that insanely expensive flower bulb. If someone pays $100,000 for it and sells it at $1,000,000 they are a canny investor who just made $900,000! Lest this sound like something far fetched, I have an friend who has made a LOT of money off a couple recent bubbles. I can remember before the 2008 stock market crash him ranting and raving about the way the way the US stock market was tied to a crazy real estate bubble and he was chewing his finger nails off trying to figure out when he should dump his stocks and put them in something else. Sell too soon and he'd lose lots of potential earnings, sell too late and he would lose a lot of money. After the crash, I bumped into him and asked him about how his investments were faring. He said he was doing fine---he'd sold out and bought shares in Canadian banks and said he thought that they would pick up some undervalued holdings in the USA. A few years before that, he came over to show me his fancy new sports car that he picked up when Jim Flaherty announced that he was axing the "Income Trust" investment vehicle. He had invested against the promises by Stephen Harper that the conservatives would keep this tax loophole---even though it was costing the government huge amounts of money in tax revenue.

The key point that my savvy investor friend has made to me is that whenever he makes an investment decision like this, the "professionals" always try to talk him out of doing it. They invariably say that the there is still lots of room for improved earnings. In effect, they say that the tulip bulb will continue to increase in value---maybe up to $2,000,000! The other thing that this guy says is that he makes investment decisions based on what the front page of the newspaper says, not the financial section. In both cases, what he means is that bubbles are examples of "Groupthink".  That is, when a consensus emerges inside an institution or body of people that refuses to think about an issue based on evidence and doesn't consider minority points of view. Instead, they look towards each other for reinforcement---especially when it reinforces a point of view that promises rewards for those that hold it. In his case, the people who were making money selling investments to people---both in brokerage offices and as reporters for the financial sections of newspapers---had a vested interest (primarily unconscious) in promoting the idea that "the sky was the limit" for both NINJA mortgages and Income Trusts. I'm sure much the same thing happened in the 16th century Netherlands.

In the case of real estate, I once had a conversation with a fellow at my day job that pretty much epitomizes the Groupthink. I suggested that real estate was over-valued, his response was "houses NEVER go down in price". I suppose the reason he said that was because in his personal experience he'd never seen a house decline in price. Unfortunately, a lot of people actually believe this. If you do, take a look at the following graph of Toronto housing prices (in constant 2017 dollars.)

Image from "TorontoHomesforSale.com",
Fair Use Provision.

If you see the graph, there are two peaks---one in 1974 and another in 1989. These are when housing bubbles crashed and house prices declined. (I bought my house after the 1989 one.) Yes, Virginia, houses do go down in price. 

The important issue with regard to housing is that there is a very strong tendency towards Groupthink because of two factors. First, for most people their home is the only real investment that they make. That means that there is a strong fear that if they don't buy a house, they will never have any sort of financial security in their lives. Secondly, there are very strong ideological and emotional ties to the concept of home ownership. The iconic image of a good family life is the white picket fence and a grassy backyard for "the children to play in". A lot of people literally think that if they cannot provide a single detached home they have failed as human beings and are committing some sort of child abuse.   

Yup, this is the "bare minimum"---anything less means failure as a parent!
Public Domain image c/o the Wiki Commons

The thing to remember about a bubble is that the key issue is whether or not what you pay for a thing exceeds its intrinsic value. I previously did some calculations for a median priced ($540,000) single detached house in Guelph. I assumed that there was a 20% down payment, which means that the real value of the money borrowed was $432,000. I also assumed a 25 year pay-off window. I worked this out according to the highest rate of interest I could find, 6.1%, which meant that borrowing cost was $403,000 in interest; and; the lowest rate I could find, 2.85%, which translated into $171,000 in interest. In 25 years there are 300 months, which means that the interest charges come to $1340/month at 6.1% interest, and, $570/month at 2.85%. That interest per month is the amount of money you are paying to "rent" the house you are living in while paying off your $432,000 in equity.  What really is useful to think about, however, is to compare these monthly interest payments to the average rent payments that I talked about in my last article.

  • bachelor apartment: $750
  • one bedroom: $980
  • two bedroom: $1,124
  • three bedroom: $1200
  • average cost of an apartment: $1,066
As you can see, just the cost of the interest that people pay for buying a house compares very favourably to the rent that people are paying for apartments in Guelph. This means that if a person can scrape together a good down payment and afford to pay the full mortgage costs (interest plus principle) buying a home is still intrinsically a good thing---if the housing market doesn't crash and the cost of borrowing doesn't increase dramatically. And it is even better if houses still keep increasing in value. I would suggest, therefore, that no, Guelph isn't in a classic housing bubble. But having said that, I doubt if there is a lot of room for houses to increase at the wild rate that they have over the last ten years. I expect the prices to plateau and maybe even decline slightly.

Of course, in the calculations above I haven't taken into account the cost of paying off the principle, which is $1,440/month. But if a person can afford it, that really isn't a cost because it is money that they are paying themselves. It is an investment into personal equity. But that is pretty cold comfort to someone if they have trouble making those monthly payments of $2,780/month at 6.1% or $2,010/month at 2.85% (interest plus principle.)

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I recently heard a podcast by "Canadaland" where Jesse Brown interviewed a professor where they talked about the impact of modern technology on journalism. One of the ideas that really caught my attention is that the news consumer market always consisted of two streams. The first consists of 'hip' people like the readers of "The Guelph-Back-Grounder" who were always interested in getting more in-depth information than was ever provided by newspapers. Others are people who only ever picked up news as a "by-product" of other interests. They are the people who bought a subscription to the local paper for "match, hatch, and, dispatch" (marriage, birth, and, death notices), and would glance at the front page along the way. They are also the people who would watch a sitcom and suffer through the tv news because they were too lazy to get off the couch and every other channel had news on at the same time anyway.

The internet and sources like "The Guelph-Back-Grounder" is providing better information than newspapers and tv newscasts ever did. For the hip folks like the people reading this blog, there has never been a better time for news. But, unfortunately, for the folks who never actively sought out news, this is the worst time ever. There is no paper providing "match, hatch, and, dispatch" anymore---so they never get exposed to the front page stuff. And with Netflix and the 1,000 channel universe you never end up sitting through a news cast because there's nothing else on. These are the people who believe that the Pope endorsed Donald Trump and the Hilary Clinton is a pedophile who buys children from a Washington Pizzeria. I suspect that they are also the people who are going to vote for Doug Ford in the next election.

One way you can push against this tendency is to share real information with the crazy members of your family. And the way to do this is very simple---simply share "The Guelph-Back-Grounder" on social media. Share it on Twitter, share it on FaceBook, if you see it on Reddit, vote it "up". Push back against the paid advertising and the trolls from Russia, by simply sharing real news instead of just complaining about the fake stuff.

Oh, one last thing you can do---support "The Guelph-Back-Grounder" financially. You can commit to a monthly micro-payment through Patreon or make a one-time payment through the "tip jar". (Thanks to Douglas for your payment after the last post---you are awesome!) You may think I am a filthy capitalist scumbag who doesn't deserve a sou, but the fact is that unless people will pay for real news you are eventually going to get nothing except propaganda on the web. And believe me, that would suck mightily! 


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As I mentioned before, Stats Canada says that the median household income in Ontario is $81,480. In the last post I brought up a graphic from the Credit Counselling Society which I think bears another look: 

Image added under the Fair Use provision.

If you look at the pie chart there are three elements that refer to purchasing a house:  housing, savings, and, dept payments. Let's consider a couple of people who earn the median income of $81,480, that means that the 35% of their income that the Credit Counselling Society believe should go to housing comes to $28,518. Divide that by 12 and you get $2,377/month. That comes pretty close to the numbers I came up with in the above at 6.1% ($2,780) and 2.85% ($2,010). Having said that, it is very important to remember that these are just the numbers for paying principle and interest. There are significant other costs that come from owning a home:  taxes, insurance, maintenance, and, renovations. But having said that, the $540,000 home that I based all of this calculation on is a median-priced, single detached house. This means that half of the single detached houses in Guelph sold for less than that. It also means that there are cheaper options, such as row houses, duplexes, semi-detached, and, condos---most of which are cheaper than fully detached houses. It is also possible to cut the costs of maintenance and renovation by doing the work yourself. 

It is also important to understand, however, that the money that people spend on buying a house is not completely "housing". It is also a form of "savings", and, paying off a mortgage is also a form of "debt". So if you follow the pie chart above, you could say say that what people really put into their homes could be as high as 60% of their income (35% housing, 15% debt repayment, and, 10% savings). And 60% of $81,480 comes to $48,890 or $4,074/month, which makes home ownership seem a lot more affordable. Of course, not a lot of people are going to want---or even be able---to devote 60% of their income to buying a place to live, but it is important to realize the implications of the numbers. It isn't much fun to scrimp and save for decades in order to buy your own home, but lots of our parents did the same thing---and the result is what usually is the biggest chunk of personal wealth that anyone owns.

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It seems to me that the real problem we are facing in Guelph is wealth stratification. That is, people who can afford to buy a house can use that purchase to amass more wealth in the form of equity whereas the people who cannot will end up just losing all the money that they pay in the form of rent. Luckily the CMHC has provided household income tables that break down Guelph residents into increments of $20,000. (Unfortunately, the latest numbers are from 2011, but I think it shows a trend that if anything has gotten worse since then.)

  • less than $20,000/year, 5,770 or 10.5%
  • $20,000 to $40,000, 8,320 or 15%
  • $40,000 to $60,000, 8,920 or 16%
  • $60,000 to $80,000, 7,635 or 14%
  • $80,000 to $100,000, 6,690 or 12%
  • $100,000 and over, 17,530 or 32%
As you can see, 44% of Guelph's households make $80,000/year or more. These are the people who can buy homes without enormous personal sacrifice---depending on what they buy. People making less than $20,000/year can't even find a place to rent. But what about the households making between $20,000 and $80,000/year? That comes out at 45% of the population. These folks have to compete with the upper 44% for houses to buy and it can be tremendously frustrating to never find anything you can afford, even though you are making what used to be considered not a bad income. There are a lot of issues raised by this, but this post is already getting rather long, so I'll save that stuff for a future article.