Winnipeg Free Press - PRINT EDITION

Getting a foot in the door

Would-be homeowners face more obstacles than ever buying a place of their own

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Shuhsien Zhu and husband Christopher Davidson were fed up with throwing money away on high rent in the city. So with their lease up last spring, they decided to make the jump into the housing market.

"We were paying almost $1,300 in rent downtown in a highrise," said Zhu, a 29-year-old registered nurse. "We were sick of paying that much money when we could buy a house and the mortgage payment was cheaper."

After attending a few open-houses, they found their first home, a small fixer-upper in Crescentwood, which they took possession of at the end of August. Having saved up a five per cent down payment, the couple paid $195,000, even though they could have afforded much more -- at least according to their financial institution.

Their bank pre-approved them for a $600,000-mortgage, but Zhu and Davidson had no intention of splurging.

"We thought, 'Let's not spend that much money,'" says Zhu, whose husband is an electrician.

Although the couple found their first home with relative ease, finding an affordably priced home these days can be a tough slog for first-time buyers.

Homes in the $200,000 to $250,000 range are the hottest segment of the resale market in the city, accounting for about 20 per cent of all resales as of the end of October, according WinnipegRealtors MLS data.

Most buyers in this range are first-timers, largely young couples and newcomer families, says realtor Anita Sharma, with Re/Max associates in Winnipeg.

"There's not a lot of inventory in the market, so when a listing does come up, it sells pretty quickly," Sharma says. "We're still seeing bidding wars."

Almost a decade of low interest rates, including record-low rates in the last few years, have fuelled a real estate price boom in Winnipeg unlike anything in the last several decades.

Although it's been a boon for homeowners, who have seen their homes' values more than double in the last 10 years, the low-rate environment has helped inflate prices to the point where it's become challenging for prospective first-time buyers to find an affordable house, says Jeff Sparrow, a mortgage broker and owner of the Castle Mortgage Group.

"The first-time homebuyer threshold is much higher than it used to be," he says. "Trying to find a house for under $250,000 is difficult because the price increases here locally have gone up dramatically."

Federal mortgage-lending rule changes haven't helped, Sparrow says. While measures eliminating zero-down mortgages and reducing the amortization period to 25 years were aimed at gently deflating a bubbling housing market, these changes have only served to increase demand for the low-end price range in the real estate market.

The most recent mortgage-rule change, which took effect in July 2012, decreased the maximum amortization period to 25 years from 30 years for homebuyers with less than a 20 per cent down payment. That equates to a fair chunk of change for first-timers.

"That five-year shortening of amortization for most first-time buyers translated into about a $100 to $150 monthly payment difference," Sparrow says.

"The other big issue here in Manitoba is that the closing costs are higher than they are in other provinces."

Besides the land-transfer tax and lawyer fees, buyers now have to pay PST on mortgage-loan insurance.

These costs now add about two per cent to the total purchase price of the home, so buyers actually must save a minimum seven per cent instead of the minimum five per cent down payment to qualify for a mortgage.

More changes are likely as the Office of the Superintendent of Financial Institutions (OSFI) is eyeing tightening the way financial institutions calculate how much they can lend to buyers, Sparrow says.

One of these changes is how financial institutions weigh unsecured debt in their calculation to determine how much to lend to prospective buyers.

"Even if you haven't used it (your credit card), they're going to count it as if you've maxed it out," Sparrow says. "By doing that, it forces a fairly major payment to count against the client that may or may not exist."

Despite the obstacles, many potential first-time buyers are still qualifying for mortgages and many, like Zhu and Davidson, get pre-approved for substantially higher sums than they may have anticipated.

Sparrow says that's because lenders generally use the gross debt servicing (GDS) ratio to determine the size of a mortgage borrowers can afford.

This is a measurement of a percentage of a person's gross income that has to be spent on housing costs, such as interest, principal, heating and property taxes.

"The other debt-service-ratio qualifier is the total debt-service ratio that includes everything in the gross debt-service ratio, plus every other debt an individual has," Sparrow says.

"Because we play in the gross-income world, these measures can lead to unrealistic mortgage-approval figures, so you end up with that example where the income looks pretty good, but $600,000 is an insanely high number."

As a result, first-timers should consider what they're prepared to pay for a home and how much they can realistically afford rather than letting the pre-approved amount dictate how high they can go.

"The reality is that the housing costs and debt are just part of the picture," he says. "What lenders don't have to take into consideration are things like child care, operating costs for the vehicle and a lot of other expenses that people are going to have that just aren't factored into these debt-servicing ratios."

Still, lenders do stress-test buyers' affordability by, for example, qualifying borrowers seeking a variable-rate mortgage at a higher interest rate than the advertised one to ensure they can handle interest rate hikes in the future, says Farhaneh Haque, director of mortgage advice at TD Bank Group.

"It's not a function of your comfort levels but also a function of your affordability," Haque says. "It's a good exercise for the buyers to ask themselves: 'Today, this is what I'm paying, but if rates were to go up, this would be my payment. How comfortable am I and what sacrifices do I need to make in my budget?'"

For some first-timers, the sacrifice is just too high. Sparrow says many prospective first-timers get discouraged because they simply can't find a home in their price range.

But those kicking tires shouldn't lose heart, he says.

Winter is here, and while it's typically a slow time for the real estate market, a cooling-off period is often the best time to bargain-hunt.

"There's a lot more choice as far as product goes, whereas in the spring, it becomes highly competitive and first-time homebuyers can become completely disillusioned and choose to rent," he says.

"That's changing now, and we're seeing a lot more of them coming out of the woodwork to buy."

Republished from the Winnipeg Free Press print edition December 7, 2013 B12

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