New generation of homeowners faces new risks

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The last home I bought in Winnipeg cost $56,000. It was a four-bedroom, one-and-a-half storey on Elm Park Road in St. Vital. I lived there for seven years. Tired of paying $800 a month in mortgage and taxes without knocking anything off the principal of my loan, I decided to sell.

My real estate agent advised me I might have trouble selling the house for what I paid for it because I had converted two of the bedrooms into a loft and the other two into one office and the market was soft. I was faced with the reality of paying the bank a few thousand dollars to make up the deficit between the selling price and the balance of my mortgage.

It wasn't always this bad. I was able to purchase my first home in the North End below market value and the money I earned by flipping it provided the $4,600 (10 per cent) down payment I needed to buy a three-bedroom River Heights beauty with plenty of oak and a red brick fireplace situated in the middle of a quiet bay. But when I decided to switch from character to modern convenience, five years of mortgage payments only provided me with enough equity for a down payment on a modest new home in Canterbury Park. And I was back to square one, facing 25 years of monthly payments until I could hold a mortgage-burning party.

To folks trying to buy a home today, it sounds like I was living in a different world. But that's the way it was for a guy with a lower-middle-class income during the 1970s and 1980s. I couldn't really get ahead because interest rates ranged from eight to 10 per cent (keeping monthly payments high) and housing prices only went up two to five per cent a year at best (making it difficult to build up equity).

It's important for people to see the actual numbers I was dealing with because somehow all the warnings that today's economic indicators are screaming seem to be falling on deaf ears.

People are still buying homes despite the fact the home I fled in St. Vital now costs $300,000. That's because interest rates are so low (three per cent) that monthly mortgage payments on that same home are close enough to what I paid and the equity gained annually can keep you in the market.

The major difference is I never faced complete financial ruin from buying a home while thousands of today's homeowners in Winnipeg are living on the edge of disaster. And they don't seem to see this. Perhaps it's because people can still afford the Canadian dream the way things are right now.

A school teacher in Arizona recently felt the same way about the American dream. That school teacher was making $40,000 a year and his wife was bringing in $25,000 for an annual income of $65,000. Housing prices in Arizona were skyrocketing so they scooped up a suburban bungalow for $300,000 at low interest rates. The combined income that most families now need to buy a house just managed to cover their monthly mortgage payments.

But the U.S. economy collapsed, interest rates went way up and the family ended up carrying their belongings, along with a crippling $200,000 debt, out the door after the bank sold their house for $100,000.

We keep thinking it can't happen here. Somehow the reality of our monthly bank statements keeps getting lost in things like Canada's tougher banking regulations and the Bank of Canada's continued reluctance to raise its leading lending rate. The math is so simple if we keep it simple but we ignore it at our peril.

Monthly bills are paid with wages. And take-home pay has certainly not risen over 100 per cent in the past decade. Many homeowners find they are "short" hundreds of dollars every month after paying all the bills and these house-poor individuals have to borrow against the equity in their homes just to keep up. But this just makes their debt rise and savings go down. Debt as a percentage of income is skyrocketing in Canada.

And that's the difference between homeowners of today and me. While I might have lost a couple of thousand dollars when the market for my house changed, I never faced financial ruin.

Maybe I'm telling you something you already know. Or maybe by offering the practical example of my experience I hope people will fully realize just how perilous the housing market has become. A family trying to buy an average home right now may have to assume $300,000 in debt. They can handle mortgage payments at three per cent but if those rates double (or even triple to the level I used to pay just 20 years go), that monthly mortgage payment jumps from $1,000 to $2,000 or even $3,000.

How many average Canadians can afford that?

Don Marks got tired of missing out on concerts because a hot water heater blew and now rents an apartment in Osborne Village.

Republished from the Winnipeg Free Press print edition October 29, 2012 A13