[Riverdale Rink Rat]

http://www.cmhc-schl.gc.ca/en/corp/nero/jufa/jufa_018.cfm

While slightly self-serving, CMHC's compendium gives the major differences between the two countries. While the term 'overwhelming majority' sounds good, the reality is that Canadians are in arrears or default on tenths of percentages of mortgages (~0.3-0.5%, IIRC), while the US number is 10x that or more. That's a big difference.

More grist for the US housing bust mill from Barry Ritholtz:

http://www.ritholtz.com/blog/2012/05/underwater-homes/

http://www.ritholtz.com/blog/2012/05/the-housing-bottom-is-here/

The second post's title is layered with myriad levels of sarcasm...

 

[MadMax]

I think being underwater wouldn't really matter to the average honeowner. If you are comfortable where you are, have a long- term fixed interest rate that you are paying off regularly, then it wouldn't really matter how much your house is worth. Of course if interest rates rise drastically, your mortgage comes up for renewal and there is a big time drop in prices suddenly then that would be a different story. Although I believe there may be a slight correction, I don't think there would be that sudden impact that our friends to the South went through and are still going through.

 

[cdr108]

From the Star today: more interesting statistics
Wary homeowners paying off mortgages faster

Some 83 per cent of Canadians have at least 25 per cent equity in their homes ...

that's not really that significant ... and it's not that simplistic of a calculation.
this equity is premised on the capital appreciation that has occurred in the interim.
the equity can fall just as quickly.

ie. someone buys a condo in 2006 for $210K with 5% down ($10.5K);
now the condo is worth $300K and without taking into account principal repayment, so on paper they have $100.5K ($90K + 10.5K dp) in 'equity' = 33.5% even though only 5% was put down.
[if we add principal repayment of $26K over the past 6 years, then its $126.5/$300K = 42.1%]

if there's a 25% drop in prices from $300K, that would bring the valuation down to $225K;
and on paper the equity would only be $15k/$225K = 6.67% in 'equity'
[if we add principal repayment of $26K over the past 6 years, then its $40.5/$225K = 18.0%]

 

[brockm]

that's not really that significant ... and it's not that simplistic of a calculation.
this equity is premised on the capital appreciation that has occurred in the interim.
the equity can fall just as quickly.

ie. someone buys a condo in 2006 for $210K with 5% down ($10.5K);
now the condo is worth $300K and without taking into account principal repayment, so on paper they have $100.5K ($90K + 10.5K dp) in 'equity' = 33.5% even though only 5% was put down.
[if we add principal repayment of $26K over the past 6 years, then its $126.5/$300K = 42.1%]

if there's a 25% drop in prices from $300K, that would bring the valuation down to $225K;
and on paper the equity would only be $15k/$225K = 6.67% in 'equity'
[if we add principal repayment of $26K over the past 6 years, then its $40.5/$225K = 18.0%]

The *real* equity calculation that people should consider should include: land transfer taxes, closing costs, taxes, maintenance and inflation.

 

[Ric]

How about this dumb article from the Star.

http://www.moneyville.ca/blog/post/1203372--why-10-down-on-a-house-worked-for-me

Buyer had 20% saved for downpayment; decided to put 10% down instead (thus incuring CMHC premium of over $5K). Used the other 10% to pay off car loan at 0%. I can't believe they published this crap; gotta be a joke.

 

[dlam]

How about this dumb article from the Star.

http://www.moneyville.ca/blog/post/1203372--why-10-down-on-a-house-worked-for-me

Buyer had 20% saved for downpayment; decided to put 10% down instead (thus incuring CMHC premium of over $5K). Used the other 10% to pay off car loan at 0%. I can't believe they published this crap; gotta be a joke.

Oh no, not Crystal Yee again. She constantly gives bad advices, giving a bad name for the 20-somethings. Her problem is that she is only looking at monthly payments, rather than total mortgage to be paid with interest. That is a mentally of a person living paycheck-to-paycheck. She only put down 10%, which incurred CMHC insurance, so that she can free more money each month to pay back faster? Sounds like taking two steps backward to take a step forward. And why would you pay off the 0% loan?!! That's like paying off my osap loan when i'm still in school.

edit: not exactly as the same as paying off the osap loan during school, but it's dumb enough to be up there.

 

[adeel]

alot of the moneyville 'advice' is quite horrible...another moneyville writer did the same thing as Krystal (but i cant recall if the car loan she paid off had a higher rate than her mortgage)

 

[Eug]

Wow, that's pretty bad. However, her biggest mistake probably was buying that car in the first place. If she could only afford a $55000 downpayment on a home, why the hell is she spending so much on a car that requires $17000+ worth of loans?

BTW, I know a guy who had a 3 bedroom condo in King West, and a Porsche Boxster. He lost his job, but couldn't get out of the lease on the Porsche, so he sold his condo. This was back in the 90s.

I wonder what that 3 bedroom condo would be worth now...

 

[ILuvTO]

Just read Yee's column and the other column where the author bought a 560k house in Scarborough with 10% down. I LOL'd at both articles. Folks, this right here is the reason why house prices are as insane as they are. I'm sure foreign investors play a part, but I think stupidity and poor money management skills amongst the general population are the biggest factors. Yee especially blows me away with her logic. She paid off a 0% car loan and is instead paying 4% on that money through her reduced mortgage down payment. How this made sense to her at all is beyond me.

As a side note, I'm not sure if anyone is keeping up with FML listings. I check in every few days and smile at some of her blog posts. The blogger is quite funny and entertaining. She had this line in one of her blogs which ties in with the above; "Damn my understanding of finances, it’s truly a curse". I don't blame her for feeling this way. Wouldn't it be nice if we were all as oblivious as Krystal Yee? We could load up on debt and not even worry about it/realize it. LOL.

 

[James]

...
Despite wildly escalating house prices, especially in major centres like Vancouver, Toronto and Calgary, the average outstanding principal is just $170,000, according to the report authored by economist Will Dunning.
...

I can see this figure being valid in other parts of Canada but I would be more interested in specifics pertaining to a city like Toronto or Vancouver, moreso than a nationwide average.

 

[rbt]

She paid off a 0% car loan and is instead paying 4% on that money through her reduced mortgage down payment. How this made sense to her at all is beyond me.

Indeed. In the face of job-loss low monthly payments won't help but a large chunk of easily accessible cash would. I can see recommending keeping cash on hand and not making a pre-payment against either loan.


Getting money sunk into a mortgage back out via a HELOC can be very difficult when you're doing it to pay the mortgage loan and have zero income.

 

[ILuvTO]

Indeed. In the face of job-loss low monthly payments won't help but a large chunk of easily accessible cash would. I can see recommending keeping cash on hand and not making a pre-payment against either loan.

I could see the argument for her keeping the cash on the side as well. But even then she'd be losing unless the interest she was making on the money was greater than the extra interest she was paying towards her reduced mortgage.

I love how she rationalizes her stupidity. Most buyers must be like her. "Oh it's OK if I put 5% down on this 500k condo, I'll have a higher paying job in a couple of years anyway/condo will appreciate a lot/some other nonsense". Ugh. People that are clueless about basic budgeting and finances shouldn't be allowed to make such large purchases. LOL.

 

[cdr108]

How about this dumb article from the Star.

http://www.moneyville.ca/blog/post/1203372--why-10-down-on-a-house-worked-for-me

Buyer had 20% saved for downpayment; decided to put 10% down instead (thus incuring CMHC premium of over $5K). Used the other 10% to pay off car loan at 0%. I can't believe they published this crap; gotta be a joke.

what credentials do these people have to be offering financial advice, especially in a national newspaper?

* firstly, i thought Vancouver has good public transit so why buy a NEW car, especially as she puts it "as a single income homeowner in an unstable job market" .
i assumed new because no car manufacturer i know offers 0% for used vehicles, but almost all do for new products.
it's probably more prudent to just use car rental services like ZIP cars, autoshare, etc in urban areas like Vancouver.

* owing $17,500 on a car loan, where she was paying $270 bi-weekly at zero per cent interest means she would be financing the amount for 2.5 years.

so instead of toughing it out for 2.5 years with 0% interest, she's going to pay AT LEAST 4+% (which we know can only go up) over 25+ YEARS (does someone here follow her blogs to know how long an amortization she chose?) on that $17,500 car loan and $5,128 CMHC insurance premium ...
minimum interest over 25 years on that $22,628 is $13,000+ ! ! !

so in reality, the 0% $17,500 car loan will cost her at least $35,628

 

[interested]

^^^
This is a huge problem with our education system. Kids are graduating and if they choose not to, get no exposure to any business courses or virtually none. Unlike my generation (baby boomers), when I was in my 20's, I was not bombarded with credit cards, social media sending me messages that I can own a condo with all the bells and whistles, or messages that we deserve everything now and why wait. That is what credit is for.

Instead, while we did not get business exposure (unless we took the courses), my parents at least engrained in us that you bought what you could afford and yes, you took a mortgage to buy a house....a good investment according to them, because you were saving for something. That said, they would have died if we put 5% down and financed at 95%. I get prices are way up now necessitating lower down payments.

The trouble is the boomers have become used to credit and in so doing, their kids are seeing this side of the boomers now(who are better equipped than most young people....though not always) to carry the debt. They see their parents putting everything on credit cards, have almost never used cash to any degree, so they do not make the equation of actual money going out, rather it is just a piece of paper that shows you spent this much. This inherently means you overuse the card because you have "not run out of cash in your pocket".

As a society we need to start to instill in our children, young adults, that taking on a lot of debt today hand ties you for years down the road. This however is something even politicians have realized they can't do. They offer everything during campaigns and then reality hits. One is not popular preaching any austerity. Afterall, I am entitled to the same lifestyle as Bill Gates, am I not?

 

[marsh]

I agree with the prior post, credit has become easier, we're used to it and we need to educate basic financial management skills at a young age, but adults as well. If adults don't have good financial management skills how they can possibly teach their children those skills? Schools may have a role too, but fundamentally I think this is a personal responsiblity.

I also think that society as whole has become much more consumeristic. As an example, I am blown away by all the LV/Gucci/Prada bags that you see women carrying all the time (often young women). They may be "starter" level bags but even a starter level bag I suspect prices are around $1000. I'm in my mid forties and when I was in my 20's, I wasn't even aware of these brands and certainly neither me nor my friends were spending this kind of money on purses. Also, our incomes generally haven't kept up - hence credit.

I also think we haven't as a society in the last 50 years have had to face catastrophic economic downturns, yes there have been recessions (and there have been bubbles that have burst) but nothing compared to the Great Depression. I find there is a general divide between those over 70 and those under 70. My parents and my friends parents are all over 70 and were children during the Great Depression and WWII and experienced what it was like to not to have things and to face hardship. Uniformly, they are "savers". They don't run up credit, they don't throw out anything (it can be fixed, reused etc, etc). My grandparernts were also like this (they never had a credit card, paid for their house in cash). I remember my grandfather telling me stories as a young man in the US (he was American) about the Great Depression and how there was literally no work . He road the rails criscossing the country looking for work, relying on soup lines and finally enlisted in the army out of desperation. Those kind of traumatic experiences really shape a persons life. Baby boomers, my generation and the generations after me really haven't had that experience. Europe (Greece,Spain etc) may be going through something like this now. I hope we don't go through this in Canada and have to learn the hard way.