A house is displayed for sale in a new housing development in Ottawa on Tuesday, July 14, 2020. THE CANADIAN PRESS/Sean Kilpatrick

Yukonomist: High marking the housing market

It is an axiom of barstool economics that house prices never go down.

This is usually backed up by a compelling story, often true. For example, I recall friends 20 years ago saying it was ridiculous to pay over $100,000 for a small old government “one-and-a-half” house.

The advice that usually follows is to run your personal finances like a high-marking snowmobile driver: find the steepest housing market you can, fill your sled with high-octane debt, then pin the throttle and see how high you can get.

Like a weekend at the Pass, you see each of your pals doing it. Each one gets just a bit higher. Soon it’s your turn. Instigated by that classic feature of both financial markets and high marking competitions, Fear Of Missing Out, you try to get even higher.

Just as a modern mountain sled might have 10 times more horsepower than the machine you learned to ride as a kid, five-per-cent down payments and ultra-low interest rates give today’s homebuyers a lot of buying power.

Whitehorse house prices seem to set a new record each time the Yukon Bureau of Statistics puts out a report. Ditto for house prices nationally. In the last two weeks, analysts have spotted some startling new facts. Houses in Barrie, Ontario cost twice as much as in Chicago, adjusted for the exchange rate. In order for the average household in Hamilton to afford that city’s average house, using the usual affordability guidelines, they would have to be earning double what they earn now. The home-price-to-disposable-income ratio is 1.65, which is three standard deviations above the long-term average (that’s statistics-speak for “a lot”).

Of course it must end some time. Sadly, snowmobiles are subject to the laws of physics. House prices can actually go down.

Torontonians who bought a house at the peak of that city’s 1989 surge saw its value decline by 28 per cent over the next seven years. Prices on a nominal basis didn’t recover for 13 years from the peak. Adjusted for inflation, it took 22 years.

If you wanted to move and your mortgage was worth more than your house, you had to have cash on hand to cover the negative equity. Which you didn’t, since you had bought at the peak of the bubble.

Canada is one of the few countries that did not see major house price declines after the 2008 financial crisis. According to the Economist magazine’s inflation-adjusted data, house prices in the United States fell a third between 2006 and 2012. Spain’s fell over 40 percent from 2007 to 2013. Britain’s fell 22 percent.

With the Bank of Canada raising interest rates this week for the first time since 2018, and inflation hitting a 30-year high of 5.1 percent, there are two questions for Whitehorse housing market enthusiasts. Should you buy a house at today’s high prices? And, if you already bought one, what should you do to avoid the housing equivalent of your snowmobile tumbling end over end down the slope with you diving for cover.

For the purchase decision, it is important to think through the likelihood and impact of scenarios where you might have to re-sell the house within a few years. What is the risk of losing your job and not being able to find work at similar pay? Might a transfer or family event compel you to move? If you had to sell your house for, say, 10 or 20 per cent less than you paid for it, what would that do to your net worth?

If you’re going to live in the house for a long time and can afford the payments (more on that in a moment), then buying can still make sense. Looking back from the end of your mortgage in 25 years, that high house price will have been spread over 300 payments.

If you already have a house, you have to consider the affordability of your monthly payments. According to Rosenberg Research, a record number of Canadians getting new mortgages recently — over half — chose variable rates. The average since 2013 is around a quarter.

Market watchers expect the Bank of Canada to keep raising its interest rates, which feed into higher mortgage rates. This week rates rose just 0.25 per cent to 0.5 per cent, still very low by historical standards. Forecasters expect the Bank’s rate to rise to between 1.5 per cent and 2.25 per cent by the end of 2023.

Let’s look at a $500,000 mortgage. According to the Bank’s data on rates for insured mortgages, the average five-year variable-rate mortgage went for 1.46 per cent in December 2021. That translated into a monthly payment of $1,989. Factor in some rate increases, and that payment rises fast. The month before the pandemic hit, for example, variable rates were 3.97 percent for a $2,621 monthly payment.

An extra $632 per month mortgage payment will take a bite out of your wallet.

With geopolitical upheavals and record inflation, rates may rise even higher. Or another wave of the pandemic might cause central banks to keep rates low. But if a big pop in your variable rate mortgage would stress your monthly budget, you should consider switching to a fixed-rate mortgage. A friend just got a 2.11 per cent offer, which translates to a $2,194 payment. More expensive than variable, at the moment, but secure for five years.

The good news is that your bank is pretty confident you can repay your mortgage. They stress test your payment abilities at a rate of 5.25 per cent. That’s a payment of $2,980, almost $1,000 a month more than the December 2021 rate above. While it’s nice to know your bank’s risk analysts feel safe, and think you could scrimp enough to pay that much, whether you really want to is another question.

The other bit of good news is inflation. That 5.1 percent inflation rate means the principal on that mortgage you got a year ago is now worth 5.1 per cent less in real terms. As long as your wages increase to keep up with inflation and the rest of your household bills, this is good news. Another year or two of surprise inflation will be a boon to mortgage holders.

One risk out there is that the Yukon government and City of Whitehorse will make progress on their longstanding political commitments to making housing more affordable. This would mean lower house prices. Expect it to come up in this month’s Yukon Legislature session. The City of Whitehorse is setting up a new housing advisory committee to tackle the crisis.

Our governments have been talking about doing something about housing for years. However, house prices keep setting new records. It’s as if Whitehorse housing market participants don’t believe the commitments of our politicians will translate into measures that actually move the market. Even in a world of higher interest rates, Whitehorse will still see higher government transfer payments, more government jobs and lot shortages for years.

Amidst all this uncertainty, there is a lot to consider as you decide whether to buy that house and whether to do it with a fixed or variable mortgage.

Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He is a Ma Murray award-winner for best columnist.