Back when my in-laws were looking to buy their first home, first they saved for a couple of years to come up with a down payment of a couple thousand dollars. They then qualified for a mortgage with a twenty-five year term and an interest rate of around 5% for the entire term. New homes at the time were about double the average annual family income, based on the wife staying at home to raise the kids and Dad working. Dad was an electrician making about $6,000 a year and their three bedroom new home in Brampton was $12,900. Affordable.
Moving on to my first home. My first family home, a fixer upper, was $42,500 and our family income was just over $20,000. Throughout our more than twenty years of marriage and eight homes, the price we paid was always right around double our annual family income. Even our last matrimonial home was sold for $189,000; my ex was not working, but I was making about $90,000 as a computer consultant.
Fast forward to today. I am working at a call centre, making just over eleven dollars an hour, not an uncommon wage in London for people who work at the few jobs available here – The Tim Hortons, the Home Depots, Wal-Marts and so on. If you are lucky enough to work full-time that adds up to a whopping $23,400. Assume that two people in the same family are working, which is a stretch considering that 54% of people are now divorced. Let’s round that off to $50k for the household anyway, so, if the same relationship is true we should be able to buy a home for $100k, right? Not a chance! The average new home price in most urban areas is at least $400k, four times what we earn!
The housing market has always functioned on the concept that young people buy their first home and throughout their lives they move up to bigger and better homes, gaining equity for that day when they retire and sell their last home. If no one is entering the bottom of the market the whole thing grinds to a halt. Prices will fall dramatically when there are no buyers entering the market for the first time.
The same thing is going to happen with cars. Car payments through a bank or lease payments were always affordable, even for those who wanted a new car every three years. Car prices today often require payments that look more like a mortgage payment on a small house. These car payments together with astronomical mortgage payments are what is pushing the average amount of debt through the roof. Older Canadians usually have no mortgage and no car payments, so that leaves all the rest of the younger population shouldering more and more of the debt load. A minor hiccup in interest rates is going to result in the kind of foreclosures we saw in the US and prices will crash the same.
Add to all this the costs of operating a vehicle. Interest rates on car leases are absurd. Buyouts are insane. Insurance costs are over the top. Repairs, particularly on parts for foreign cars are out of site. Now add five buck a gallon fuel and people are no doubt going to question the value of owning a car. Trips of any kind, whether to the local store or a Sunday drive in the country, must be rethought when the price of gas is factored in. When my kids were young we traveled all over Ontario and the north-eastern states for their hockey and soccer, all year round. Today I could never afford that and my kids would suffer if they wanted to play organized sports.
It’s what’s behind things like the Occupy Movement. More and more people are feeling disinfranchised because they see the rich getting richer and richer, yet the majority are falling further and further behind. It could all serve to bring on an economic collapse. Thoughts?