Canadian Moral Superiority - Prudent Homebuyers

As Canadians, we pride ourselves on not being American, at least when it suits stoking our Canadian egos (hey you don't really want to get into a pissing contest with the sole superpower unless you're going to define the rules right?).

Case in point: the perceived "stability" of the Canadian housing market. We're lead to believe by Stephen Harper, Jim Flaherty, Mark Carney, and the mainstream media in general, that the reason we haven't had a US-style housing price collapse is because we have a combination of prudent, less risky banks, and responsible borrowers.

I'd challenge that on both points.

First off, let's start with borrowers. The average Canadian house price is 337,410 CAD. The median Canadian household income before taxes is 70,800 CAD. This leaves us with the average home to gross household income ratio of 4.77. Canadian housing prices are at record levels, seeing an unprecedented 19% increase YOY in 2009, despite the fact we just escaped the largest post-war recession to date.

At the peak of the US housing bubble, median US household income was 50,000 USD, with the peak housing price being 230,200 USD. This would put the ratio at the peak of the US housing bubble at 4.60. And yes, we're still inflating our bubble, US prices have collapsed significantly, bringing affordability back into many markets in the US. Meanwhile, the Canadian market continues to ramp to infinity thanks to cheap mortgage rates, panicked buyers that actually are buying into the "buy now or buy never" mentality that's pushed by the real-estate industry, and lazy media publications that print everything that's spoon-fed to them by the CREA (or the NAR in the US).

The rule of thumb (in the US) is that a house should cost no more than 3x household income. Keep in mind, this is the rule in a country that pays generally less in taxes, can deduct the cost of their mortgage interest from income taxes, and where consumers have the option to lock into a 30 yr fixed rate mortage, whereas Canadian consumers typically lock in for 5 year terms, and then face the risk of rising rates at renewal time. In general, the cost of carrying a mortgage in Canada should be higher than that of the US (and hence, it would be prudent to borrow less).

The scary part is, the prospect of higher interest rates, and the soon to be introduced HST on housing (coming in July), is actually motivating buyers to rush out and buy before these 2 events happen! Seriously, if you buy the day before the HST hits, and then try to sell the day after, do you really think that you can sell for the same price you paid, and just assume the buyer will pony up the extra 13% in taxes...or does the seller eat the difference?

As far as rates go, I swear it might be easier to explain the theory of relativity to some buyers than try explain the inverse relationship between mortgage rates and home prices.

Are Canadian homebuyers smarter than Americans?

If some dipshit jumps off a cliff and breaks his leg when he doesn't realize the water is only 6 inches deep, you laugh and say, "Holy shit dude! You OK?", you take him to the hospital, laugh about his stupidity and shitty luck and get the poor fucker fixed up.

If some other idiot that saw what just transpired does the EXACT SAME thing less than 5 minutes later...isn't your reaction more likely to be "Holy shit! What the hell is wrong with you?", and you leave the idiot screaming in agony just to teach the stupid ass a lesson.

That's us...idiot number 2.