Tuesday, January 15, 2008

Fixed or variable stress?

Since we are moving back to Alberta in July we have once again had to undergo the painful task of contemplating mortgage options. Of course, the first thing that kicked us in the pants was the sheer size of the payments. Almost $1000 every 2 weeks?! Are you kidding? So when I was talking to my mother and she mentioned that her and dad bought their house for $50 000 in 1977, I almost started to cry. Why can't I get a house for $50000? Well, I can, but I'd be sleeping on the floor and cooking in a kitchen-slash-bathroom.

But were houses really that much cheaper back then? Using Statistics Canada data for income and Royal Lepage Canadian housing statistics I arrived at the following conclusion: we are actually very lucky to be buying a house at this time.

In 1977, the average family pre-tax income was $21 000. In 2005 it was $78 400. The average house price in '77 was $65 000 and $295 000 in 2005. Those represent 271% and 354% increases over a 28 year period. However, if you adjust these numbers to account for inflation a different picture emerges. Average family income was $64057 in 2005$ in 1977. Average housing price was $200 000 in 2005$. So when you look at the increase it is not so big. However, it does seem that housing prices are rising faster than income, even adjusted for inflation, as they have gone up 47.5% versus the less rapid increase of 22.5% in family income.

Now, my wife being the astute devils advocate she is has raised a good point. In 1977 a large portion of that family income was made by one family member, so other costs like childcare didn't eat up the paycheque. Presently the family income is more often than not earned by two individuals meaning other costs come into play. But I've got to tell you, all of that aside, I'm sure glad I'm not paying 1980s interest rates!

If you took out a mortgage for $65000 in 1977 ($200 000 in 2005$), your mortgage would start out at 12.5%. Five years later it would rise to 22%. Sick. Our current rates are at 6%. Pretty good comparatively. In fact, at current rates of 6%, a $295 000 mortgage amortized over 25 years would cause your mortgage payments to eat up 29% of your pre-tax income. Getting a $65 000 mortgage in 1977 amortized over 25 years starting at 12.5% would cause your payments to eat up over 40% of your pre-tax income. Ouch. For that to happen now, current AVERAGE housing prices would have to rise over $400 000.

Now before you overanalyze my post, I do admit I made a lot of generalizations and didn't consider a lot of factors. Maybe after-tax income was higher in 1977. Maybe other living costs were less. All I'm trying to say is that things are not always as bad as they seem at first glance. You have to consider that all things are relative.

One last thing: a lot of the concern regarding housing prices could be allayed if we would just change our priorities. When I tell some people that I fully plan on having my children share bedrooms they look at me with disgust and quickly run for the phone to call the nearest child services agency. The societal idea of an "acceptable" house size has changed considerably over the last 25 years. Although I cannot provide a citation for this statistic, I did hear it somewhere: over the last 25 years the average North American family has halved in size and the average family home has doubled in size. That means the average amount of home space per person has quadrupled! I know there is an obesity epidemic, but we're not getting that big!

Verbosen verboten

supererogatory: Going beyond the call of duty (taken from wordsmith.org)


Anonymous said...

Can I live in your kitchen-slash-bathroom?

Anonymous said...

Oh, you know my kids are sharing a room. Until they're old enough to get grossed out by each other, anyway.