For the last eight years, Canadians have enjoyed the unprecedented luxury of cheap credit, one that many have taken full advantage of. Our total mortgage debt stands at roughly $1.36 trillion — that’s a 30 percent increase from 2010, when it was at $994 billion. We are also the most indebted country in the G7, with a household debt to disposable income ratio of 1.68, meaning that for every $1 earned, we owe $1.68.
This relative ease of borrowing coupled with population growth due to immigration, and the influx of foreign investment has fuelled a sharp surge in home prices, especially in Toronto and Vancouver. Indeed, similar trends can be observed in global cities like New York, San Francisco, London, Sydney and Melbourne.
But at least in the case of Canada, things are changing. Our central bank has raised interest rates twice since July, and the federal government, in response to an overheated housing market, has tightened mortgage rules, simply making it more difficult for the average Canadian to qualify for a sizeable home loan.
VICE Money set out to figure out just how hard (or easy) it is for first-time home buyers to obtain a mortgage in three other countries, whose cities have also seen a massive growth in home prices — the United Kingdom, the United States and Australia.
It’s worth noting first of all that home ownership in the U.K. has fallen to a 30-year low. Government data shows that almost half of all people aged 25 to 34 rent from private landlords — in 2004 just 24 percent of this cohort was renting.
The dramatic rise in home prices over the last decade coupled with a perpetual supply problem, especially in London, are without a doubt the primary reasons for a decline in homeownership.
But what is specifically different about the U.K. and North America is although there are a vast array of lending options — over 90 lenders offering thousands of mortgage products — Britain has very stringent down payment requirements.
The higher your down payment, the more competitive your mortgage rates are.
To obtain the best possible mortgage rate, a first-time buyer needs a down payment of 40 percent. The higher your down payment, the more competitive your mortgage rates are. And the difference is significant. Let’s say you have 40 percent of the deposit on a home worth £350,000 — if you take out a fixed mortgage with a 25-year term, you can get a pretty competitive rate of 1.59 percent from HSBC, one of the biggest lenders in the U.K. Your monthly mortgage bill would be roughly £848. If you only had a down payment of 10 percent, you would end up with a 2.49 percent rate, and a monthly repayment of £1,411.
“Every five percent deposit will make a difference which is worth bearing in mind, especially for those on the cusp of the lower band,” says London-based mortgage specialist David Hollingworth. “If they can push a bit further on the deposit size, it could qualify them for a better mortgage rate.”
It is admittedly very difficult to compare the housing market in the United States with that of Canada, simply because they have ten times the number of people, and significantly more variation in income distribution between suburbs and cities, rural towns and urban centres.
But the overarching theme in the U.S. is that when it comes to the mortgage market, borrowers will hardly ever run out of options, regardless of the amount of money they’ve saved up for a down payment. There is also a massive emphasis on having a good credit score — so even if you had once gotten yourself into severe debt, but managed to pay that off and now meet your minimum payment requirements, your chances of getting a competitive mortgage are pretty high.
“There are plenty of low down(payment) or no down(payment) options out there.”
There are several government-backed mortgage programs that have less rigorous lending standards and lower down payment requirements. The most popular is the Federal Housing Administration loan program — an insured mortgage that requires a downpayment of just 3.5 percent. These FHA loans are issued by big American banks, like Wells Fargo, which also partner with other mortgage insurers like Fannie Mae, to underwrite loans for a downpayment as low as three percent.
Puzzling, given how mortgage requirements were immediately tightened in the aftermath of the 2009 financial crisis.
“Most people still think getting a mortgage is hard in the U.S. because underwriting got tough after 2009,” Houston-based mortgage broker Dave Hershman told VICE Money. “But things have eased up significantly. There are plenty of low down(payment) or no down(payment) options out there. Even credit score requirements are much lower now.”
Australia has by far, the most comparable housing market to that of Canada. Property prices in its two largest cities, Sydney and Melbourne, have soared almost in conjunction with Vancouver and Toronto, driven by similar factors — rural-urban migration, immigration, and foreign investment.
Australians have also taken full advantage of cheap credit. Household debt is now a record 190 percent of household after-tax income — 30 percent of Australian households have debts of more than twice their income, according to data from the Grattan Institute, a Melbourne-based think-tank.
For young Australians, accessing credit isn’t the biggest hurdle — it’s saving up to buy a home, especially in a city like Sydney where the average home price is AUS$725,00 for an apartment and almost AUS$1 million for a house.
“With low interest rates, affording to service the mortgage isn’t a massive problem”
“With low interest rates, affording to service the mortgage isn’t a massive problem,” says Brendan Coates, a housing policy expert at the Grattan Institute. “The bigger problem is building a deposit, and most young people just don’t get there. High-income households are by far, most responsible for the increase in the amount of mortgage debt.”
Like Canada, four major banks issue the bulk of mortgages, but according to Coates, almost all these mortgages are variable ones. “Households take on so much more of the risk, than banks because of the number of variable mortgages. An interest rate rise will affect almost every household that holds a mortgage.”
In response to concerns that Australians are taking on way too much debt, Australia’s banking regulator recently limited banks’ new interest-only lending to 30 percent of total new residential mortgage lending, meaning that only 30 percent of all new mortgages will be comprised of interest-only loans, where you only pay the interest each month on your mortgage.
While it’s indeed very difficult to compare the ease of obtaining a mortgage across different countries because of a confluence of factors — age demographics, purchasing power, wealth distribution, supply of housing — the one underlying similarity between what most major housing markets in the West have experienced since 2009, is low interest rates.
Unfortunately, while that has made borrowing cheaper, it has also driven up house prices and gotten a whole slew of people into more debt than they can potentially handle. While it is wise for governments to crack down on risky lending practices, says Coates, lending should not be restricted just for the sake of bringing down home prices.
“Striking that balance is hard, but not impossible.”