In the overheated housing markets of Toronto and Vancouver, credit unions are finding themselves falling back on ancient Greek philosophy when they advise homebuyers. As they help young couples determine what they can afford to buy, many are following the maxim popularized by Socrates: “Know thyself” — one of the ancient Delphic maxims.
This approach captures the credit union difference and how they can help members achieve financial success, while avoiding painful missteps.
The standard approach by the Big Five Banks, mortgage brokers and Canada Mortgage and Housing Corp. (CMHC) is to look at an individual’s or a couple’s income and tell them what they can afford. Then, it’s off to a realtor to make a purchase. Or, perhaps, enter a bidding war.
But credit union advisers say this isn’t the best approach, since it doesn’t consider how people differ. “You can have two couples with the same income, so they qualify for the same mortgage,” says Ryan McKinley, senior mortgage development manager at Vancouver City Savings Credit Union (489,000 members, $21 billion in assets). But one couple may be frugal savers, while the other couple likes to vacation and dine out. “They could both qualify for the same mortgage but it’s only truly affordable for one of them,” McKinley says. “It’s a lot easier for us to help when we understand what they know and what they don’t, so we can help them along the way.”
McKinley says that advisers can also help people avoid hidden pitfalls that can keep them from reaching their important goals. For example, many people have a car loan or lease with a monthly payment of $400 to $500, not realizing that this will reduce the mortgage they can qualify for by $100,000. “We’re combating the lifestyle that we live in now, with very easy access to credit. It’s easy to get into consumer debt, paired with an expensive housing market, paired with an incredibly expensive rental market,” McKinley says. “It makes it hard to get yourself out of debt and put savings aside.”
McKinley finds it disheartening when he sees young people who have “done everything right: gone to school, gotten jobs, are making decent money but given how much it costs to rent it’s still hard to save at the same pace that the real estate market is appreciating.
“What we try to do is have a more holistic discussion,” McKinley says. “Look at their lives. When pre-approving, figure out what the payments are going to be, extra fees and taxes, etc. and the difference between that cost and what they’re paying now. We tell them to put that aside and see how comfortable that is for them.”
Affordability versus wants
In the Greater Toronto Area (GTA) market, Wade Stayzer, vice-president, retail, at Meridian Credit Union (309,700 members, $14.7 billion in assets) is taking a similar approach, telling people to try living as if they were paying the full cost of home ownership but put the difference in a savings account. “The easy part is finding a place that you want, then you have to understand what you are able to afford,” Stayzer says. “We often encourage people instead of going in to see how much mortgage money they can get, tell me how much you’re able to pay. Do your budget, find out what you can pay and let that dictate what you buy, regardless of what you qualify for.”
Stayzer says that in 2009 Meridian moved to a proactive sales culture based on understanding what members’ needs are and helping them build a plan to achieve their goals. “They’re their goals, they’re not our goals,” he says. “There’s no judgment here. If you want to buy a boat, then we’re going to try and tell you how you can make that happen and also make sure that you know here’s the impact it’s going to have on your financial health. That’s a differentiator for credit unions, we will give people-centred advice.”
Stayzer adds that people need to be honest about their dreams and plans. “If your main dream is you want to travel and you want to see the world, then the answer for you is put home ownership on pause for now. You need to understand what you will compromise on and what you won’t.”
The Each One, Teach One financial literacy program developed by Vancity, which more than 80 credit unions now use, covers this same territory in four workshops on home ownership and what people need to know before they buy.
Rent, relocate or reconsider
Andrea Pryer, a branch manager with DUCA Financial Services (45,000 members, $2.5 billion in assets) in Mississauga, Ont., says one of her proudest moments in 30 years in the business was when she helped a young couple get their lives back in order to stay in their home. The couple had been forced to declare bankruptcy because they became overextended with a rental property. “When they came to me they were very sheepish and embarrassed to open an account,” Pryer says. “I said, ‘I’m not here to judge you, I’m here to help you. Let’s see if we can get you a mortgage approved.’
“We always try to do what’s right for the member,” says Pryer. “I say to people sitting across from me: ‘Don’t get me wrong, we have goals and totals that we have to meet but I’m not going to do it on the backs of selling you something that you don’t need.’ ”
So, what are the options for young people? In many ways they come down to: rent, relocate, or reconsider your ownership approach.
Rob Carrick, The Globe and Mail’s personal finance columnist, has frequently written that renting is usually cheaper than buying and that over time it can be a better approach financially, if people are able to save and invest the difference. Carrick recently suggested that major Canadian markets may have reached peak home ownership, noting that: “Census data show the national home ownership rate — that’s the percentage of households that own — fell to 67.8 percent last year from 69 percent
in 2011. Among 30-year-olds in 2016 who lived in their own place, 50.2 percent were owners. Baby boomers at that same age had a 55.5 percent ownership rate.”
Toronto realtor Ralph Fox also recently wrote: “Compared to most major cosmopolitan cities, Toronto remains relatively affordable. We are all going to have to come to terms with the fact that living in a big city is expensive and in cities like New York and London, the majority of its populations that choose to live there rent due to affordability reasons. In a not too far-off future, there will be nine million people living in the GTA and whether we’d like to admit or not, the majority of the GTA’s inhabitants will be renters, and not by choice.”
Last fall, journalist Jessica Barrett wrote in a column for The Tyee, an online independent Canadian news magazine, a bittersweet farewell to Vancouver. An Alberta native, Barrett said that after 15 years of trying to live in the city she had come to love, she had decided it was simply not affordable and was relocating to Calgary, which surprised her by offering many of the amenities and shops she had assumed were only available in Vancouver. “In the end, leaving was a choice I made for myself, for my well-being and for the future I would like to have,” she wrote. “But truthfully there was no contest — it was the city or my sanity. My sanity won.” Her plea touched a cord with her generation and was widely tweeted, shared more than 19,000 times on Facebook and attracted more than 550 comments.
We want higher density
A younger generation that wants to live, work and play in the same neighbourhood is pushing cities like Toronto and Vancouver to construct more high-rise condos and increase density to make room for them.
A recent Toronto Region Board of Trade survey of 803 18- to 39-year-olds found 74 percent supported greater density, even though their parents who live in established neighbourhoods might not agree with taller towers and in-fill housing.
McKinley notes an increase in lane-way homes in Vancouver, some used by younger people, others by parents who move into them and let the young generation have the bigger home.
Several credit unions have also developed programs that allow co-ownership of property so that unrelated people can combine their resources to purchase a home. But this approach comes with warnings. McKinley says that to help people considering this approach, Vancity has developed a co-ownership guide that covers such things as what happens if one person loses their job, or decides to move, or gets married, or dies (life insurance on all involved is a definite requirement). The goal is to consider as many events as possible and ensure they are covered in a legal agreement.
Perhaps not surprisingly given these caveats, this option has not attracted widespread interest. A similar approach is a co-ownership arrangement with a parent, which is an option more people are trying. McKinley says it can be structured with any percentage of sharing and it allows parents, who in the past might have contributed a few thousand dollars toward a down payment, to make a heftier contribution but be protected. He notes that, ultimately, credit unions “only have so many levers to pull” and that there is little individuals, or even governments, are able to do to improve affordability in the short term. ◊