Create affordability in your spending decision-making process: Part 2 of 2

Part one looked at the affordability of purchasing items other than a home. The second part examines the affordability of buying a private home. Also, we will discuss these two things:

  1. Who Decides on Affordability?
  2. What should happen to people who live in houses they cannot afford?

affordability [to buy a home] means…


The ability to buy your home with or without a mortgage so the total estimated cost doesn’t affect current and projected household budgets, plans and commitments.

A home is a strong commitment

In Canada, apart from a few brief periods when you bought your home, in the 1960’s to early 1980’s you laid the groundwork for a large, predictable, tax-free capital gain. Normally, the tax-free gain on the sale of this home would be far greater than inflation. Today, selling your home that was purchased after the mid-1980s can result in either a profit or a loss depending on the time and place. However, unless you bought to resell, this shouldn’t be a problem.

In the early 1980s, North Americans went on a spending spree with credit. Greed was rampant, and like many areas of the economy, real estate prices fell. For example, the Canadian real estate markets in Vancouver and Toronto sizzled until the mid-1980s when prices fell. The burglary lasted almost 10 years. So in 2008, it shouldn’t come as a surprise when US house prices plummeted along a similar path. We also have to reckon with the fact that house prices there will remain low for a long time.

Although they would not admit it, governments encourage irresponsible spending. Just look at how the economy works! Consumers need to spend to sustain growth, even if it means taking out expensive debt financing. Yet governments are constantly trying to get us to spend money.

In the 1970s, the US Congress passed the Community Reinvestment Act…


“…to encourage custodians to serve the lending needs of the communities in which they operate, including low- and middle-income neighborhoods, consistent with safe and sound banking.”

In retrospect, safe and healthy Banking, should be read with a “wink, wink” facial expression. Not to be outdone, the Canadian government’s Canada Mortgage and Housing Corporation says they “…are working to improve Canada’s housing financing capabilities to help Canadians who cannot afford housing on the private market.”

They have this crazy, irresponsible, absurd statement on their website:


“A way to help [low-to-moderate income] Households are to be provided with an equity loan so that they can qualify for a traditional mortgage. The loan…actually lowers the qualifying income required to obtain a mortgage.”

Before buying a home, understand the full implications of home ownership. Beware of the lie that if you don’t have enough money today, real estate appreciation will help you own a home today. At best, it’s a potential trap to keep you in a refinancing cycle. This is the government’s financing method that led to the US subprime debacle.

Owning a home may include most or all of these annual expenses (unless otherwise noted):

  1. Mortgage payment that can go up or down
  2. Traffic taxes (one-off)
  3. property insurance and taxes
  4. Repairs, maintenance, heating, lighting costs
  5. One-time legal fees and several small things.

However, renting a home involves a monthly payment with the responsibility of maintaining the grounds and often also responsibility for heating and lighting. You have no other expenses.

Who decides on affordability

Governments try to define affordability for us. They want households to use the same ruthless Ponzi-style funding that they’re wasting taxpayers’ money on. Reject their approach. Every household should decide if he or she can afford to buy a house.

Each of these criteria should apply before you conclude that you can afford to buy a home:

  1. You are debt free.
  2. Working with a monthly budget.
  3. Know your housing needs. For example, will family sizes increase in the near future?
  4. Have at least a 20% down payment on a conventional mortgage.
  5. Understand and accept the sacrifices required to pay for the total annual housing cost. What may you have to do without to pay these costs regularly?
  6. Understand the current and projected state of the economy and housing market and feel reasonably confident that you can fund all of your housing expenses for six months even if you have been laid off.

What happens when you have to give up your priceless home?

To complete this challenge, separate two choices. First, can the homeowner afford her current home? Second, if not, how can we work with her to create affordable housing?

If the person or family cannot afford the home according to my definition, go straight to question two. Don’t try to provide so-called help by reducing or deferring the mortgage for a few months; that is dishonorable and wasteful. Disgraceful because it gives the impression that the family can keep their home. Then the family will have to give up the house in a few months. Next, the approach is wasteful as time and money is wasted knowing the family will have to leave home.

In these situations, focus on lifestyle advice and financial planning. Emphasize lifestyle issues such as affordability, budgeting, the anatomy of a mortgage, and administration. Teach the benefits of renting when people cannot afford to buy houses. Yes, it’s a virtue. Some ownership arrangements give homeowners significant risks without equity. That’s why so many mortgages in the US are higher than home values.

While seeking counseling in shelters, people should work with churches and charities to prepare them for life in rented accommodation. This could be a long journey; but if people reject the victim’s path and learn from their mistakes, it could be rewarding.

Conclusion

Nowadays, people rush to own their homes and get into deep debt as their housing expenses take up a large chunk of their monthly budget. Be patient, rent until you can afford to buy. Then you build a solid financial base and reduce financial stress.

Copyright (c) 2011, Michel A. Bell