If You're Buying a House
Are house prices inflated? Will it be cheaper to build after the war than buy now? Here are answers by Maclean’s architectural editor
JOHN CAULFIELD SMITH
IF YOU are renting your present living quarters and have made certain that your lease will be renewed it will probably be economically wise for you to stay where you are.
If there are compelling reasons why you should seek a new home, the scarcity of houses obtainable on a rental basis will confront you with the question of whether to build a home for yourself or buy one already built.
In the April 15 issue of Maclean’s I listed the advantages and difficulties of building; told how one goes about it.
The subject of this article is buying. Are house prices inflated? Will they be lower after the war? And if prices are going to stay up for some years to come, what’s the best way to go about purchasing?
There are houses to be bought. It is often unprofitable now to be a landlord, because rents have been frozen at what many claim were depression levels, while costs of repairs and maintenance have soared. So, while there is a demand and while prices are high, many landlords are selling.
But are house prices inflated? Will they be lower after the war?
The opinion of H. L. Rogers, past president of the Toronto Real Estate Board, is representative of that held by many real-estate brokers. Mr. Rogers concedes that overcrowding and increased income have resulted in a keen Canada-wide demand for houses. “It is true,” he declares, “that today’s price level for certain types of dwellings is above that of 1939, which represented depression levels, but it is still much below the price levels of 1920 to 1929. Government controls have been a check on inflation. The selling price of a house is inflated only when it materially exceeds the cost of replacing the building, less a reasonable amount for depreciation.” This point has, in Mr. Rogers’ opinion, not yet been reached. “Prices may go somewhat higher. I see no prospect for cheap building for at least five years, possibly not even then.”
But if prices of existing homes have risen, so has the cost of building a new house.
To a Montreal audience, J. L. E. Price, president of the National House Builders Association, recently demonstrated that a $6,450 dwelling erected in that city in 1939 would run $9,100 today. The increased
cost of $2,650 represents a rise of slightly over 41%. This may be partially explained by higher material prices and labor rates. But, according to Mr. Price, the main factor is that it takes longer for labor to accomplish as much as in 1939 and do it as well, Mr. Price blames the present situation on persistent failure of employers and labor organizations to recognize the need for apprenticeship training.
According to a recent nation-wide survey conducted by the Postwar Research Department of The MacLean Publishing Company Limited, 135,000 Canadians plan to buy houses after victory is won. Certainly, purchase has its advantages. You see precisely what you’re paying for, you know the exact price, and you can accurately calculate the annual cost of ownership.
In buying an existing dwelling, you know in advance if there’s a pleasant view from the living room, if the kitchen’s bright and sunny, if the bedrooms are large enough to take your furniture. If in doubt as to the quality of construction you can always get an architect or expert builder to give you his opinion. There’s no guessing as to whom your neighbors will be: all you have to do is consult the city directory. You’ll find, as a rule, that in established residential areas, facilities like schools, shops, theatres, churches and transit are already present.
Accurate cost estimates for new buildings cannot be made today. Conscientious as your architect may be, circumstances over which he has no control can easily make a difference of hundreds of dollars between the estimated and final cost. But in purchasing a house you know at the beginning what your total outlay will be. To make sure you are not being overcharged compare the price asked with amounts recently paid for similar dwellings in the neighborhood. Complete records are kept at the local registry office.
In buying an older house it is quite possible you will obtain materials and equipment unavailable today. Oil burners, copper piping, oak floors are but a few features which might be mentioned.
Cost of Ownership
CAN the cost of owning be satisfactorily compared to cost of renting? No, not exactly. But as a rough yardstick it is generally wise to set aside in a special bank account an amount equal to one per cent
a month of the value of the house. Thus, if you have a house valued at $6,000 you should set aside $60 a month.
Out of this special fund you will meet mortgage interest, taxes, fuel costs and maintenance and repair charges. Part of the money will actually be savings, for out of this fund will come the normal reductions of mortgage principal.
Most people cannot afford to pay all at once the entire price of the house they buy. They are prepared to make the cash down payment required but have to raise the rest of the money elsewhere. They usually do so by obtaining a loan from a lending institution, and the loan is secured by a mortgage on their property.
The lending institutions interested in making mortgage loans are insurance, mortgage, trust and loan companies. Its kind of business determines, under Dominion legislation, how much money each type of firm can lend. For example, the largest advance a life insurance company can make is 60% of its estimated value of a property. The interest rate varies from 5% to 5^2% per annum. Various repayment plans are available by which monthly payments, covering interest and principal, retire the mortgage within a certain term of years. The monthly payment on a 20-year mortgage at 5%, calculated half-yearly, comes to $6.58 for each $1,000 borrowed. It is $6.85 at 5^%.
You may find that the property you plan to purchase is already mortgaged. If you buy it the holder of the mortgage is bound to accept you in place of the previous owner, though when the time comes to renew the mortage he may refuse to do so if he sees fit. In any event, it is often advantageous to pay off old obligations. Possibilities of doing thig should be investigated if the interest rate is excessively high, or if expensive second mortgage financing is involved. Be prepared to pay a small bonus, plus service charges, for the privilege.
Should the property you’ve chosen not be mortgaged, don’t make an offer to purchase it until you are sure that the necessary financial arrangements can be made. Your age will be a consideration if you’re over 49.
Municipal taxes are the largest “unknown quantity” in the year-to-year costs of home ownership. Land is usually assessed at so much per foot frontage. Corner lots bear a slightly higher rate per foot than inside lots. A building is assessed for the amount by which it increases the value of the land. In the case of a house, this may be about two thirds of its real worth. Land and building are subject to an annual tax levy based on so many mills per dollar of their total assessment. A mill is one tenth of a cent. The mill rate is made up of two items: the general rate, covering cost of administration, fire and police protection; and the school rate, covering cost of education.
By itself the mill rate signifies nothing. In one community the mill rate may be low but assessments high. Ina neighboring municipality the mill rate may be high but assessments low. It’s best you should obtain from the city hall or local municipal offices exact information on how much your taxes will be. At the same time enquire if all improvements are paid for. Special taxes are levied for limited periods in order to repay expenditures on improvements such as water and sewer mains, sidewalks and roads. In the case of new properties they may still have some years to run. After the purchase has been completed you may appeal the assessment of your property if it seems unreasonably high.
Make sure the house you buy is adequately covered by fire insurance. “It may be already insured,” says an insurance broker, “but care should be taken to see that no lapse occurs after your offer to purchase is accepted. The construction of the building should be correctly described in the policy and you should carry enough insurance to cover its actual cash value.” Plate glass and ordinary window glass may be insured for a small sum, and residence liability insurance is also available. It provides protection against a damage suit by anyone hurt on your premises. Life insurance is sometimes taken out by an owner so that in the event of his death the mortgage can be paid off and any possibility of his heirs having to sacrifice the house eliminated.
Maintenance charges must not be forgotten. To guard against accelerated depreciation, attention has to be paid to upkeep and repairs. If painting is neglected a house will not long remain in first-class condition. The roof might not need re-covering this year, but may next.. In budgeting shelter costs, every homeowner should regularly set aside a sum of money to provide for expenses bound to be incurred.
Before starting out to buy, organize your program. Decide what kind of house you want, where you want it, and how much you can afford to pay.
Every member of the family can assist you in tabulating your accommodation requirements. Make a list of all the features needed or desired. How many rooms should there be? Must the garage be attached to the house? Is a basement recreation room essential? Note the various items in order of their desirability: the most important first, least important last. When the time comes to make your final selection, no one dwelling is likely to offer everything you’ve set your heart on. But with your list you can make concessions from the bottom upward, while insisting on satisfaction of requirements from the top downward.
After you’ve made up your mind as regards the house you want, decide where you’d like it located. Choose a neighborhood free from blight and nonresidential activities, where well-kept dwellings and neatly tended lawns testify to pride of ownership. Make certain all necessary public utilities and services are available. Schools, churches and shops should be conveniently accessible, as should facilities for recreation and relaxation. Y ou will probably find there are a number of attractive districts in which you could live happily. List them in order of preference.
No gauge can be applied to accurately specify how much any one person can spend in acquiring home ownership. Each individual case is different. Economists formerly agreed that from two to two-and-one-half times the annual income of the head of the family should be the maximum sum involved. Today it is safer to figure on the earnings which remain after deduction of income tax rather than on full earnings. If this net amount is exceeded it is quite possible that there will not be enough money left to provide for the necessities and minor luxuries of life.
Barring the possibility of hearing, by chance or through friends, of a dwelling that exactly answers your requirements, there are two ways of finding the house you’re looking for. You can either conduct the search yourself or you can enlist the services of a qualified real-estate broker.
The latter method is best. Buying a house is not like purchasing a dress or a suit of clothes. A number of legal formalities must be observed and the advice and guidance of a broker—an experienced professional man—are well worth while. Also, if the house you have in mind isn’t on his list at the moment, it’s likely he can locate it in double-quick order.
When you have located a house which seems to meet your needs, there are several points to check before you decide to buy. If you are in doubt about the construction, an architect can give you an expert opinion. Ask the present owner about heating costs. Fuel bills are an important consideration in our climate. Is the house insulated? Are there storm windows? Insulation and storm windows are desirable in the interests of comfort and convenience, as well as for economy of heating.
The need for a new kitchen sink or replacement of rotted veranda posts will be obvious. Less apparent but more important is the condition of the roof. Examine it for leaks; it may require some patching. When was the chimney last cleaned? Dirty flues are a fire hazard. Is the basement damp? It may be if the connection between rain-water down pipes and drain is faulty.
Major alterations and renovations can wait till after the war. Then that portion of the National Housing Act relating to home improvement loans will be in effect and work of this sort can be financed on very easy terms.
Proper Purchase Procedure
IT IS necessary for the prospective buyer of a house to make an “offer to purchase.” A standard legal form is used that protects both parties to the transaction against imperfections in title and misunderstanding of facts. A lawyer warns, “As an offer to purchase becomes a binding contract, enforcible at law upon acceptance by the seller, you should be absolutely certain before making it that the dwelling concerned is the one you want.” A deposit must accompany the offer. Sufficient time is provided for examination of the title to the property. If any valid objection should be found which the seller on notification fails to remove, the contract may be cancelled and the deposit returned.
Legal advice is invaluable. Choose a solicitor wsll known in your community to act in your interests. True, his fee might be saved by dispensing with his services, but the economy will prove costly if you later discover the house you paid for really belongs to someone else or that it’s mortgaged, though represented to you as being clear of encumbrance.
After reviewing the various registry office documents relating to your proposed purchase, the solicitor will furnish you with a certificate of title indicating the
result of his search. Continued on page 49
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He also undertakes investigation for unpaid taxes, for executions and attachments for bankruptcy. Any of these searches may disclose some lien or claim against the property. As a rule the solicitor also obtains a survey to ascertain if the house stands within the boundaries described in the deed or if there are encroachments on or by neighboring properties.
At the time you make the offer to purchase and pay the deposit, you arrange to provide the balance of the price in cash and/or by mortgage on the date fixed for closing the transaction. In addition, the offer to purchase requires you and the seller to each pay your due proportions of municipal taxes, fire insurance premiums and other current charges. On the day appointed a meeting is held at the registry office. The seller transfers the deed of the property to you and the title documents are registered in your name.
The National Housing Act can be utilized by an owner building a dwelling for his own occupancy or by a builder erecting a house for sale. Only houses whose construction has been financed in this way may be purchased under the National Housing Act.
The National Housing Administration has nothing to do with the price the builder charges for the house. It has been claimed that builders are reaping a tremendous harvest through exploitation of the shelter shortage. A few may be profiteers, but most builders are patriotic, eager to hasten victory by furthering the war effort in the way they best know how. They seek no more than a fair reward for their enterprise.
One builder, who operates chiefly in Etobicoke, a municipality just outside Toronto, claims that construction economies effected by large-scale builders enable them to offer houses at prices far below the cost of a single dwelling erected by an owner for himself. His program calls for completion of 40 houses annually and is organized to provide year-round employment for his mechanics.
This typical five-room bungalow stands on a lot 33 feet by 130 feet. The living room is at the front, to the right of an entrance hall. Behind it, separated by an arch, is the dining room. The kitchen, to the left of the dining room, is next the bathroom in order to cut plumbing costs. Two bedrooms, at the rear, are reached by a short hall. Closets are numerous and of generous size. The basement is built of concrete block and is fully excavated. Firstfloor walls are solid brick, with asphalt shingles used for the roof. A gravity warm-air system heats the house, insulation being provided on exterior
walls and ceilings by wood fibreboard lath. Plaster is used as a wall finish throughout the house, with gypsum lath employed on interior partitions.
For some time this builder has financed erection of his low cost homes under the National Housing Act. In the case of the bungalow described above, the monthly payment over a period of 20 years is less than $30, including interest, principal and taxes.
Mortgage loans made under the National Housing Act are on a joint basis. Of the sum borrowed 25% is made up by the Dominion Government and 75% by the lending institution. A joint mortage is taken as security and, in addition, the Government gives the lending institution a limited guarantee against loss on its share of the loan.
The interest rate on a National Housing Act loan is 4j^% per annum, calculated semiannually, and the purchaser redeems the mortgage by means of convenient monthly payments made like rent. A number of repayment plans, covering both interest and principal, are available. The monthly payment on a 20-year mortgage comes to $6.30 per $1,000 on loan. To the monthly payment must be added 1/12 of the annual municipal taxes.
Except that the purchaser must be officially approved, buying a house built under the National Housing Act is like any similar property transaction. Let’s assume that a builder asks $7,000 for a house you’d like to purchase. The mortage is for $5,000, so the cash down payment you will have to make is $2,000. On the 20-year plan your monthly payment will be $6.30 for each $1,000 of mortgage, or $31.50. Adding to this amount 1/12 of the annual municipal taxes, the monthly total would be about $45.
A builder who has had wide experience selling dwellings he has built under the National Housing Act says, “There’s a set procedure to be followed which is relatively simple. Most of the paper work has already been done by the builder, long before the purchaser appears on the scene.
“Each lending institution has its own application form which the builder must fill out seeking approval of the would-be purchaser of a house,” he continues. “The institution’s mortgage manager makes a recommendation one way or the other and passes the application on to the National Housing Administration, which makes the final decision.” As a rule the purchaser makes a deposit of $50 or $100 on the dwelling he wants to buy. This shows evidence of good faith, and if for any reason the purchaser is not officially approved the builder returns the money.
The purchaser must supply details of his income and financial assets. Only his personal earnings count; family income is not considered. If his credit record is good the purchaser is likely to be considered acceptable if (a) the amount of the mortgage is not more than twice his annual net income and (b) the monthly payment is not more than one fifth his monthly net income. “Net” is the amount left after income taxes have been deducted from earnings. Purchasers are not permitted to raise the down payment required on a National Housing Act house by means of a loan or other assistance of any kind, except in the case of ex-servicemen who have a re-establishment credit. Such ex-servicemen can use their credit to provide cash up to two thirds of the down payment required.