Tuesday, February 23, 2010

Free money

Hat tip to Just Jack for the inspiration for this post. Here's what the payments on a 5-year closed variable mortgage at 2.25% interest amortized over 35 years looks like at various debt levels:

$100,000 = $350 per month
$200,000 = $690 per month
$300,000 = $1035 per month
$400,000 = $1380 per month
$500,000 = $1725 per month
$600,000 = $2065 per month
$700,000 = $2410 per month
$800,000 = $2755 per month
$900,000 = $3100 per month
$1,000,000 = $3450 per month

If you were ever left scratching your head why 1983-built 2000 square foot Gordon Head bungalows with glimpses of the Olympic mountains or the smell of salt water in the air are fetching close to a million dollars when they sell, look past the granite and stainless right down to the foundation of this insanity: free money.

The net take home pay on a $60,000 per year income provides enough cash flow to borrow $1M using these insane metrics (provided you have a second income greater to cover the rest of life's expenses in the eyes of the bank). NOTE: I'm not saying this is happening, I'm just providing an example to put it into perspective.

OMC suggests adding future payments at higher rates for same debt levels. I feel safe doing so because I know readers of HHV understand the risk of taking on too much debt too cheaply.

At 4.25% interest (35 year amortization)
$100,000 = $456 per month
$200,000 = $912 per month
$300,000 = $1367 per month
$400,000 = $1823 per month
$500,000 = $2280 per month
$600,000 = $2735 per month
$700,000 = $3290 per month
$800,000 = $3650 per month
$900,000 = $4100 per month
$1,000,000 = $4560 per month
[25% decrease in affordability]

At 6.25% interest (35 year amortization)
$100,000 = $582 per month
$200,000 = $1164 per month
$300,000 = $1750 per month
$400,000 = $2330 per month
$500,000 = $2909 per month
$600,000 = $3490 per month
$700,000 = $4072 per month
$800,000 = $4655 per month
$900,000 = $5235 per month
$1,000,000 = $5817 per month
[40% decrease in affordability]

If you believe like I do that we've reached peak affordability (as in people can't afford any more debt than they currently can get) then you'll quickly see how higher interest rates effect real estate prices moving forward.


Chickinvic said...

Crazy stuff. This is going to end very badly. I'm sure glad I don't have an albatross like that hanging over me.

omc said...

What is really interesting is if you were to add another column at at 4.25% (supposedly later this year)and another column at 6.25% (3-5 years from now).

Nope, no bubble here.

mln said...

2.25% -> 4.25% is a 33% jump in monthly payments

2.25% -> 6.25% is a 71% jump in monthly payments

omc said...

What most people don't want to deal with is the 2.25-4.25% inevitability.

In the 80s we had affordabilities maxing out at 19%, when we 21% the market crashed. The cost of carrying a mortgage only changed by 9%.

The BoC has said to expect another 2% on the prime lending rate in the next year. We are likely looking at an increase in carrying costs of 30% from now when the prices are peaking at this low rate.

Nope, no bubble here.

omc said...

I should mention, the affordabilities change based upon the amount mortgaged. If you have a $600k mortgage you see a change of 30%, not 25%.

I used a morgage amount of $200k for my eighties comparison, which is probably a bit high. The % change would actually have been lower than 9% because of this.

Just Jack said...

Now, imagine all those other people who a maxing out their lines of credit!!!

That's the really big BOMB as their are far far more people refinancing than buying homes.

Animal Spirit said...

so, how much fuse left on the time bomb?

Animal Spirit said...

o.k. I'll answer my own question.

How much incremental gain in interest rate combined with level (or declining house prices) will put the 60K household income buyer of a 500K house in a position where they can't pay their mortgage, line of credit, or credit card bills?

kunwak said...

Pretty good Interview on CBC The Current Review with Joseph Stiglitz. Re: Impeding commercial real estate crisis and failure of US to appropriately address economic crisis.

Here is the podcast:

kunwak said...

And this related article is also interesting in the "Free money" context:

Mr.4AM said...

I think real estate will get worse faster than some expect starting in 2011.

The global sovereign debt problems are only now being seriously considered; however, since there's no real growth in nearly every national economy of the G20 (it's all stimulus money that is in fact FINITE), the only solution on the current horizon is to keep on printing money and devalue each of the currencies.

Eventually one of them will crash, or rather, the country will default on their debt and crash their currency, and take the rest of the world markets along for the ride.

So I expect more QE magic until a massive global crash occurs, and eventually somebody realizes that you can't print your way out of debt and they eventually opt for a Volcker-like solution of inflating all the debt away...

... at which point 6.25% interest rates will be very wishful thinking!

It's only a question of time. The only other preferable way out of this global mess is for countries to start producing real things that generate real profits (not just paper or derivative based profits), but I can't think of anything, any service or any new invention that can produce enough profits to pay off all the insane debt levels the G20 have, which means a massive crash or long downhill spiral (whether through massive deflation and/or high inflation) is inevitable.

Real Estate will see no escape, and as history tells us, those with the biggest debts (i.e. mortgages, LOCs & credit card/ large student debts) will be the first victims of asset price devaluation in the deflationary cycle(s) resulting in being upside down on the mortgage (i.e. like what we're seeing in the USA for the past 3 years), and secondly through inflation and higher interest and mortgage rates, like we will see in the US starting 2011.

"If you want to know your future, look at your present actions" - Eastern philosophical saying

If you want to know the future of Canadian real estate market, just watch the American film on the same subject. Canadians have been travelling down near parallel roads, thus our final destination will be in the vicinity of our American cousins.


Robert Reynolds - GBA said...

Mr. 4AM

That is possible, unlikely but possible I guess.

Though you make a contradiction. If they inflate away the debt, so goes your mortgage.

Just Jack said...

Only if your wages are inflating as well. Otherwise, it will cost you the same amount of labour to pay off the mortgage.

patriotz said...

If they inflate away the debt, so goes your mortgage.

You have to pay off the mortgage from your wages, so that only works if your wages are inflated too.

Also inflation means higher interest rates.

they eventually opt for a Volcker-like solution of inflating all the debt away...

Hello? Volcker was the guy who stopped the inflationary spiral, not started it. If you want someone to blame for inflation, try Richard Nixon.

Village said...

Excellent, time for me to buy! =)

Just Jack said...

Well, just renegotiated the rent. We're getting new hardwood floors in the bedrooms, painting the inside and having some repairs done to the bathroom. We're supplying most of the labour. Rent increased by $50 to $1,150 per month for a home in the city worth about $450,000. I operate a small business out of the home and deduct 20 percent of the rent and utilities.

Basically, I am too cheap to buy a home.

Vic said...

Tick tock, tick tock.

Central bank urged to hike interest rates after June

February 24, 2010

The Bank of Canada should uphold its conditional pledge to keep its key policy rate at 0.25 per cent until July but should then embark on sharp rate hikes of 50 basis points at every announcement date until mid-2011, says an analysis prepared for the C.D. Howe Institute.

HouseHuntVictoria said...


Just Janice said...

HHV- That is a great article, and it does a very good job of comparing and contrasting the two housing markets in the US and Canada.

One thing I note is that given the differences, when our bubble does pop, I imagine the lags between the burst and the bottom might be significantly shorter than in the US. I also note that the damage to the financial sector that occurred in the US might be more contained, but can't see a reason why the damage to the housing sector would not be similar?

Just Jack said...

Another reason, may be that American mortgages are calculated differently than Canadian? Ours are calculated semi-annually not in advance. While the states uses the same compounding as a car loan here.

Just Jack said...

So, I wanted to quantify if Flaherty speach on mortgages had any affect on sales in Victoria.

I looked at the number of sales in condominiums and houses before and after Feb 15.

Condominium sales
66 sales between Feb 6 to 14
58 sales between Feb 16 to 24

looks like Flaherty scared a tiny fragment of this market which is mainly ftb'ers into not buying.

54 sales from Feb 6 to 14
88 sales from Feb 16 to 24

looks like Flaherty speach has prompted people to buy in the move up house market.

In summary, don't accept any offers that are subject to the sale of the buyers condominium. As we could start to see sales collapse when the buyer can not sell their condominium or starter home.

patriotz said...

As we could start to see sales collapse when the buyer can not sell their condominium or starter home

That's what always happens when the market starts falling. The conveyor belt seizes up.

Problem is there are always people who have to sell, and if they want to sell without any subjects, they are restricting themselves to buyers with cash or who qualify for big mortgages. Who have a lot of bargaining power and know it.

think said...

Just Jack,

I don't think that data has anything to do with the news released Feb 15th - usually it takes about 1 week to close on a purchase so all the sales from the week after Feb 15th would have been made prior to the news release. The drop in condo sales has happened independently to any mortgage rules changes. The softening of the market has been starting since the beginning of Jan. and is just starting to pick up speed a bit. Tons of new inventory hitting the core areas of Victoria the last couple of days - houses and condos. End of Feb data going to be very interesting. I think the surge of listings will continue into March with sales becoming less and less into the spring - we are heading downhill and it is starting to pick up speed! Sales/list for oak bay houses .38 - very bearish very exciting.

Anonymous said...


I have been following your recent posts. You are truly a bear with foresight. Some of the other posters have said your predictions are without merit.

I pulled some data from the sales database which reinforces your theory. Take a look at this.

Victoria Sales and New Listing Stats

MD said...

I have been reading this blog for about 6 months and I am glad that there are some like-minded individuals in Victoria that don't just buy the "Victoria is different" line (so tired of hearing that). We are a beautiful city but not immune to global economics, it is arrogant to believe that.

I also follow "Think" and agree with they trend they are seeing as I have graphed this myself and came to the same conclusion as I have watched the inventory grow and sales slow. I have been keeping my own stats for about a year.

Keep the intelligent posts coming! I enjoy the reading!

Thanks also to Double Agent for your insider info

omc said...

I think many of us appreciate the enthusiasm that many of the people here have towards the possible emerging changes in the market. It is refreshing because some of us have gotten a bit jaded with waiting for too long.


Can you verify the oak bay houses stats, or is it just your impression.

think said...

Thanks for the great posts :) Double-agent - I love the visual ;) Great graph!

OMC - yes I can verify my numbers. I just double-checked them - it is actually .33 - even more bear!!

This is how I calculated it. From my PCS covering single family homes from 500,000 - 1.1 million, Oak Bay only. I have added the total number of sales for Feb. to date which comes to 8 total. I have then added the number of new houses listed Feb. to date - that number is 24. So sales (8) divided by new listings (24) is .33 or 33% sales to new listings ratio. Have you noticed the same trend of quieter sales and lots of new inventory on the inventory you are watching?

I am excited by the Jan/Feb trend, but there is a big IF... It is only IF this trend continues into the coming months that inventory will rise to a point to cause significant downward pressure on prices. So I am excitedly watching.

Vic said...

Great chart Double Agent, the increased listing action will eventually overwhelm the buyers out there. Spring of 1990 was the same when all the buyers thought for sure they could get the fast sale at top buck. As it turned out, if you didn't get the sale on the first weekend you were in for a very long haul.

I am still convinced the pool of FTB's has to be running out and what ones are left won't be bidding in a few months,they'll be low balling.

Just Jack said...

Well, I have 13 sales to date in Oak Bay and 41 listed for February (which also includes properties that were listed AND sold since the first). Thats a 0.32 ratio, which suggest, just as THINK said, a bearish market.

The tricky thing about our market is the LOW sales. Really with 13 sales, anything can happen like an agents office being slow in entering sold properties which could bump that number up by a half dozen - which could change things dramatically.

13 sales is pretty weak data, there may have been just as many sales recorded in Whitehorse this month as Oak Bay or in the first hour of Feb first in New York. There simply is not enough data to do any meaningful analysis.

But spring is a coming.

Just Jack said...

Canadians are generally nice and polite people. If you accidentally step on our foot - we apologize.
If things get really bad - we write a letter.

We are not "low ballers" we simply tell the vendor what a beautiful home they have and how the price is so reasonable in this market - and we simply walk away and don't bid. Eventually, we just don't bother even looking as that would put us in uncomfortable position of making any comment at all.

It is extremely unlikely that a low ball offer is ever presented by an agent to the seller rather than accepted. Still nothing ventured - nothing gained.

If you are going to low ball an offer, make sure you grease the agent. Have the agent be both selling and listing agent and offer to pay (separately - under the table -cash) the difference in the sale price and full commission on the list price.

Remember - your negotiating with the agent - NOT the home owner.

think said...
This comment has been removed by the author.
think said...

Some more hints of market softening:

- general population opinion seems to have changed - last year anyone I talked to about the market couldn't stop saying how hot and exciting it is and how it will never go down, now I hear a lot of people saying "bubble" and seeming nervous, even agents are saying "unstable" and may drop this year

- new listings that I am watching are coming on at more "reasonable" prices, people seem to know to list low and sell fast or sit on the market a looooong time...

- seeing lots of sales under asking - for example - MLS # 272123 - this house sold last spring (if my memory is correct) for $800,000 (which was under the 2009 assessment of 817,000) - then a few months later came back after renos (roof, electrical, bathroom, hardwood floors) for $950,000 - hmmm, sounds like a flip attempt to me. But it sat and got reduced a few times, then it just came up as sold... but for only $835,000!!!!!! Don't think you can even cover the closing costs with that let alone the renos! To me this sounds like people are realizing - dump now or ride it down.

To sum it up, we have lots of new listings flooding the market due to PENT UP SELLERS that didn't list last spring. Better dump your overvalued real estate now or be priced out forever!!!!!

Just Jack said...

Pent up supply?

Now, that's a stopper. We have over supply, under supply and now pent up supply.

I like it.

If you can have pent up demand - why can't you have pent up supply. I never really understood what pent up demand was - and how absolutely wonderful when talking to an agent you could mention pent up supply! The look on their faces would be priceless. When they ask (and they should) what pent up supply is - you have them first explain what pent up demand is - then tell them its the opposite.

I think I will add that to my list of sayings that everyone knows the answer to, but none of the answers are the same

1) pent up demand
2) location, location, location
3) an investment
4) why do you call them apartments when they're all stuck together
5) the meaning of life
6) God
7) what direction is up in space
8) why do feet smell, but noses can't walk

think said...

LOL ;)

now we just have to pump it... we need to get word out about the "pent up supply", maybe the TC would like to write an article, ha ha.

Just Jack said...

Since posting my list above, I have received the answers to question #8 and #5, so I will have to cross them off the list.

Bob leftcoaster said...

History has shown that if you write a press release that's easy to cut and paste, it will show up in the TC. Some headline like, "Pent up supply means more choice for buyers" might help sell papers.

msr said...

Hey Double-Agent,

Do you happen to have the listing numbers for the VREB for the past year or two?

I'm trying to put together a spreadsheet ala Roger and I VREB doesn't have a press release archive.

patriotz said...

Have the agent be both selling and listing agent and offer to pay (separately - under the table -cash) the difference in the sale price and full commission on the list price.

That would be a criminal breach of trust by both you and the agent.

Secret commissions

426. (1) Every one commits an offence who

(a) directly or indirectly, corruptly gives, offers or agrees to give or offer to an agent or to anyone for the benefit of the agent

— or, being an agent, directly or indirectly, corruptly demands, accepts or offers or agrees to accept from any person, for themselves or another person

— any reward, advantage or benefit of any kind as consideration for doing or not doing, or for having done or not done, any act relating to the affairs or business of the agent’s principal, or for showing or not showing favour or disfavour to any person with relation to the affairs or business of the agent’s principal;

Just Jack said...

Of course it would be a breach of trust, but you and your mortgage broker have already cooked your income and expenses, the builder on the home is not finishing the landscaping and is calculating this as your 5 percent down, and the lender is getting you a mortgage at 7 times your gross income at the variable rate before the April deadline.

Oh yeah its your second "investment" home, but you've gone to a different lender and are declaring the home in your spouses name as a primary residence in order to only put 5 percent down, which you really aren't. Your agent informs the lender that you can get $5,000 month for a 1,000 square foot for this Colwood townhome and includes this in your income, thereby allowing you to borrow even more money, for your children, so that you can do the same thing all over agani

And to celebrate, getting your home, you go to a restaurant that autograts 18 percent on the bill.

Total "tip" to the agent $1500.
If its good enough for Vanderzalm?

asianman said...

I almost bought last year with a off shore mortgage but got turned down, at the time I cursed the bank for turning me down, but now I thank them for saving me pain. I realize that this market is not just bubbled but grotesquely so, therefore i have decided to wait on the sidelines until it crashes. I always thought canucks were down to earth straight forward people and most are, but some of the insane levels of greed I have seen in sellers has made my stomach turn. I know better now. Thank you for your blog.

Vic said...

Great Olympics, far exceeded my expectations. What a game yesterday ! Now the ugly part where the bill comes and you don't want to open it.

asianman, thank your lucky stars. Most of the greed comes from our cheapskate Scottish heritage many Victorians possess. They will soon learn the other corresponding word : fear.

Just Jack said...

Monday morning and the first of the month which gives us an opportunity to look back on February with some ratios and medians and a snap shot of what the median price bought you last month.

First up.

The urban municipalities of Victoria. 145 homes sold last month with 306 new listings. Which gave us a 0.47 sales to new listing ratio and a median price of $625,000. A balanced market being between 0.4 to 0.6 clearly indicates this market is almost dead centre in not favoring either the buyer or the seller. The median price bought you an updated 1970's home having 2,100 square foot of living space on a 7,700 square foot lot in a modest middle income neighbourhood like Gordon Head. Think "Gordon Head Box"

The Western Communities struggled a bit last with a sales to new listing ratio of 0.34 and a median price of $461,500 for a 1990's built home of some 1,950 square feet on a 7,800 square foot lot. Basically, a Gordon Head Box but in Colwood. The $163,500 equating to about $525 per month in a mortgage or roughly the monthly expenses of a two car family commuting from Colwood to Victoria. Or make that one BMW 5 series with a cool surround sound system financed on your mortgage.

Last up for single family homes being the Peninsula areas of North, Central Saanich and Sidney. Dismal sales of 34 homes and equally dismal new listings of 79 for a sales to new listing ratio of 0.43 and a median price of $600,000 Too few sales to make any good comparisons, but your probably looking at a modest home in Dean Park at this price. Basically a home in the bone yard of the Pacific where the retires, like African elephants, come to die.

Now, onto Condo's in the Victoria Core. A whopping 130 sales and a stimulating 274 new listings, gives us a ratio of 0.47 and a median of $283,500 for a 900 square foot sky box. Which would be a lower floor mid 1990's (repaired leaky) condominium in Fernwood. However, with the added CMHC fees, strata cost and taxes, the only car you can afford is that 65 Valiant your grandfather gave you. But your better than most - because you do get a secured underground parking space unlike those work/live condominiums where your neighbor may operate a 24 hour massage business or an MLA office (I always get these two mixed up - as you get similar results from both of them).

Anyway Happy Monday.