In the US, mortgage resets are partly responsible for the financial mess that is wreaking havoc throughout the global economy.
In Canada, and Victoria specifically, mortgage resets haven't been a significant issue yet because interest rates haven't fluctuated outside of a two to three percent zone over the past 6 years. We are witnessing an unprecedented period of extremely high prices and extremely low interest rates. While home buyers today are out loading up on overpriced homes at incredibly low interest rates with little to no forethought about what this might do to them financially in five year's time, readers of HHV get to see what it may look like.
If you bought the average home today, using a 5% down, 35 year amortization mortgage, locked in for 5 years at 3.69%, you'd be taking on about $500,000 in debt. This debt will actually cost you more like $1.15 million by the time you're finished paying it off, but that's a whole other issue. What concerns me most, is what this level of debt looks like in five year's time.
Total loan principle: $500,000
Monthly payment: $2120
Principle paid: $38,420
Interest paid: $88,844
Principle outstanding at term end: $461579
Let's make one key assumption here that is backed up by 31 years of Victoria real estate history: the price of your home will not have appreciated at all in this next five year period.
You may have $38K in equity in your home and just enjoyed the lowest interest rates you will ever pay. The economy has recovered, somewhat, and interest rates have increased incrementally over time to something closer to a historical average in the range of six to eight percent. Here's what you could be facing when you go to renew your mortgage:
6%
Monthly payment: $2762
7%
Monthly payment: $3066
8%
Monthly payment: $3380
How many families buying today do you know that could handle a jump in monthly payment of anywhere between $600 and $1200 per month? I don't know any. And if this happens, many of these families will be forced to sell their homes. With $38K in equity, they have few options. REALTOR fees will eat half of that $38K. The market won't be "booming" in an interest rate environment like that, that's for sure, especially if prices have remained high. Wages haven't kept up, neither have rents. It could be a dangerous recipe.
I believe, as do many of the readers here, that we're going to see prices drop another 15% or so over the next several years. If we're right, then the scenario above is really dire as some lenders won't renew mortgages on underwater properties and homeowners may face cash calls.
Let's run some hypothetical numbers based on two more assumptions: prices drop 15% from today's average and interest rates climb 2% over the next two years. Because of the purchase price savings, a buyer is more able to put 10% down and go with a 30 year amortization at 5.69% instead of 35 year amortization. Here's what that looks like:
Total loan principle: $400,000
Monthly payment: $2318
Principle paid: $29,204
Interest paid: $109,876
Principle outstanding at term end: $370,795
Is it moot? From a quick glance, it seems like there really isn't much advantage for waiting. Interest rates will be higher and payments will be higher. The renewal amount is $100K less though (as was the purchase price in this assumption), and that makes a significant difference to a family's ability to continue to afford their own home:
6%
Monthly payment: $2210
7%
Monthly payment: $2460
8%
Monthly payment: $2712
Are we going to see an increase in distressed sales in five year's time because of extremely high prices and low interest rates today? Does it make sense to wait to save potentially save $100K? What numbers are you using in your calculations?
126 comments:
If you think the US real estate market is toast, don't be so sure, there's now a rising new trend in a particular sector that is finding work and making good money. They are called the *drum roll please*...
...The Undevelopers
If you FoRenters don't wise up soon you'll be priced out forever on a global scale. You won't be able to buy a shack in India let alone a house on this beautiful island. It's like LOST but real life.
ummm.. OK fred.
just a cut and apste of my last post for fred
I don't think we should be so hard on the so called "victoria haters". Its ok to vent your frustration here, and I don't really disagree with them that you sell your soul to live here. Is it really worth it?
We should vent a bit more on " I hate realtors " though. It makes me smile, and I have never met such a bunch of low functioning snakes. Insider trading, conflict of intrest and out right lying. An example would be simply trying to get one of your own buyers to purchase a home before you release it to mls. It only benefits the realtor and any real profession would never allow it. They do much, much worse and still smile at you.
So lets let our anons know how welcome they are!
HHV, please comment on this latest crapola to hit the industry, as it is a very dangerous situation:
Apparently, in BC, the buyer's agent holds onto the downpayment his client puts on an offer-to-purchase. I was under the impression that sellers had first rights to this money, as compensation for inconvenience of "what if the sale falls through because a buyer walks away for no good reason."
Anyway, here's the dilemma, REAL & CURRENTLY HAPPENING STORIES, RIGHT HERE, RIGHT NOW:
Lately, (sellers who bought within a year or so ago, and are underwater, but forced to sell through job-loss, let's say), there have been times when offers are too low to cover outstanding mortgages. Therefore, the banks have the right to step in and protect their territory by refusing such offers.
Sooo, IF the offer is accepted, the SELLER'S/LISTING agent is finding himself not only LOSING the commission owed to him, but to add insult to injury, is LIABLE to PAY THE BUYER'S AGENT HIS COMMISSION! All because the total selling price is not enough money to pay off all creditors. So the bank gets it all, leaving realtors screwed.
I was shocked to hear this. But I was told it is happening right now, with listing agents having the right to sue buyers' agents for the money that buyers' agents cannot keep themselves in the first place! OUCH.
Please, HHV, find out the inside story on this BS, and the legal choices of all involved.
You realize that realtors will be foolish to take ANY listing that is not juicy with owner-equity?
Is it legal (maybe) for agents to get commissions upfront, pre-sale, with the legally-protected right to keep if sale goes through, but of course with the understanding that funds will be fully refunded to seller if property does NOT sell? Thank you
As soon as the average income earner is "priced out", the market will drop because the average income earner which is the largest segment of possible buyers stops buying. Supply and demand....Right now what keeps the average income earner buying is mostly anxiety...ie not having a home like the Joneses, unavailability of rentals, fearmongering by folks taking the buy now or never position....and of course low interest rates which we know will regress to the mean which is certainly higher than what we are seeing now. The message I have for all potential buyers is deal with your anxiety instead of jumping into a bad financial decision and if you find your anxiety overwhelming, find a more affordable market.
I use a similar calculation with a more optimistic drop in prices in Victoria. I use a 5yr fixed terms with biweekly rapid payments.
$400k principal at 3% vs $250k principal at 6%.
Biweekly rapid payment: $950 vs $800
Principal after 5 years: $331,617 vs $215,149
After 5 years, the situation changes as follows.
6% interest rate: $1181 vs $766
9% interest rate: $1474 vs $956
12% interest rate: $1792 vs $1110
Some have told me that 12% is unreasonable but my parents remind me of their 20% in the 80's. No way in hell that I would like to pay $1792 biweekly in 2014. We're going to wait at least until this fall to see where prices go. Even then, we'll be looking for a modest SFH.
I like the posts that look at where we'd be in 5 years if we bought today. It's tough being in the 30's and seeing that it's not worth owning till I'll be in the 40's. At the moment we are in a pre-boom rental, so pay under 800 a month including heat and hot water.
Having enjoyed our 20's with schooling and traveling we weren't ready to look at a home until housing had already taken off. Now we can only sock away 25k a year and don't really know what we'll do in 2-3 years. A big part of me wants to keep renting in Victoria and look for a get away property for summers and weekends. I don't believe Victoria is different, but if for some strange reason it is.... there is no way cabins up island will not be hit.
In 2 years I am 98% certain that having cash in hand will open up some opportunity somewhere local. I just wish it was a place to call home.
Thinker, I typically try not to comment on REALTOR issues. Frankly, they can deal with them themselves. As a buyer, I'm not too concerned about my buyer's agent hanging onto my deposit, in fact, I'd be more concerned about him/her not holding onto it. Seller's and seller's agents don't need to be protected from buyer's, it's the other way around. That's the "price" of being a homeowner.
Fooder, agreed 100%.
One thing bears leave out in the formulas is life expectancy and retirement planning. If you are 30 years old today and wait another 5 years you'll still have a mortgage at the age of 50 if you use a 25 year amortization. If you wait much longer than 35 you might as well forget retiring. Are you comfortable with not retiring? I don't think I am.
Based on the diets and lack of activity of a lot of people today 50 is pretty old for men. By the age of 50 you should start shopping for funeral plots because it's just about that time. Just something to think about on a sunday night / monday morning.
Actually Grim, You will notice that HHV used a 35 year in the first calc and a 30 in the 2nd so assuming it takes 5 years to get down 15%, I think it will be quicker, his mortgage is paid off at the same time. Not only that but he has also saved that money for retirement and at the time the two scenarios both end its the same house able to sell at the same price so you are gaining nothing buy buying that asset earlier at a higher price. In fact you lose.
"Based on the diets and lack of activity of a lot of people today 50 is pretty old for men. By the age of 50 you should start shopping for funeral plots because it's just about that time. "Thanks, Grim. I needed something to think about while I run the Times Colonist 10k on Sunday.
"If you FoRenters don't wise up soon you'll be priced out forever on a global scale. You won't be able to buy a shack in India let alone a house on this beautiful island. It's like LOST but real life."
You RE agents must be having some slow open houses this weekend. With the Canucks taking over conversation no one wants to waste time driving around looking at overpriced crack shacks,they are home sweating out the games with their buddies discussing wether or not they will be laid off soon.
Grim,
don't forget that 50% will be divorced within that period and will be so screwed if they bought in the last 3 years or the coming year....and then you get all that way to 20 years paid and you split. The lawyers take half if not all , and then you are so screwed for another dozen years if you waited to have kids and pay 30% or more of your take home in child support.
Then you may go through several job changes with breaks in no income flow.
Then maybe get injured along the way in a car wreck or work accident by chance.
Then your parents get ill and you have to support them cause they only have CPP.
So many depressing things to plan for if you buy in your 20's-30's cause life aint perfect like your RE agent tells you Grim ...lots more to happen before the old pine box dude, lots more.
Besides, 50 is the new 40. ;)
Hey Fooder - I'm here on Maui. Flipping through the RE papers here, it looks like every 5th house is a short sale. You could pick up a 2Br, 1.5 bath condo in Kihei for $169k, pay it off in 5 years, and come surfing for six months a year for the rest of your life. Or how about a 4br 2ba SFH for 269k?
The only problem with Hawaii is that the locals aren't very friendly. Although, depending on who you talk to, that's not too different from Victoria!
I hear you Womp. After many years hopping around the world I'm looking for the weekend get away rather than the 6 month a year thing.
Your point is well taken though, There is a better life getting cheaper every day if you have savings. It makes me wonder why we spent so long talking about moving to box neighbourhoods in Alberta when there are amazing deals already in some fairly exotic places.
Does anyone know if more forestry land up island will be sold off any time soon?
Thinker, when a real estate brokerage - whether it represents the buyer, the seller, or both - holds the deposit in trust, it does so neutrally. That is, it does not hold it on behalf of anybody. The only way that money can come out of trust is if the deal completes or the deal is cancelled in writing by mutual agreement of the buyer and seller, AND both parties agree to release the funds. A real estate brokerage cannot unilaterally return the money to the buyer or release it to the seller; it is not a "no money back" deposit that you might have thought it was. The deposit is nothing more than "good faith" money.
This is not the case when the money is held by a lawyer. A lawyer holds the money on behalf of his client, so may pay out the money under direction of his client. Big difference.
Also, a buyer cannot walk away "for no good reason." Either the deal is unconditional, in which case the buyer cannot walk away without risk being sued for performance. Or the deal is conditional, in which case the parties to the deal have to perform some further functions - such as obtain financing, conduct an inspection - before the deal is firm. Once the conditions are waived, the buyer cannot walk away without risking being sued for performance.
If a buyer's agent has brought a buyer who is ready, willing and able to purchase the listing, he is due commission according to the terms of the listing contract, regardless of whether the listing agent can actually collect from the seller. It's the listing agent's job to determine whether the seller has the wherewithal to pay out. The buyer's agent's job is to bring the buyer. If he does so, he has earned his commission.
Could an agent ask for a fee up front, regardless of whether a house sells? Of course. Regardless of how one feels about realtors, it takes time and effort to list a house. Some realtors might prefer to be paid for their time, just like - gasp - the majority of you reading this blog. It's just that organized real estate has evolved a ridiculous system where all the work goes un-billed unless the house sells. Which is part of the reason why listing commissions are so high - the houses that sell have to pay for the effort that went into selling them AND the effort that went into trying to sell all the properties that didn't sell.
There is only one reason why a house won't sell - the seller is asking too much. If an agent is willing to take a listing from a seller with unrealistic price expectations, that's his own fault. He's the "expert" and is supposed to know what the house has to be priced at to sell.
Given that assessment, there seem to be more idiots in the ranks of realtors than in any other profession save stockbrokers.
So my coworker and her husband bought a $495K SFH in Brentwood Bay last weekend. (Long time readers may recall that this coworker of mine is the one who is pregnant and attempted to buy a $690K house a few weeks ago. I'm glad their offer fell through because they would have been stuck with a tenant for 35 years to pay the mortgage. The house they eventually bought has no suite.)
The strange thing about the sale has me wondering if their realtor may have misled them to secure a higher commission. They put in a conditional offer subject to inspection. The inspector found that the wiring in the house was not up to code; indeed the outlets were all wired with the wrong type of metal and as a result the house was "uninsurable" in its current state. The inspector also found some black stains under the roof that was probably not mould, though testing was not done.
Though the house did not pass inspection, their realtor convinced my friends that they should not walk away from the house. Indeed, the realtor told them that if they backed out of the offer, the house would be effectively re-listed and if they wanted to put in a new (i.e., lower) offer, they'd have to compete against any other buyers out there. (The re-listing would have had to come clean about the wiring issue, which was apparently not realized during the first listing.) My friends, somewhat stressed because their baby is due next month, relented and took the place as is for $495K. Obviously, their first priority is to fix the wiring; I don't know how much it will cost but my colleague believes her husband and his father can do much of it themselves.
My question is, is what the realtor told them correct, or would they have been able to negotiate a better offer on the place within the relationship they had already established with their first offer? It seems to me that they should have been able to the first to counter immediately with a lower offer given the status of the inspection.
Their baby is due on May 12, about one week after they take possession of the house.
- StargazerXL
Stargazer said:
My question is, is what the realtor told them correct, or would they have been able to negotiate a better offer on the place within the relationship they had already established with their first offer? It seems to me that they should have been able to the first to counter immediately with a lower offer given the status of the inspection.--
The agent shafted them. It is quite common to renegotiate the purchase price based on the inspection report. However, there is always the chance that the seller will balk at any reduction and the deal will fall through. There is also the chance that the buyer may get cold feet and walk away. Either way means no commission for the buyers agent. There are lots of good, ethical agents out there. Your coworker did not use one of them.
BTW. If aluminum wiring was used throughout the house it is going to cost a considerable amount to rewire the place. Snaking wire through walls is a time consuming, tedious job. And they will need an electrician for some of the work.
"The market won't be "booming" in an interest rate environment like that"
if thats the case then why will there be a interest rate enviroment like that then?
With respect to the Aluminum wiring - you can have the electrician terminate all the aluminum wiring with copper pigtails. Most insurance companies will accept this modification if it is performed by a licensed electrician. Find an insurance company that does, it's a heck of a lot cheaper that running copper through the whole house.
Stargazer XL -
Buying a house without including a subject to require the insurability of the house is the height of folly. And paying half a million dollars then coughing up (potentially) thousands more to rewire the entire house just seems dumb. Some experience house hunting has confirmed one thing to me - no matter how much you like a house, in the current market, a cheaper better house will appear later, if you can be patient and wait.
As far as the realtor's "advice", it's the buyers who make offers and the sellers who accept them. So what if they have to compete later with someone else? If that pushes the price higher, you have to be prepared to walk away.
This isn't a contest with other buyers, and the sooner people realize that, the more harmonious this househunting game will be.
The buyer's agent is skating in ethically murky waters recommending making an offer without the making it subject to getting insurance, and this to a family with a baby on the way??? The agent should probably be reported, doesn't sound like he is looking out for the best interests of the buyers at all, he's just looking at the buyers like a wolf looks at a piece of steak. The wolf's hungry, he's gotta eat...
I see the FTB madness is soaring to new heights. Here is a sale in Gordon Head that went over asking in 1 day. No house inspection as it was entered on MLS and sold the same day. But at least they "won" the bidding war.
http://i40.tinypic.com/2vjr2xk.png
One wonders what surprises lurk inside this 53 year old house.
GrimReapin:
As a follow up on your retirement comments, first off someone at 30 should not be thinking about their house as an investment; it is a roof over your head and only provides cash if you sell.
I assume that FTB's at 30 feel interest rates will stay at the 4% level and not rise. If this is how they think, then OK, but then they need to look at their retirement planning knowing that their investments will also suffer from these same low interest rates. Prudent financial planning would suggest they have to SAVE a lot more money for retirement.
One should be heavy into fixed income as they approach and enter retirement and given todays interest rates even $1 million saved in combination with CPP is not going to provide much of a retirement; one needs to be looking for $1.5 to $2.0 million. So if you believe that interest rates will stay low, you had better be directing a LOT more money towards retirement. This means a lot more than the 18% RRSP limit on your income.
I would suggest young people should make meeting these retirement objectives far more of a priority than buying a house. I sense that over the next five years a lot of FTB's will look back on their recent decision to buy a house as one of the biggest mistakes of their lives.
Patriotz said:
There is only one reason why a house won't sell - the seller is asking too much.This is your standard reply to a house not selling but in this case you are incorrect.
The seller can lower the price to a ridiculously low level and the house still might not sell. The buyer and seller can agree on any purchase price they want but if the mortgage cannot be discharged in full, at closing, the bank will not agree to transfer title and the deal is dead. In a short sale the house won't sell unless the seller can come up with some cash on his own. In many cases the seller has no cash or the ability to get another loan so they are trapped and cannot sell the house.
Roger,
then of course we get to the situation like in California where none of the houses can be sold by the owners to cover the shortfall between market prices and outstanding mortgages - but court ordered sales happen eventually. Down in the US these auction style sales take no account of the shortfall, once the house is taken over by the bank, its the bank that eats the loss - ergo subprime crisis here we come.
It hasn't happened much in Victoria yet, but I think this is already happening in Vancouver, Calgary etc.
Coming soon to a home near you, foreclosure auctions...
The mortgage rate is low, but how low? HHV is using 3.89% for five year. Any one have more info on the different rate by banks? I want have a pre-approval and wait.
Thanks.
Greg, Roger, Reid et al,
Given the short sale scenario, should buyer's today not put down too much so they "can" buy CMHC mortgage insurance in case they are forced into a short sale scenario to protect themselves?
That's an interesting question hhv, but if putting down 20% or less, you pay additional 3-4% for the insurance. So by putting down 20% (to get the cheapest payment and still have CMHC insurance), you are paying for the bank not to be on the hook if you walk away.... But that would only cover the bank if they couldn't get the money from you, I'm sure they have to try to do that first.
My thinking would be that if you feel prices are going to go down to the extent where that would be a concern, probably you should not be buying at this time, at least not with that kind of deal.
Putting down more that 20% at this point, with prices already down 10% or so, you are looking at needing prices to drop another 15% or so from here (allowing for other closing expenses like commissions) before being in a negative equity situation. If looking ahead, someone feels they need to protect against that, why would they be buying?
When I buy, I'm sure I'll pay "too much", but I'll have reasons for buying and I'll also have a financial cushion against anything but a complete housing implosion. Even then, I anticipate paying my mortgage without much difficulty.
I would not be trying to structure the deal to protect against a short sale, I doubt it would protect me at all - just the bank. Structuring it to create the shortest amortization with the lowest interest payment seems a lot more useful in the long run - as while prices drop you are at least creating some additional equity room, the more time goes by, the better the situation.
Just my $.02.
Why not buy under an Agreement for Sale. If the mortgage is close or even a little over market value why not take over the seller's mortage (check to make sure the lender will alow this).
This way you will have no "skin" in the game until it comes time to sell.
That is rough about the couple getting scammed just before the baby is born. Our first born was just over 2 years ago and the urge to nest/security is a big one. We know many people who found themselves in the same spot and jumped in. As you can imagine they are in financial ruins, every one of them. They didn't realize how much a little one costs, or the biggest cost of all in Vic; lack of decent childcare. people soon realize it is often the best option to stay home far longer than the 1 year.
I just met a couple who bought last year and is extremely house poor. They bought a second, smaller place (now a strata) and will relist their present house after they move. They are expecting to come out even. I am expecting them to lose up to $150k, though I would never say that to them as a closet bear.
Realtors have no heart.
BTW I am an electrical engineer who used to work in the trades (ticketed) and I would never accept any type of aluminum wiring.
The danger with that type of agreement for sale is that if the letter of the agreement is not met the entire time of the agreement, the "seller" can repossess, tough luck for any payments or equity gained since, you don't own it until the last payment is made - in other words, its not your name on title.
Once the final payment is made, then title is transferred - up to 25-35 years later!
Good way to lose thousands. Handle with extreme care...
The whole purpose of the house inspection is to get price reductions or at least get deficiencies fixed for you by the seller prior to completing the sale. That realturd just screwed your friends big time BUT let's face it here your friends are pretty stupid. This is equivalent of buying a broken display model tv for full price.
HHV, I am with Greg on this one regarding CMHC insurance. Anyone buying a house today must believe that it will be rising in price over time or else they why would they buy given ownership costs exceed rent.
But I suspect many FTB's are using CMHC as they do not have 20%, so maybe they are getting some personal insurance without knowing it.
But at least they "won" the bidding war.
http://i40.tinypic.com/2vjr2xk.png
One wonders what surprises lurk inside this 53 year old house.I am not sure the buyers care. They might be looking to subdivide and build two new houses.
Roger, Greg, omc, and anonymouses,
Thanks for your perspectives. I think my coworker's $495K house is indeed wired with aluminum and they will be only switching out the outlets with copper ones. If possible, I will advise them to use the services of a licensed electrician to protect whatever insurance they get on their purchase. I suspect that if they don't and if (god forbid) a related problem were to occur, they could be SOL if they try to collect on the insurance.
Oh, and I'm going to find out who they used as their realtor, so I can NOT use them in the future!
- StargazerXL
With aluminum when it corrodes it doesn't conduct very well. It becomes a resistor, just like your stove top element. Poof, up goes the house! The terminations have to be done just right by an electrician or you get this. To be honest I have seen too many goofball electricians lately to even feel good about that.
The problem is that you don't really know if there are any modifications in the walls, and yikes, what if the home owner does/has done any thing. You can't just wire in copper as you really get problems fast as the 2 different metals speed up the reaction. It definitly sounds like the home owner has been involved!
Mold spores and an electrical fire, welcome home baby!
What I would like you to post is the name of the inspection company, as not all are as effective as this one was.
Stargazer,
Post the name of the realtor as well. That way all of us will know who to avoid.
Here is some info on aluminum wiring.
Aluminum Wiring in Residential BuildingsIf there are any prospective FTB's reading this blog I hope they are learning that being impatient and not using common sense will cost them bigtime. There will always be another deal down the road. Interest rates are not going anywhere for awhile and the sales will start to taper off in a few months like they always do. You will get a better deal if you wait and don't get caught up in the spring madness.
They bought a second, smaller place (now a strata) and will relist their present house after they move.Wow, just brilliant. Out of the frying pan and into the fire.
Did it occur to them that in a declining market you should sell the old place before you buy the new place?
Garth Tuner really knows how to tell it like it is. Here is an excerpt from his latest post.
This is exactly what happens when desperate governments collapse interest rates to nothing, when irresponsible realtors pump and dump, and when inexperienced first-time buyers are led to slaughter by peer pressure and media whoring.
Yes, there is a mini-bubble right now. In the first 15 days of April 3,681 houses sold in Toronto, up 30% over March. The average sale price of $383,000 was down just 5% from a year ago. The local real estate board says this means prices have finally stabilized.
What it actually means: New victims.
"Did it occur to them that in a declining market you should sell the old place before you buy the new place?"
We have quite a few neighbours that have built a new home without selling their first, now the're landlords.
While I don't subscribe to the "all landlords are losing money" mantra, a lot of these folk are attending the school of hard knocks as they learn their way through tenant selection: 3 months no rent payment plus damage; another with police calls about every 2 weeks with who knows how much damage, only I'm sure to lose a month or two rent themselves.
Roger 10:50- and if they can't come up with that cash, most likely they aren't making their tax payments either, and sooner or later, another POS hits the market and THEN it will sell at whatever price someone is willing to pay, especially when those things start glutting the market the way they are in the Southwest US and Florida. The banks aren't even dumping all their foreclosures on the market to try and keep prices up; just a small percentage and even that's a glut. Strategy: massive fail.
Partriotz... WHAT declining market? Don'tcha know real estate always goes up, and gold always goes down?
Don't start quoting Garth Turner on here, he an old windbag who likes to hear himself speak. A few priceless quotes from our good friend Garth in 1999, just before the biggest RE run in history:
“If you have the bulk of your net worth in a home, you are probably at risk. You certainly will not see your wealth grow over the next 20 years. In fact, you may see a large chunk of it evaporate.”
“10 years from now you should expect stock values to have at least doubled, if not quadrupled.”
“By 2005 Ford will dominate in a way that it has not since the Depression-era 1930.”
He may be right about RE being overvalued, but its one of those 2 times a day that a broken clock is right...
Anon 10:52,
I quote Garth because he talks common sense. And lets look at the 1999 predictions you quoted:
“If you have the bulk of your net worth in a home, you are probably at risk. You certainly will not see your wealth grow over the next 20 years. In fact, you may see a large chunk of it evaporate.”--
Twenty years won't be up until 2019. We still have to work our way through this recession or the coming depression as some predict. And then there are all those boomers with no savings and only a house as their major asset. What happens when they unload? You need to wait another ten years before you can say Garth was wrong.
“10 years from now you should expect stock values to have at least doubled, if not quadrupled.”--
The TSX was around 7500 in 1999 and peaked at 15000 (double) in June 2008. So the guy was off by one year. Looks like an excellent prediction to me.
“By 2005 Ford will dominate in a way that it has not since the Depression-era 1930.”--
Yep he blew this one. But being wrong about one company is no big deal.
So I think I'll keep posting comments from Garth.
And anon try and use some imagination. Pick a username so your comments can be tracked and referred to later. Or are you just another RE shill or nervous homeowner that found this blog recently and will disappear in a few days?
Talk about spin...those predictions are exactly 100% backwards...100%. We sure don't have to wait another 10 years to find that out.
Talk about spin...those predictions are exactly 100% backwards...100%. We sure don't have to wait another 10 years to find that out.
Well then you should definately go against Garth's advice and buy a few condos!
No one knew even in 1999 that Greenspan would lower rates so low in order to fuel a real estate boom. Never in our lifetime did the government create such a monster hype job/mania that a home is the be all end all. I am sure Garth was not the only expert predicting slow growth in real estate then as the tech boom came to a nasty ending and the housing market had been a dead dog for the last 5-7 years.
Equities will easily be double to triple or more in ten years because retirement cash is what will drive people back into the markets to recover their losses. Those who got hosed for hundreds of thousands on a house will have no borrowing power to invest or the balls to invest in anything. Once bitten twice shy as they say, and the rookie FTB's risk taking level will be non existant.
Good post
I had this exact conversation on Saturday.
BoC drops rates to 0.25% this morning but sends a strong message about economy and their desire to see long terms interest rates drop. See quote from BoC release below.
“With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."
So given what we have seen to date in this recession FTB's will likley ignore the economic risks in the statement and cellebrate the lower interest rates by snapping up even more entry level houses as now they will be able to borrow even more money.
If I had taken Garths advice and bought stocks instead of Vic RE in 1999, I would be regretting that decision today. And that over a 10 year period...He may be right in the next 10 years but I am just saying he is basically just a perma-bear on RE so take what he says with a grain of salt.
"The TSX was around 7500 in 1999 and peaked at 15000 (double) in June 2008. So the guy was off by one year. Looks like an excellent prediction to me."
Too bad that one year just happened to be the year the market have back almost all of those gains.....
Anon said:
If I had taken Garths advice and bought stocks instead of Vic RE in 1999, I would be regretting that decision today. That is because you have a hard time listening to various sources of information and coming to your own conclusions. Sheep get fleeced. If you had weighed all the information available a year ago you would have been out of the stock market with a nice profit. I did and so did many others on this blog.
Too many people are too lazy, foolish or greedy to learn about financial and real estate markets. They take the easy way out and listen to a ggod story from a real estate agent or "financial adviser". Listening to the advice of a commissioned salesperson is a great way to lose money.
Roger. Well said
"That is because you have a hard time listening to various sources of information and coming to your own conclusions. Sheep get fleeced. If you had weighed all the information available a year ago you would have been out of the stock market with a nice profit. I did and so did many others on this blog."
People who invested in RE can still get out TODAY. With a huge profit since 1999. So you played the Stock market bubble and other's played the RE bubble. Does that make you any wiser? I have read Garths book and heard him speak, and was never impressed. But to each there own.
Hi roger--have you been successfully timing the stock market throughout the last 10 years? or just the latest crash? That would have a big impact on returns.
It's a tough strategy overall though, no?--comparatively, timing real-estate is relatively easy I should think--as HHV's previous post points out.
When I see posts about how well people have timed the stock market, I always cringe because I know there is a flood of anecdotal stories about how well people have timed real estate waiting to pour in...
"It's a tough strategy overall though, no?--"
Not really. I'm not the brightest and even I could see in 06-07 that things (stocks, housing, assets, etc) were in a mega bubble. It was time to sell and to go short. It has been lucrative to say the least...
Anon--did you apply those mediocre smarts to the housing bubble as well? A small but highly leveraged investment in the late 90's in Victoria real estate, if sold recently, would have netted some hefty returns.
Another Anon said:
So you played the Stock market bubble and other's played the RE bubble. Does that make you any wiser?--
Prudent investing in the stock market is based on examining companies that make money for the shareholders. One can look at earnings, revenue, costs and many other parameters and make a financial decision. There is a difference between investing and speculating. Unless you are playing speculative stocks you are not buying into a bubble.
Real estate on the other hand is another matter. If you are a true real estate investor you are looking at rental income and net earnings after all expenses. Otherwise you are just a speculator. If you are a homeowner you should not be thinking of your house as an investment but as a place to live and a possible hedge against inflation. Anyone that thinks that their house will rise more than slightly over inflation is a speculator.
Did we have a speculative bubble in real estate? Yes. Did we have a speculative bubble in the stock market? No - Just a typical cycle like always.
"Did we have a speculative bubble in the stock market? No - Just a typical cycle like always."
But wasn't a lot of the money fueling the stock market rally of 2003-07 actually bundled real estate money? The two bubbles seemed to go hand in hand during that time, and both had all the traits of speculation.
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Sometimes the web amazes me.
In case anyone missed it Bank of Canada dropped the Prime Bank Rate to 0.25%
...I wonder how long before they start paying you to take a loan?
ZIRP here we come.
Not only that but they said they will not raise it again, until June 2010 at the earliest. Looks like the Vic RE correction is going to take a while...
June 2010
WOW I missed that tidbit, told you Anons high interest rates were not coming back any time soon.
Japan has had a Zero Interest Rate Policy (ZIRP) for over a decade, we might not be that long, but a couple years for sure.
Looks like the Vic RE correction is going to take a while...
I don't think zero interest has done much for RE prices in japan--why should we suspect it will continue to buoy things here?
Job losses and bankruptcies will sway the market. It's about the properties that are put up for sale and the circumstances in which that happens.
The FTB's are emotion players. They've been sold a dream and are willing to focus on the monthly payments. It'll remain lively for a bit...until job losses start to eat away at the FTB'ers.
It will be very telling if the low interest rates do nothing but stabilize or minimize a fall. Economic news is bad. Jobs uncertain. Markets are off. There is little that can be done to put humpty dumpty back together again!
25% down 25 year mortgage - it's still not cheaper than rent and should be at the bottom. Be patient. If you have property sell into the dead cat bounce and hang tight!
"It will be very telling if the low interest rates do nothing but stabilize or minimize a fall."
Yes it will, it will tell us that the market has been stabilized or that the fall has been minimized - all the rest of the statements and fear-mongering on here (from both sides) will be speculation.
In the meantime, the sun shines, the flowers grow. Victoria is wonderful whether you own or rent.
The bull comments on this blog are nothing short of amazing. Here we have one month where the median house price goes up (average price down) and sales activity picks up and they are pronouncing that the downturn is over. Folks better take another look at those March stats to get a sense of reality...
March stats overview
March Stats slideshow
April sales projection based on VREB stats released Monday April 20.
A small but highly leveraged investment in the late 90's in Victoria real estate, if sold recently, would have netted some hefty returns....
...
Anyone looking at the charts and numbers could see at the time that RE was a reasonable investment in the late 90's. But there was no way of knowing that the bubble was coming soon after.
Also how many investors who bought then (or before) do you think sold at or near the peak, instead of believing that the market would keep going up and holding? Not many obviously, because if the had all sold the market would have already tanked 50% from peak.
That's the thing - not all investors can get out at the top of a bubble. Not even close. Only a few,
"That's the thing - not all investors can get out at the top of a bubble. Not even close. Only a few,"You mean the way I dumped all my stocks and bought more gold before the FIRST crash last year?
Not THAT hard, apparently. One just has to refuse to listen to paper pushers.
"Anyone looking at the charts and numbers could see at the time that RE was a reasonable investment in the late 90's. But there was no way of knowing that the bubble was coming soon after."
RE was an awesome investment in the late 90's. The biggest run-up in the last 3 decades that lasted 5-7 years (is this soon after by definition?) But there was no way of knowing there would be a correction in this cyclical market?
Spin cycle on high please.
RE was an awesome investment in the late 90's....
No it wasn't, It was just a reasonable investment.
It's only from our viewpoint now, just past the top of the biggest bubble ever, that it appears "awesome".
Sort of like Nortel in 1995. Just because some idiot comes around and pays twice as much for your investment as it's really worth it doesn't mean you were a genius. Just lucky.
"The bull comments on this blog are nothing short of amazing. Here we have one month where the median house price goes up (average price down) and sales activity picks up and they are pronouncing that the downturn is over."
I see nobody proclaiming anything about the median prices. What I do see are comments from both sides that the market has not corrected near as much as hoped / feared. This is an entire YEARS worth of data that is telling us that Victoria RE is repeating history yet again.
Try that 30 year average price graph up there on the MEDIAN price to get to reality, and then make a correction for all of the lower priced condos that weren't there in the 1970s or that had their own serious correction in the late 90's (leaky condo syndrome.) Oh, but no, we wouldn't want to skew the numbers now would we.
SFH have done much better historically and corrected a whole lot less (kind of like the last 12 months) than some would like to paint.
Some of you bears are the worst offenders when it comes to spin. One month you're all about the last month's change, spin 6 months forward and now you want the YOY change. Why don't we just pick one that makes the most sense (maybe a rolling 6 month average?) But that might get you the picture you want, eh?
I hate to say it but can both sides stop blaming the other for spinning. It's known as different perspectives and is the reason we are here.
I for one am not focused on what goes on each month for sales. I'm living in the belief an average family must be able to afford and average house. If an above average earning family can't afford a below average house things will change.
I enjoy the views of both sides and stats from both sides even more. In the end bulls may be right, and the average family is not a good indicator of housing affordability. If it's not, then we are broken in a way that wont end well.
"Try that 30 year average price graph up there on the MEDIAN price to get to reality, and then make a correction for all of the lower priced condos that weren't there in the 1970s or that had their own serious correction in the late 90's (leaky condo syndrome.) Oh, but no, we wouldn't want to skew the numbers now would we.
SFH have done much better historically and corrected a whole lot less (kind of like the last 12 months) than some would like to paint."You've picked great data to try and have us compare. Where can we get it? It's not available publicly. I'm guessing you've done so on purpose. If no one can find the numbers you suppose to correct you, then you must be right.
You can't change the yardsticks in the middle of a data set, nor can you change the baselines. We can only compare the numbers we've had over time with the numbers we continue to have. Which is what has been done from the beginning on this blog.
Is there spin? There's certainly some colourful commentary, but I don't think your allegation of spin is accurate.
When you can share 30 years of median data, please do, I'll be happy to run the numbers and prove you right.
BTW, this graph, which is what many of us base our annual comparisons on, doesn't include your "low-priced, leaky condos" that "we" use to skew the numbers. But it now goes all the way back to 1967, which gives us an extra 11 years to show just how out of whack "we" are here now.
When are you going to give yourself a nickname?
SFH have done much better historically and corrected a whole lot less (kind of like the last 12 months) than some would like to paint...
Got some facts to back up that claim? Like just one house that sold in spring 2008 and has sold in 2009 for over 90% of the previous price?
I think it's clear that a lot of bears are getting angry that they missed their chance and they now realise they'll probably never buy. That's a sad state of affairs to be in. But listen bears there is nothing wrong with being a FoRenter. Landlords need people like you to pay their mortgage forever. So look yourself in the mirror and say "YES! I'm a forenter!!!". It'll cheer you up big time.
Spin ? Seven times average family income to own an average house at near historic highs is bear spin ? LOL
patriotz is on the money,few bulls sold near the top,just as in the stock markets. When the bull is running the fear is low,when the bear comes knocking,the excuses come out tenfold what a great city this is.
PS YOY tells the real tale of how stupid the market got and those that thought the party wouldn't end.
Fence Sitters Will Be Sorry
Will someone take the torch up and work on a VREB buy before real estate must go up threat graph?
My problem, is that I have money burning a hole in my wallet, that I want to spend. Yup, could go out this afternoon and buy a house- which would make two realtors, a banker, home inspector, and the government happy to receive a pay cheque.
So, why don't I - just do it!
Simply because, my money is making money and I am adding to the bank roll versus house prices declining about 1 percent a month. And most importantly, I can see myself retiring the debt faster when I am paying 4 times my income for a home rather than 7 times my income.
Worst case scenarios, I stay a FoRenter and have a large bankroll or I buy a home and live paycheque to paycheque.
I love the FoRenter smear. As though being financially savvy is an insult? It's kind of like a leased-Audi A6 driver making fun of me for my paid-for Toyota Yaris. Oh well, some people just don't get it. So they insult those of us who do and try to let us know "we'll be sorry" we missed our opportunity to drive a car we'll never own.
'Deeper' recession ahead says IMF Yup this looks like a great time to take on major debt buying a dream home.
I continue to be amazed by the bulls. The last anon response to my post didn't even make sense in many of the statements. But there was plenty of taunting and armwaving....
This is an entire YEARS worth of data that is telling us that Victoria RE is repeating history yet again. -
Huh?
Try that 30 year average price graph up there on the MEDIAN price to get to reality, and then make a correction for all of the lower priced condos that weren't there in the 1970s or that had their own serious correction in the late 90's (leaky condo syndrome.) Oh, but no, we wouldn't want to skew the numbers now would we. -
What median price graph are you talking about? What condo correction should be applied to the charts? Individual VREB graphs are available for SFH, condos and townhouses. Only the BCREA produces mixed average residential price data (condos, SFH, towns) and they remove their historical reports from their Website each time they publish a new one.
Anon since you quoted me I assume you are targeting your comments in my direction. On many occasions I have posted that in the absence of a Housing Price Index the median price is a better proxy than the average price. VREB does not produce these graphs so I do. I have always stressed that you need to look at trends longer than a month in order to get a picture of where the market is heading. Three month rolling averages are useful to see trends. In areas where sales are low, like Oak Bay, one needs to use six month data because the sample size is so small. Here is the Greater Victoria SFH rolling average.
GV SFH 3 month average -
When I look at the 3 month rolling average for the median SFH I see that it is still trending down. On the total MLS sales front I still see fewer sales this year than in previous years.
MLS Sales by Month & Year -
So from my point of view the market is still undergoing a gradual correction from last years peak. I fail to see anything in the stats that would get RE bulls excited. Maybe all the media and real estate industry hype is clouding their judgement.
Thanks Beagle for the international perspective. I, for one, will sit on the sidelines for now, pay down my debt, amass more downpayment and teach my kids to grow their own food.
Fooder said:
I enjoy the views of both sides and stats from both sides even more. -
There is plenty of viewpoint from the bulls but what bull stats are you referring to?
I cannot recall a single graph, chart or stat table produced or posted by a bull, on this blog, to back up any of their statements. The only thing we ever get is that real estate went up quickly from 2000-2008. Hardly informative. People come here to learn about what has happened recently and for rational discussion on future trends.
Even more funny is the person leasing the Yaris (can you even lease a Yaris?) laughing at the person who owns the Audi. Believe me, it happens.
My neighbour and my best friend who both bought houses think that because we still rent that we have nothing. I don't want to ruin their dreams by telling them the truth.
S2
What is singularly telling is that our gradual correction, as Roger so aptly points out, is happening in the absence of any kind of localized economic event. There has been no news of significant Victoria job loss/economic negativity. In fact, if anything, the opposite is true. Victorians are bombarded on a daily basis with positive local advertorials like the one's telling us about our balanced economy and the three-weeks recycling of the same 50 low-paying open jobs in Saturday's TC.
The only "balance" Victorians get are stories from outside the locality that times may indeed be tougher than we're experiencing here.
When the gov't layoffs happen in June, and they will, then we may see the cart pushed over the hill and the true local event needed to wake the sheeple up from the slumber to realize we are not that different after all.
In 2008, the gov't employment website had on average 300 positions open per day at a rate of 15-20 new each day. It's down 65% now to, on average, 100 open positions with 4-5 new job openings. The gov't employs over 13,000 Victorians. They're not hiring, they will be laying off, and their fiscal year end of March 31 meant that contractors contracts ended. I wonder when we'll start hearing about all the contractors for gov't not having any more work?
Government lay-offs and cessation of consultant contracts will finally help send SFH prices down, agreed--but they will take me and my consulting work with it.
What a catch 22--the only way I can afford a house is when the economy practically collapses--but when it does, that's when I can least afford the chance to buy.
The local RE hype continues, check out this forenter motivational ploy.
There is a lot of hype that now is the time to buy real estate because mortgage rates are so low. For many this will be the worst financial mistake of their life. But I like facts so here we go.
Here is what happens when you take out a 500K fixed mortgage at 3.8% for 5 years. Two tables are shown. One with 25 year amortization and the other with 35 year. Take a look at what happens to the monthly payment at renewal time in 2014.
5 Year Fixed Mortgage--
You can clearly see that the payments jump way up!! What if the homeowner tries to increase the amortization in order to get the payments down. They end up owing the bank for many more years. In the case of the 35 year amortization mortgage the renewal will be for 35 years and the payments will still be higher.
Adjusting the Amortization--
One last note. Take a look at all the interest the homeowner is paying over 10 years. And they say "renters are throwing their money away on rent".
I don't think the 14 year old boy that keeps posting the foRenter comments realizes it isn't much of an insult. If you remember my comments of the house poor young family that had bought at the peak, were very house poor and were trying to sell for the same they bought at last year.. You couldn't pay me enough to change places with some one who has bought in the last couple of years.
If I had to be a FoRenter instead of that financially screwed, bring it on.
Anyone else a bit put off by the fact that their "High Interest Savings" account is now down to 1-2%?
Gee, let's punish the savers and reward the borrowers as we head into the biggest recession in decades... Thanks BOC!
"Gee, let's punish the savers and reward the borrowers as we head into the biggest recession in decades... Thanks BOC!"
Didn't you hear, the only way to solve this problem is to give the economy even more of what caused the problem in the first place!
when your savings are making no money in interest, now may be the time to consider buying into investments (TD e-series have some nice indexes). I'm looking at 75%/25% equity/bonds, but I am looking at long term (~30 years).
Dude you need to keep at least 6 months of cash in the bank and that money is earning NOTHING.
or you could keep that 6 months worth of money in a "guarantee of principal" fund, say 25/75 in safety (cashable GIC) / fixed income (a bond index mutual fund). As long as you can cash out/access your money within a short time, I don't see why you would leave it in a savings account rather than investments.
you missed the quote from PNR
"The sooner one starts to pay off a mortgage, the earlier it will be eliminated"
if you wait 10 more years for prices to go down, how old will you be when your mortgage is finaly paid off?
Greg wrote:
The local RE hype continues, check out this forenter motivational ploy.Indeed, from the comments section where the author responds to criticisms that he is a shill:
I can assure the reader that I am not a realtor. Nor am I in any way affiliated with VREB or with the development sector in our region. My columns are written with no purpose other than to offer opinions on our region's real estate sector. These are based on my experience as a past owner of a Lower Mainland real estate company, and broad, senior experience in a number of industries.Ummm...yeah.
- StargazerXL
So sick of these "biased" articles. Was in Vancouver on the weekend and they had this radio show that sounded legit, but they just went on for half an hour about how its the best time to buy. Kept interviewing local realtors and mortgage brokers. They just market it like a real expert realty show, no warning that its paid advertising.
Someone should start a fund to go towards advertising the other side of the story. How real estate is extremely overpriced and in store for a devastating correction. I would definitely pop in $100. Would love to wake up one Sunday morning and see an ad in the TC laying out the facts and pointing people to this blog!
roger I like your last tables.
But you and I both know that if people are going to use a 35 year mortgage they are doing it for the monthly payment. The buyer will not buy the $500k house they will max themselves out monthly and buy the $600k house because the payments will be the same.
More fuel for the fire
On another note I like high yeild corporate bonds right now for investments I am up 2.4% since march 2 which is 18% annualized, and I expect that to improve over the next 6 months or so.
Roger posted some links in the Craigslist real estate section awhile ago. It costs nothing but irritates the real estate bulls no end, I'm sure...
"Anyone else a bit put off by the fact that their "High Interest Savings" account is now down to 1-2%?"
Yes, but then I look at the rest of my portfolio, which has lost 30% over the past year, and it doesn't look so bad. I tend to agree with Mish that we are in a period of deflation, so my cash is actually increasing in value. I only wish I'd followed my gut and converted more to cash last summer. Who cares if the money I have for a down payment is only earning 1% if the thing I'm going to spend it on is dropping 10% per year?
if you wait 10 more years for prices to go down, how old will you be when your mortgage is finaly paid off?...
The person buying later at a lower price, and making the same payments as someone buying now, will actually have the house paid off sooner. In other words you can take out a 25 years mortgage instead of a 35, or whatever.
Sorry for being logical but I just can't help myself.
With the notion of having a mortgage longer if us bears wait longer. I have no proof of this, but I think bears are the type of people who get a mortgage and pay it off quickly.
I'm not looking for the max amount of debt I can service, I'm looking for debt I can handle without undo risk, no stress, and an ability to pay it off on my own time schedule. For me it is mandatory I loose no sleep over my decision.
I heard yesterday that the international students is suddenly on the decline. This would have a very big effect on rents wouldn't you say ?
I was in burger king last night and it was dead. A few people were doing drive through but that was it. I think as the recession takes hold in Victoria more and more people will avoid the fancy chains like Burger King in favour of discounters like McDonalds and Subway. BK has free whoppers with a meal so if you do go you can econmize by saving the whopper and eating one half for lunch the next day and one half for dinner.
What was real bizarre was walking into Office Depot yesterday and it was a ghost town. 3 employees and 4 customers in that huge store. If that isn't a sign the business cycle is a bust.
Bad News Bears (wasn't that a movie or something?):
http://www.news1130.com/more.jsp?content=20090423_094221_740
Good anecdotes guys. In Nanaimo here there are a lot of places for lease popping up all over the place, as well as a few businesses going under.
I don't know how BK is considered fancy, you can get sandwiches for $2 on King Deal Days or combos for $3.99.
Going into stores and seeing how the atmosphere is, chatting with managers etc is the best way to gauge how the economy is performing.
"News" from a marketing firm? Ha ha, that's a good one...
Question for you guys: typically in the past, when you get pre-approved for a mortgage, the banks would hold the rate for you for six months (or at least mine would). At one point, they even extended it for another 45 days for me.
With interest rates bottoming out, but going to rise at some point down the road, will banks still be guaranteeing a rate for as long as six months?
Jobs losses major threat to mortgage market"Eight per cent of Canadian mortgage holders, representing some 425,000 home owners, indicated that being able to make a mortgage payment is currently an issue or concern"
Check out the graph in the article. It says "Mortgage arrears in Canada have been edging up" Edging up? To me, it looks like it's almost vertical over the last year...
womp, banks will normally live up to rate guarantees, but I would get a six month commitment in writing as they normally only go out three months.
Historically when interest rates pop up there is a massive buying activity as many of those pre-approved people want to lock in their low rates, then the market dies off 3-4 months after the rate hikes.
"What was real bizarre was walking into Office Depot yesterday and it was a ghost town. 3 employees and 4 customers in that huge store. If that isn't a sign the business cycle is a bust."
The last time I went to Office Depot I almost didn't go in because the parking lot was so deserted I thought they were closed. I was the only customer in the entire store.
Conversely, I'd gone to Staples right before and it was bustling; not crowded but plenty of customers around. So I don't think it's necessarily a harbinger of doom for the economy, merely a sign that Office Depot is in serious trouble. Probably has to do with that being a crap location as much as anything.
I have to run 15 kilometers to burn off 1 Big Mac.
Fast food restaurants generally do more business in a recession or if the restaurant is located in economically challenged neighbourhoods. Because, you can load up with fat and sugar at cheap prices.
If you want to be around by the time your 35 year mortgage is finished - order the salad.
I`m starting a collection--$5 bucks a day--to feed the trolls, wait for it.... Big Macs!
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