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.

Olympic silence

Is the perfect time to introduce the straw that broke the camel's back.

While we DON'T know what will be announced, it's safe to say something will be (I'm leaning towards EXTREMELY minor--does she have a pulse? Good. Is it under 65 beats per minute? Good. Give her a mortgage.)

Is it over? Bear beers soon?

Discuss.

Birds of a feather

I find this utterly amazing. Derk Holt, economist with ScotiaBank and pretty much the most consistent (recently anyway) "bubble talking expert" in Canada is reaching in this article today.

His premise: if the government reins in mortgage rules to slow the rapidly inflating bubble and the Competition Bureau wins versus the CREA (his argument being real estate transaction commissions will drop sharply and quickly, which I disagree with) you essentially wipe out the effects of one move with the other.

Really Derek? Isn't that just a bit of a reach of logic? I get that ultimately the buyer pays all of the commissions because without the buyer you have no money changing hands, but do you really believe that the seller "paying" less commission will lead to the buyer bidding higher for the same property? Maybe in the long term as more liquidity is created in the marketplace, but this certainly won't occur in the next 18 to 24 months--which is all the time it will take to deflate the bubble with mortgage policy changes that are very unlikely to occur anyway. Remember, we don't care about the secondary and tertiary buyers in the market, it's always the new entrant that drives the bottom of the pyramid, and this move doesn't put more money in the pockets of first time buyers.

So why would Derek Holt be so quick to rush to the defense of the CREA? Head scratcher that one, eh? (sarcasm)

Crazy talk

We have a serious problem in Canada. Not only is Joe Average drunk on cheap credit, it seems our so-called fiscal conservative government can't see the water from the wine. Crazy. Dangerous. And it can only end badly.

Take this article from Saturday's G&M (H/T Rob) where apparently the heads of the Big 5 banks were calling for tighter mortgage lending rules back in late November of last year. Now compare it to today's G&M article providing the government's response: No Bubble, No Changes.

You may be asking yourselves if the banks are so concerned, why don't they just tighten up lending rules themselves? The short answer is competition--they're not the only lenders in the game, and they don't trust one another to play under the same self-imposed rules anyway. They want regulation to apply to everyone.

You may also be asking yourselves why the government is ignoring the now Canada-wide housing market bubble? The answer is simple: political expediency. Rational actions in Ottawa are not welcome. If the government did tighten lending standards, an 18% drop (similar to what occurred when the tightened from 0 down 40 year ams), will likely be the tip of an iceberg.

The opposition will make extreme hay about how the present government created the mess, fooled the "poor, ignorant, not-responsible-for-their own-home-buying-actions citizenry" (of which there has never been more in Canada) into believing the market run-up was going to last forever, only to to do nothing about it when they are elected in a landslide. After all the damage will be done and parent-knows-best-even-more-socialist-Canada's-New-Government job is to now prevent it from ever happening again in the future. It's telling that no political party is talking openly about the Canadian housing market. So while you may be politically inclined to harp on the Harper Cons, they are all to blame IMO.

It's a lose-lose proposition. And the effect keeps the taps wide open in the rapidly filling wading pool where the kiddies are tippy toeing to keep their mouths above the waterline. Eventually the kiddies will be forced into learning to swim for themselves or drown. I have no doubts the majority will learn to swim. I have faith in my fellow Canadians that way. But remember: it's the drowners that make the market.

UPDATE: Double Agent let's us know that the Competition Bureau and the CREA were unable to come to an agreement on curtailing the ability of the CREA and its members to keep fleecing home sellers. Surprise, surprise eh. Like newspapers and the rest of the media, the CREA and many of its members just don't understand that times have changed and refuse to get with the changes.

(Please note that I won't be cutting and pasting articles in blog posts due to recent changes in Canadian copyright law, I'd appreciate it if you would adhere to a paraphrase only limitation in the comments too).

Home sweet home

I grew up in Victoria. When I was a kid, think the 80s, none, and I mean absolutely none of the people I knew had a suite in their home. Sure there were a few suites around. But no one had to have one and certainly no families I knew relied on one to afford their home.

Times have obviously changed and it's almost as common to find a home with a suite in it as it is to find one that doesn't.

I won't write a long post about the trouble of tenants or the folly of purchasing a house that has been renovated sans permit to create an illegal suite. Or the financial insecurity caused through owning a home your family can't afford without rental income in a time of falling rents and rapidly increasing vacancy rates.

I will simply ask a question:

Will we see a time again in the coming years when a house with a suite is not the preferred choice of Victoria buyers?

BTW, this is post number 401 at HHV. On February 9, this little blog will have its 3rd birthday. Thank you readers for making it what it has become. I've enjoyed these last few years and look forward to whatever doors it opens next.

Carla & Darren, I know you read this

And here's the independent analysis your "journalism" should have provided when you republished VREB's spin in today's online edition:

"For the first time in four years, January sales volumes failed to meet or exceed the preceding December's sales. In January 2010, sales volumes failed to match the same numbers as January 2007 and 2008 despite record low interest rates not available to buyers in those years.

While out-performing a dismal January 2009 is surely a sign of an improved real estate market in Victoria from the doldrums of last winter, the lack of sales volume in January 2010 compared to December 2009--typically the slowest sales month of the year--marks a significant shift for the over-heated Victoria real estate market. Interested readers can review the detailed sales statistics freely available on the Victoria Real Estate Board's website."

You'll have a chance to redeem yourself in tomorrow's print edition. I wait with baited breath. Tell you what, you can cut and paste my words above, without attribution. You can even claim the words as your own. I know you're more than capable of doing this.

By the way, did you even write any of your own words today? I can't tell. Looks to me like you just parroted, er, paraphrased what Michael Sampson, VREB's Manager of Communications made available for you. I hope you at least get an occasional lunch out of this incestuous relationship, you certainly can't be experiencing any journalistic pride.

February 2 Update: They do read, they did listen, they didn't copy and paste, but hey look, they did five minutes worth of digging through previous years' stats (yes that's plural, they went farther back than 2009) and they tried to inject some balance without upsetting their largest local advertising revenue source.

I guess that's all we can ask of a media company firing on its last cylinder. Of course, they probably blame Craigslist and the internet when they sit around the lunch room reminiscing about the good old days. Here's a hint people: it's the product, not the competition.