Mortgage slaves in Toronto
There’s an interesting ’slice of life’ article in Toronto Life that profiles buyers who have overextended to purchase a home. Looking at the numbers in that story you can tell Vancouver is just as bad if not worse:
Their budget inched up, first to $550,000, then 100 grand more. When they saw a detached house in Hillcrest, with its spacious bedrooms, modern kitchen and large yard, it felt like home. It was listed at $589,000, and there were two other interested buyers. Their agent encouraged them to make an aggressive offer of $647,000, a price that was just manageable because the house had a basement apartment they could rent out to help cover the higher mortgage payments. On the night of the offers, Daniel and Louise sat in their car in front of the house, with their competition parked nearby. When the owners rejected the two top bids, the couple had to decide whether to go up or let it go. “Daniel asked me if I thought the house was worth $650,000,” Louise says. “I said that I didn’t think it was worth $250,000, but that’s not what houses are going for in Toronto right now.” They bid $650,000 and the house was theirs.
When they picked up their keys last November, they had few regrets, not even about the cost of the house. “Now we’re in the game,” Daniel says.
But they hadn’t moved in yet. They haven’t had their furnace die during a February freeze, or a tenant’s rent cheque bounce, or a slow leak from the dishwasher rot the floor joists. When you’re overextended by an irrational market and barely making mortgage payments, the smallest house repair can push you over the edge.
I imagine that many first-time buyers in Toronto and Vancouver are getting by on a fairly thin margin, recent stats put the BC provincial savings rate at a negative 7.9% (yes, we owe more than we earn).
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March 30th, 2008 at 8:15 am
Yeah, this is exactly the case. It happens again and again, still the same mistake. I have dealt with couple of cases like this every year during my career. People should be more cautious in this but on the other hand I can understand them. Imagine yourself in a position that you have found a house that fit your dreams and you are under time pressure it could easily happen that you acting bit irrationally. I can just recommend to all potential buyers to read one of my guides in order to avoid problems. You can find them on my webpage Toronto realtor.
March 28th, 2008 at 6:58 am
I agree that the prices now are incredible high but it should be change in a couple of month I believe. I think that buying a house in the US is not a solution for that problem because you may have problems with the selling if you decide like that. What concerns the Toronto houses that`s true that the first-home buyers are in real trouble but renting can be one of the possible options until the situation improves which will soon.
March 27th, 2008 at 2:07 pm
“Believe me, spec builders of new unsold houses are scared s**tless”
I agree 100% here. The problem is exacerbated because margins are now very thin due to rising labour costs. One spec builder I talked to said they made their profits on land appreciation and lost on the structure. It is not going to be pretty if prices start dropping.
March 27th, 2008 at 1:54 pm
From the article: “B.C. and its trade-dependent resource industries will soon follow the U.S. into recession, with obvious implications for real estate. “
That’s actually not the only economic concern. Almost all the reduction in unemployment in the past 5 years has been due to construction/RE jobs (yes). Supply will start waning if buyers do not materialise this year and the vicious cycle will begin.
March 27th, 2008 at 1:43 pm
re: Vancouver Magazine article
In terms of MSM articles this one isn’t bad. Looks like a few reporters are perusing the blogs and the comments! Maybe they saw the post on MSM bias a few weeks’ back? I’ll remember the name Jim Sutherland for future reference.
He missed mohican’s blog though albeit the FPPS blog is not 100% RE focused.
March 27th, 2008 at 1:20 pm
“Incur the debt, obtain principal — like “pre-saving” and hold it or waste it as you see fit, much as you would unexpended income that has gone into savings.”
A good way of thinking about your line of questions is understanding the difference between balance sheet and income/cash flow statements. People make careers out of this stuff I hear.
March 27th, 2008 at 1:18 pm
FROM VANCOUVER MAGAZINE.
2. Be Condo-Wary
This category of real estate attracts a large proportion of the wrath dispensed by the bad-news bears, who regard it as the domain of flippers and “specuvestors,” a group they disdain or, at least, envy and resent. On the upside, it’s led to blogs like Condohype.wordpress.com, which wittily dissects the marketing efforts behind our city of glass (admittedly an easy target). On the downside, it’s contributed to global warming due to the number of bears driving around counting darkened windows—a sign, they believe, that an apartment is empty, which means it is owned by a speculator who will be forced to abandon it to foreclosure when the market turns, a crucial stage in the process leading to real-estate armageddon.
All this said, many sane and sober prognosticators regard downtown condos, and apartments in general, as vulnerable, and recent market statistics provide some evidence to support the view. One of the culprits is a flood of assignments—units that were presold and are now nearing completion, at which time the original buyers (those specuvestors) will have to pay in full, something they had no intention of doing. Due to taxes and fees, assigners will have to sell for as much as 10 percent more than the original presale price just to break even, which in a slowing market will be difficult. Assuming Vancouver’s population continues to grow toward a seemingly inevitable three or four million, the long-term future of apartment living is bright—but in the short term there could be blood.
March 27th, 2008 at 1:17 pm
Vancouver Condo, Un real estate, real estate talks etc. are all mentioned in this months Vancouver Magazine!
http://www.vancouvermagazine.c.....gout.shtml
March 27th, 2008 at 12:56 pm
The BC boom is not a commodity boom but rather a credit boom where hundreds of billions of mortgage debt has been added to the balance sheets. British Columbia will likely be ground zero for a massive banking system crisis to hit Canadian banks. There is a reason why the bank act originally required 25% down payments in order to protect the buyer. Now with zero down and 40 year ammortizations, this will be truly really ugly. With little industry, wealth creation to support the price level, when the high paying construction jobs cease, this province will see tens and tens of billions of non performing debt. Canadian banks, CMHC are in big trouble. Taxpayer bailout?
March 27th, 2008 at 12:19 pm
Burden of Proof,
Except for what I see in several neighbourhoods and from what I hear from my builder buddies (I used to be in the business), hard evidence of “recently completed houses not moving” is a little hard to come by.
Before the condo craze, the percentage of SFH units was much greater in 81, and many of the current new houses are either marketed exlusively, or don’t seem to hit the MLS sheets….so you have to trust your own observation.
Believe me, spec builders of new unsold houses are scared s**tless, and will soon have to drop prices to limit potential losses, not unlike those presale condo flippers on craigslist.
BTW, current futures for framing lumber are now $230/M, as compared to $430 in 2005. No wonder BC sawmills are shutting down at a record pace.
March 27th, 2008 at 11:24 am
Pope, Freako, thanks for the clarification on savings rate. I still find it amazing that we run -5% or worse for multiple years in a row. People are living off of credit cards, previous(?) savings, and its only getting worse.
March 27th, 2008 at 11:16 am
Franko,
You said:
“Reecently completed upscale houses that were built at the peak of high material prices and high labour costs ARE NOT MOVING.”
I’m always look for indicators. Do you have a source for this information?
March 27th, 2008 at 11:09 am
Hey Regular Joe,
You might want to talk to KRRSH. He’s a dumb as a rick and apparently has as much money as Trump. He firmly believes real estate will never drop. Selling to him should be as easy as stealing candy from a window licker.
Oh and Blueskies, sorry to burst your bubble. I think Krrsh has been using vagely feminine nicknames that are also the names of real estate developments. I don’t mind, since I told him I’d buy his kids’ organs to keep his DNA out of the gene pool. I also implies his mom is providing “happy ending” massages out of Spectrum. I’m probably fair game.
March 27th, 2008 at 11:07 am
BDK
No she didn’t continue to buy RE. Her credit was history! She continued as an agent, moving to Calgary then Toronto, essentially following where the market was hot. She gave it up around 1990. She never did recover. A lot of people did but my Mom was a bit of a gambler and horrible with money. She always had a hard time budgeting making $30k in one month then making nothing for 5 months, never saved for a rainy day. I learned a lot from watching her mistakes. I may have been young but I remembered it all well, and I to this day, have benefited from her mistakes and vowed never to do the same.
That’s why I laugh at people in this market, it’s like pre 2001 never ever existed in this city. It’s happening all over again.
Leaving Vancouver For Different Reasons « Vancouver Real Estate Anecdote Archive Says:
March 27th, 2008 at 10:58 am
[...] And morefrom the same poster 2008-03-26 14:58:20 – [...]
March 27th, 2008 at 10:48 am
Stumbled upon this site a few days ago … its nice to see there are actually some sane people in Vancouver. I thought some of you might want to hear from a regular guy with a wife and two kids and how we see the market and how it’s affecting our lives.
We moved here from Manitoba a couple of years ago and bought a townhome in Langley in the mid-300s. The prices have moved up a bit – but not much. We have a 25-year variable rate mortgage with about $50,000 in equity. Anyways, we’re selling because we want to keep what little equity we have.
Listings are going up, sales are decreasing, and we think prices are likely to decrease as more homes become available. Any decrease in price is going to screw my family’s financial security.
And if we’re selling – what do think families with 40-year, 0-5% down payment mortgages are thinking? I just hope we’re selling earlier than the rest of the sheep and the Vancouver Sun/Province continues to print their hyped-up advertiser-backed real estate industry stories to keep the stampede at bay.
March 27th, 2008 at 10:37 am
I wonder if I’m getting it.
Incur the debt, obtain principal — like “pre-saving” and hold it or waste it as you see fit, much as you would unexpended income that has gone into savings. The spending would be on interest to obtain the principal — this is the anti-saving part.
I guess we are just talking about unexpended income with this measure — once the unexpended income is “saved” it goes into another bucket as an asset? As you say jesse — that asset value can decrease to negative, or increase, without any impact on “saving” *as a rate*.
Though I guess some increases and losses, when they are realized, would count as income / negative income ie interest or a capital loss. But if you are underwater on your condo, for example, and have to pay to get out — no impact on “saving” though a real whack to your net worth. And potentially interest paid on debt to pay it down would count against income.
So, if I rack up a LOC for 10k — I created an asset of 10k, while increasing my future spending on interest by 60ish bucks a month.
I could put the 10k in a savings account — and have it earn income of 35 bucks a month (offsetting the spending on interest). Or put a downpayment on a condo assignment, which if I flip it for 50k more than the price I paid will net me 40 k in income, which will boost my savings rate. Or buy a skookum HDTV. Which has no impact, other than adding a very rapidly depreciating asset to my portfolio.
Accountants must lead very boring lives, I think.
March 27th, 2008 at 10:21 am
Good story DaMann,
I remember when that happened too.
There are still people who never recovered from that emotionally and it caused more than a few divorces!
Did your Mum ever try to flip property or be a landlord again after the crash?
There were people who’d just built nice cabins in Alpine Meadows in Whistler who had to walk away from them, it would have been really sad…