215 Responses to “CMHC to help cash-strapped owners”
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March 25th, 2009 at 9:52 am
Raven:
I will use $250/mponth (property tax & insurance). Utilities was not included in the rent value, so for the sake of simplicity, I ignored it
For a SFH utilities should be ignored because they are paid by the tenant.
But you are ignoring maintenance. There has to be some maintenance cost over a 8 year period.
So total return was $157,000-133,800= $23,200.
Same ballpark, different magnitude. But you are not including sales fees. Throw those in and I think you end up about zero.
March 25th, 2009 at 9:48 am
blueskies, reading is FUNDAMENTAL. If you even follow this thread at all, you would know I’m waiting for another 20% drop before I buy. No where did I advocate that now is good time to buy. Now get back on the short bus and be on your way.
March 25th, 2009 at 9:45 am
“If the question is “should people care about real dollars” then the answer is yes, for large amounts of cash and long periods of time, e.g. real estate.”
Why? What value do you get out of knowing that $100 today is worth $85.06 in 2001 (other than knowing that your money is eroding and you need to invest in an inflation hedge?)
March 25th, 2009 at 9:44 am
Ella, although the forclosure story was very interesting, this article is far more astounding and relevant. Seriously, after you have read it, you’ll wish you had Obama’s email address to pass it along! The ridiculous thing is that it is from Rollingstone magazine, of all places! Have a read and tell me if you think that makes it any less credible!
http://www.rollingstone.com/po.....over/print
March 25th, 2009 at 9:39 am
Dave:
Repeat after me:
Now is a really BAD
time to buy real estate
Raven:
Repeat after me:
Now is a really BAD
time to buy real estate
scullboy: you go squeegee!!
March 25th, 2009 at 9:39 am
Is it real or nominal when the developer drops prices 30% below where you purchased a year before?
Also, as I don’t read these blogs on a daily basis could someone please refresh me on Dave’s new predictions? And for the person who corrected my grammar earlier in the thread get a life! I will never proof read on a blog DWI.
March 25th, 2009 at 9:33 am
Patriotz, I’m not getting the same answer as you are. By the way, $500/month expenses is overstated. I will use $250/mponth (property tax & insurance. Utilities was not included in the rent value, so for the sake of simplicity, I ignored it):
Capital Gain: $157,000
NPV:
Initial cash: -$66,250
Interest: 9%
Cashflow year 1-8: -$12,200
NPV: -$133,800
So total return was $157,000-133,800= $23,200.
March 25th, 2009 at 9:02 am
Let’s use real numbers then. 1983 vs 1988
1983 (Buyer 1):
Nominal – $159k
Real – $282k
CPI – 100
1988 (Buyer 2):
Nominal – $186k
Real – $277k
CPI – 123
Using ‘Real’ dollars, Buyer 2 paid less money. On that basis, many here would suggest that buying in 1988 is better than 1983 because ‘Real’ prices are lower.
Using Nominal dollars, Buyer 1 paid a smaller amount for the identical house and has reduced his principle. Buyer 1 would have approximately $140k outstanding in his mortgage vs. Buyer 2 who would owe $186k. Assuming equal incomes and interest rates, Buyer 1 is in a better position because he has a smaller mortgage and more disposable income. He also happens to pay off his mortgage 5 years earlier.
To make up the difference, Buyer 2 would have to save an extra $10k per year (~$800/month) in rent vs. mortgage payments. Seems pretty unlikely that would have been the case in the early 80’s.
March 25th, 2009 at 8:49 am
Wading into the real vs nominal debate…
If the question is “should people care about real dollars” then the answer is yes, for large amounts of cash and long periods of time, e.g. real estate.
As for “do they care about real dollars,” I’m guessing the most common answer by a long shot is “sadly, no.” Seeing all the crap people were getting themselves into while the bubble inflated, how could you make a case for rational decision making of any sort? Unconditional offers without home inspections? Presale purchases at crazy valuations years in advance? There’s no basic risk assessment happening there, I don’t see anything but fear, greed and hope.
March 25th, 2009 at 8:21 am
America’s abandoned cities – house price zero:
http://globaleconomicanalysis......ities.html
BC’s abandoned cities:
House price 100K to 390K
It’s the best place on earth you know.
March 25th, 2009 at 3:47 am
Hear hear!
March 25th, 2009 at 1:45 am
I think at the end of the day, and despite the voluminous postings by Raven and Dave, here’s the point:
It’s a bad time to buy property in Vancouver. Even if the prices in Vancouver weren’t laughably insane the only sensible strategy to get through the next couple of years is to place your money in some kind of vehicle where the risk is minimal, the returns secure (if conservative) and liquidity is guaranteed.
Everything else on this thread is just static.
March 25th, 2009 at 1:41 am
Hey Yves, are you some kind of window licker too? What the hell was in my post that made you think I’m a racist? I’m a crappy typer.
Christ, the window washers in this town must have to work some pretty brutal hours to keep up with you lot.
March 25th, 2009 at 1:38 am
Raven:
That depends what you mean by “profit”.
If you mean capital gain, that’s 422K-265K = 157K, minus sales costs.
If you mean total return, you have to add the present value at time of sale of the operating income of the property. That is the net rental income, i.e. the rental value minus all costs, including opportunity cost on down payment, mortgage interest, taxes, insurance and maintenance. This has to be compounded at 9% annually because that was your cost of capital. I will use 5% for the opportunity cost on the down payment.
9% of $198.750 is $17,877.5, annually. 5% of $66,250 is $3312.5 . Total $21,200. Let’s say expenses are $500/month or 6K. If the rental value was 1K a month, that’s 12K a year for a loss of $15,200. Present value of time of sale is -167K.
So your total return was -10K.
I didn’t allow for increase in rental value or expenses, that will make the loss smaller but not by much. Adding sales costs will increase the loss. Feel free to adjust rental value or expenses if you have better numbers.
That is all nominal of course, it’s easy enough to figure out real.
March 25th, 2009 at 1:21 am
Why do bulls bother to argue? The R/E is on a free fall. Mac marketing is coming out with more 40% off condos. Do you think developers with a bunch of analsis and accountings will discount their price if the market is turning around anytime soon? NO!!!!!
They are discounting now because if they don’t sell it now, the have to sell it for less later.
March 25th, 2009 at 1:21 am
“What was the point you are trying to make again?”
The point was that the above exercise to convert my dad’s profit to real dollars (in this case, I set it to 1997 dollars) was a useless exercise. The information didn’t offer any value.
I’m proving Dave’s point: “What is the purpose of correcting nominal dollars from the perspective of an individual homeowner?” He said: “Who cares?”
And I agree.
March 25th, 2009 at 1:17 am
Dave and Raven both don’t have it together.
March 25th, 2009 at 1:14 am
ANALYSIS
Nominal Profit:
Proceeds: $422,000
Less: Remaining mtg 173,450
Less: Downpayment 66,250
Profit: S182,300
Real Profit:
Proceeds: in ’97$’s $359,720
Less: Remaining mtg ’97$’s 147,850
Less: Downpayment 66,250
Profit: S145,620
Conclusion: Dad ends up with $182,300 nominal profit or $145,620 real profit. At this point, all Dad knows and cares about is he’s got $182,300 profit. Is it useful for him to know his profit is $145,620 in real dollars? I can attest that he won’t care–he made money.
March 25th, 2009 at 1:14 am
Taking your numbers at face value:
In 1997, your dad had $66,250 in cash. He converted that into a home which he held for 8 years. At the end of the 8 years, he converted the home back to cash by selling it for $422,000 but he owed the bank $173,453 so he then has $248,547 cash in 2005 after all is said and done. His net worth (assuming he has no other assets relevant to this example) has gone from $66,250 to $248,547 for an increase of $182,297 in nominal terms.
In real terms (all adjusted to 2002 dollars), his net worth in 1997 was $73,529, and in 2005 after the sale his net worth was $235,143, for an increase of $161,614 (in 2002 dollars)
Let me know if I am making any mistakes (it’s late and I won’t be able to reply until later tomorrow).
What was the point you are trying to make again?
March 25th, 2009 at 12:39 am
Scenario:
My dad bought a house for $265,000. At that time, 25% downpayment was required ($66,250), amortization was 25 yrs and the interest rate my dad got was 9%. For the sake of simplicity, assume this interest rate was fixed for the the next 8 years. His monthly mortgage payments was $1392/month. At the end of the 8 years (2005), his principle balance was $173,453.
My dad sells the house in 2005 for $422,000. Average inflation rate is 2.02% (Assume 2002 is base year, 1997 is 90.1 and 2005 is 105.7) For help, use the inflation calculator from Bank of Canada: http://www.bankofcanada.ca/en/....._calc.html
The question is, what profit did he make? Answer in nominal dollars and real dollars, and make your observation.
March 25th, 2009 at 12:29 am
I didn’t want to get involved in Dave & Observer & Arwen’s debate at first, because truthfully, I find real dollars generally a useless information.
Dave asked the question: “What is the purpose of correcting nominal dollars from the perspective of an individual homeowner?” His position was “Who cares?”
But Observer and Arwen argue otherwise, and a hypothetical scenario was introduced, which confused me, because there’s too many arbritary numbers and unrealist assumptions.
So I’m going to use a real-life example to prove how useless real inflation-adjusted numbers are useless.
OK, ready? Here goes:
March 24th, 2009 at 11:44 pm
GM, are you referring to this foreclosure story?
“The original owners paid $432 K for it 11.5 years ago
The current mortgage on it is apparently over $1 m, due to equity withdrawals”
March 24th, 2009 at 11:38 pm
“But I am living and with sacrifices both paying down debt (student loans) and saving, and eventually – when the numbers are right – I’ll buy.”
Good for you. I did this.
When I walked up to the teller to give him my last lump sum payment, he couldn’t believe it (he was about my age).
It’s the best feeling in the world paying off that evil monkey student loan.
March 24th, 2009 at 11:27 pm
…Ah, and since rents and incomes are tied, in my above frictionless universe example for the very simple math we’re assuming the renters’ incomes and their spending on housing holds so that they can keep investing (in real dollars) the same $1000.
Which actually, is quite an assumption when there are bubbles in the air.
March 24th, 2009 at 11:23 pm
Friend of mine works for a glazing co. they just laid off over 30% of their workforce last week. Sounds like its the first round and more are coming. He figures the company may last until May.
Maybe the bulls can go tell him he should stop worrying and buy some condos. Get your heads out of your ass already.
March 24th, 2009 at 11:21 pm
… Or in other words, in real terms, 25 years from now, the renters putting away the difference between renting and owning when the gap is this big will have 300K in 2009 dollars (& I just wiped any interest right out there), and you’ll still have your 150K house. In real dollars.
And hey. I don’t put away the difference between renting and owning because owning the place I live would be WAY too steep for my blood – my monthly payments would look to be 4 or 5 times what I’m paying, obliterating my income entirely.
But I am living and with sacrifices both paying down debt (student loans) and saving, and eventually – when the numbers are right – I’ll buy.
March 24th, 2009 at 11:15 pm
If you haven’t had a chance to read it, you’ve got to check out this article that Fish has posted at his new site.
http://tinyurl.com/cv3me8
Here is Fish’s new site:
http://fishyre.blogspot.com/
The article is absolutely astounding!!
March 24th, 2009 at 11:14 pm
And with substantially higher mortgage payments than rent payments, you have to add in the loss of your other investment opportunities, which for the risk adverse can even mean just a savings account.
Even if you feel like inflation is making your housing costs go down as a part of your incoming paycheque – which, historically, has been true on a monthly basis, which is why renters in the aggregate historically pay more of their incomes to housing than owners – that doesn’t mean you’ll be richer in the end. No one is arguing that often (although NOT with 40 year mortgages, and in a destabilized fashion in housing bubbles and greater worker movement)… often your average homeowner gets to a place of No Mortgage Payment at All, and only upkeep and taxes – and housing drops to 10%, even 5% of income, or lower, depending on the construction and heating needs of the place.
But that’s dependent on the variables going in, and what opportunities are being lost. It doesn’t mean that the homeowner necessarily has more MONEY, always and forever, no matter what happens, which is the point. Less and less have the equations favored home ownership as a way of having more MONEY.
Because in a bubble the strategy of home ownership (even at the peak) “works” if prices don’t go down, or people don’t get divorced, sick, injured, out of work, lose a partner, or get transferred – and/or they wouldn’t save anything if they didn’t pay your mortgage. As enforced savings for spendthrifts, maybe this is the best strategy, and for some locations in some places it still might be a solid wealth building strategy that doesn’t have risky downside potential.
But. I’ve got friends upside down on mortgage in nominal terms, now, and they’re trapped in a place too small and jobs transferred to a huge commute away, which has meant increased transport costs; even if they weren’t upside down, they would have lost all their equity and then some with falling prices. So they’re in rather rough straits. And even WITHOUT falling, even if their houses had been appreciating (in nominal terms), the market around them (ie: their move up options) would also be doing so. Which is why the latte reference matters. Because of SELLING, and because of how money buys other things.
You want to buy a place and stay there, and have enough money to save in other ways foe other needs, and/or your housing needs are guaranteed never to change, and you’re absolutely right. Eventually you’ll pay off that mortgage, and all those still renting will still be shelling out their (in 2009 dollars) $1800/month.
The question is, for what they’re getting, were they investing the $1000/month that they’re NOT paying for a similar place – ignoring having to pour money into the actual building, which is a whole ‘nother layer of expense. So, were they pouring that $1000/month in a stable and appreciating investment? Like a *savings account*?
And by the miracle of compound interest…
So, you will be slowly dropping the portion of your cheque to housing over the years, and they’ll be compound interesting in the bank. And some point, in 25 years, they’ll be the suckas still shelling out the $1800-.
BUT.
If the *fundamentals* in real dollars aren’t going your way, they’ll have 25 years of $12000 (at least) per year growing in real terms, and you’ll have a depreciated asset.
They’ll have more MONEY, in other words. But you’ll have “free” housing. But if the market is at a trough, maybe they’ll by their smaller retirement condo outright, and also have free rent.
It all depends on the equations going in.
March 24th, 2009 at 10:54 pm
(sorry I meant “You say that Buyer 1 better off because he needs to take out a loan for 100K at renewal whereas buyer 2 needs to take out a loan for 150K”).
March 24th, 2009 at 10:52 pm
Okay, let me take the time to make your example more realistic. Assume inflation rate is 20% per year and mortgage rate is 25% per year.
In your original example, Buyer 1 buys a home at 100K in year 0. Let’s assume he borrows 100K for this purchase and doesn’t even pay down any principal so at the end of the five years he owes 100K.
You say that Buyer 1 better off because he needs to pay 150K. That is correct from the example you have given, but the example lacks enough details to make a sound assessment.
In reality, if inflation is 20% per year and mortgage rate is 25% per year, this is what happens to buyer 1.
Buyer 1 buys a home for 100K in year 0. Just for the sake of argument, let’s say that he also doesn’t pay down any principal (the example can be modified to be more realistic – it doesn’t change the key ideas). He needs to pay 25K a year to service the mortgage. After five years, he has paid a total of 75K in interest payments which buyer 2 didn’t have to pay.
Wait a minute you say, buyer 1 is getting a principal residence or he can rent out the home he bought. So the 25K a year isn’t really down the toilette. True. But what if the rent he can get is much less than the 25K. Then you would have a problem saying buyer 1 clearly has the better deal. These numbers are not realistic of course, current home prices are much more than 100K whereas 25K might be in the ball park for annual rent.
So you see we have come full circle. Price to rent ratios matter and real interest rates matter
March 24th, 2009 at 10:40 pm
“Do you think it is plausible that we could get inflated dollars with low interest rates for an extended period of time?”
For the short-term, like one, maybe two years. Then recovery is inevitable and inflation has to be tamed.
“If you had a down payment kicking around for another house/condo investment property, would you rely on those conditions continuing and buy something, or hold off, or buy regardless of expectations and risks?”
I’m expecting 2005 prices to arrive within 1-2 years, so regardless of interest rates (assuming they remain 4-6%), I’m in the market for another SFH.
March 24th, 2009 at 10:36 pm
P.S. If let inflation be 20% per year in your example and assume banks will be charging at least 25% per year interest to make a profit on their loan, your example won’t work out anymore because buyer 1 will have to service interest payments which are large relative to the original principal.
March 24th, 2009 at 10:23 pm
Forget the lattes. We’re talking about houses. You have a house in Year 0 and also in Year 5, or forever for that matter.
The $50k gain is only a paper gain. I use it to illustrate that the second person must take out a mortgage for $150k in contrast to the first buyer who renews for less than $100k.
Although Person 2 buys a cheaper home in REAL terms, his house is still more expensive in nominal terms. Person 1 is clearly better off. He has the same income but smaller mortgage payments and total debt, more equity and more disposal income.
See my point?
Sorry you didn’t care for the latte example. Yes, I realized what you were getting at in your example after my first reply but wasn’t completely sure from the way you were replying. Raven has pointed it out. You borrow the 100K in nominal dollars and only need to pay it back in nominal dollars but that is halving in true value after five years.
You must ask yourself why would anyone lend you 100K in nominal dollars and require that you only pay it back in nominal dollars. The answer is nobody. That’s why banks charge interest on the money you borrow. So if you have 100% inflation, you can be sure that your interest rate will be high enough to recoup the loss (i.e. if inflation rate is 20% per year, interest rates will be higher than 20% per year).
The only way you can make money on paying yesteryear’s mortgage with tomorrow’s inflated dollar is if real interest rates = interest rate minus inflation rate is negative.
And Raven does have a point, that is a possibility. But it is very risky for countries to allow that and they wouldn’t be allowing it unless they wanted to prevent something bad.
March 24th, 2009 at 10:16 pm
Actually Raven that was me that found this boring, still do. I do find it refreshing that you are trying to back up your argument with numbers not just catch phrases. But I get where you are coming from. Don’t agree its a good time to buy or was in the last few years. Lets move on.
March 24th, 2009 at 10:16 pm
Raven: Good point. Pay yesteryear’s mortgage with tomorrow’s inflated dollar. A good way to reduce debt faster, hence the Fed’s strategy to flood the market with money supply AND reduce interest rates.
Do you think it is plausible that we could get inflated dollars with low interest rates for an extended period of time? If you had a down payment kicking around for another house/condo investment property, would you rely on those conditions continuing and buy something, or hold off, or buy regardless of expectations and risks?
March 24th, 2009 at 10:13 pm
Dave:
We got a long ways to go before you are right.
Right about what? What prediction or recommendation have I made that I am not right about yet?
You appeared on this board after it became clear that the market had turned in 2008, with a laundry list of reasons why people should buy. You have been wrong about everything the whole time you’ve been on this board.
Look at this doozer for example:
Dave Says:Reply to this comment
August 1st, 2008 at 9:08 am
I’m not sure how credible a group of mathematicians are in predicting real estate markets. Are you sure they are not economists?
In any case, I don’t think many bears here will take solace in that assessment. If anything, most bears here would consider that to be a bullish prediction.
It’s pretty similar to my outlook in that I think we will have slightly declining prices this Fall (say 5%) followed by a flat market. I differ in their assessment in that it is likely the flat market would continue for longer than one or two years, which I base on past trends (i.e. a flat market typically exists for 6 to 7 years).
http://vancouvercondo.info/200.....l#comments
March 24th, 2009 at 10:13 pm
Raven:
Bingo.
I am glad I am not the only one who gets it.
March 24th, 2009 at 10:09 pm
Quantitatively easing everyone time as Helicopter Ben lifts off with barrels of money to pour on china. Happy time if you own bond or condo in Vancouver! Interest rate low bond price kept high good time to trade with china for condo. You give them money and they give you more junk. They don’t know the money come from nowhere yet! Great time to buy more condo!!!
March 24th, 2009 at 10:07 pm
Cash is King, Dave made a prediction a couple days ago on this blog. Oh, it’s you’re, not your.
March 24th, 2009 at 10:01 pm
“The $50k gain is only a paper gain. I use it to illustrate that the second person must take out a mortgage for $150k in contrast to the first buyer who renews for less than $100k.
Although Person 2 buys a cheaper home in REAL terms, his house is still more expensive in nominal terms. Person 1 is clearly better off. He has the same income but smaller mortgage payments and total debt, more equity and more disposal income.”
Good point. Pay yesteryear’s mortgage with tomorrow’s inflated dollar. A good way to reduce debt faster, hence the Fed’s strategy to flood the market with money supply AND reduce interest rates.
March 24th, 2009 at 9:59 pm
Dave
Please don’t disappear again … I realise you’ve been wrong on every prediction you’ve made since I’ve been participating in this blog but at least your consistent.
Any chance you would like to honour us with some more predictions on # of listings (I choose date!!!!) and or price appreciation/declines!?
March 24th, 2009 at 9:58 pm
“I’m with Mr. Bear on his observation, the recent threads are a decent conversation compared to before. Used to be doom and gloomers, trolls, troll baiters, and a few jokers.”
Well THAT is a 180 degree change in perception from just days ago.
I thought the rants of a “troll” like myself are boring and tiring.
March 24th, 2009 at 9:56 pm
I’m with Mr. Bear on his observation, the recent threads are a decent conversation compared to before. Used to be doom and gloomers, trolls, troll baiters, and a few jokers.
March 24th, 2009 at 9:55 pm
“Dave and Raven, perhaps some reflection on the concept of pleonasm may help you both.”
Why? Things aren’t clear for you the first time around?
March 24th, 2009 at 9:52 pm
ple·o·nasm (plē’ə-nāz’əm) Pronunciation Key
n.
The use of more words than are required to express an idea; redundancy.
An instance of pleonasm.
A superfluous word or phrase.
[Late Latin pleonasmus, from Greek pleonasmos, from pleonazein, to be excessive, from pleōn, more; see pelə-1 in Indo-European roots.]
ple’o·nas’tic (-nās’tĭk) adj., ple’o·nas’ti·cal·ly adv.
March 24th, 2009 at 9:50 pm
“People are even occasionally admitting to not being correct about something. Are the Internetz are broken? I must just be dreaming, I don’t think anyone has admitted to more than a spelling mistake since ‘98 or so.”
I’m not immune to admitting my mistakes, so long as people provide credible sources or good rationale to correct my error in thinking. I’m here to listen to a different perspective so my views on RE is balanced. I think Patriotz so far was the only one who proved me wrong on ONE point with the Bank of Canda table. Other than that, most here just offer up baseless opinions.
March 24th, 2009 at 9:50 pm
observer:
Forget the lattes. We’re talking about houses. You have a house in Year 0 and also in Year 5, or forever for that matter.
The $50k gain is only a paper gain. I use it to illustrate that the second person must take out a mortgage for $150k in contrast to the first buyer who renews for less than $100k.
Although Person 2 buys a cheaper home in REAL terms, his house is still more expensive in nominal terms. Person 1 is clearly better off. He has the same income but smaller mortgage payments and total debt, more equity and more disposal income.
See my point?
March 24th, 2009 at 9:45 pm
Dave and Raven, perhaps some reflection on the concept of pleonasm may help you both.
March 24th, 2009 at 9:44 pm
“If buy 1 borrowed 100K originally, and paid down 20K principal, at the time of renewal he needs to take out another 80K loan. The 50K gain can’t be used towards reducing his mortgage unless he sells.”
That is true. That’s how we were able to pay down our mortgage quickly when we upgraded.
“I do agree with you however that doing calculations with nominal values is better. But interpreting them in real terms is also necessary and vital.”
Interpreting in real terms is probably useful to nobody but the economist and the advance investor.
March 24th, 2009 at 9:41 pm
patriotz:
Huh?
We got a long ways to go before you are right. I am closer to being right at this point in time than you are.