Feb 2010 Benchmark House Price: $800,796

The REBGV benchmark house price reached $800,796 in February.  The rise in listings puts us into a ‘balanced’ market condition according to the Real Estate board.  Will we be able to maintain this ‘balance’?  I suppose it depends on how much our market is driven by CMHC support and how new rules and higher interest rates affect those margins.  Here’s some interesting math courtesy of reader bestplaceonmeth:

Based on $58,000 median household income in Vancouver using ING’s “how much can I borrow?” for 35 years (yes, 35 years – it’s what all the cool kids are doing nowadays).  Also assuming no other debts (ha ha) and a conservative $250 a month for property taxes or condo fees or both.

Prior to April 19, qualifying at 1.95% variable rate:

YOU QUALIFY FOR A MORTGAGE OF $415,270 WITH 5% DOWN!

After April 19, now having to qualify at 3.89% fixed rate:

YOU QUALIFY FOR A MORTGAGE OF $313,880 WITH 5% DOWN!

Holy foreclosure, Batman! That’s a 25% haircut off current prices!

Now let’s fast forward to the end of 2010, 4 successive 1/2 point interest rate hikes and you now need to qualify at a rate of 5.89%.

YOU QUALIFY FOR A MORTGAGE OF $244,287 WITH 5% DOWN!

That’s 41% less than 10 months ago, and we’re just getting started.

See, I told you math was fun.

Now, who wants to go out and get into a bidding war?

UPDATE: It’s been pointed out that CMHC currently requires the 3 year rate to be used, so the difference is not as extreme as the above example. DoDo1975 clarifies with this math:

A quick calculation shows that a family with absolutely zero debt making $90k a year could borrow $533,721.32 over 35 years today. All else being equal, after April that number will be $456,311.49 or approximately 14.5% less. This 14.5% is constant across all income levels.

If interest rates on the 5 year prevailing rate also go up 1.5% in the future, this translates into a 28% decrease in the amount someone can borrow compared to today.

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patriotz
10 years ago

@Drachen:

The realtor doesn’t care who pays the commission, he’s not there for the buyer OR the seller

He may not care who pays him, but he certainly cares how much he gets paid, and that's a % of the sale price.

Which is an incentive to work in the interests of the seller. Always. An incentive is not a guarantee, of course, but there's a reason why agents who are hired to make a sale are paid on commission, whether is to sell RE, cars, or an actors' services.

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[…] March 2010 · Leave a Comment Patrick at vancouvercondo.info 3 Mar 2010 11:46 am – “Even the most lethargic investors realize this market has been played out. I bought […]

Banklender
Banklender
10 years ago

I am a lender worked in a couple of big banks. Currently,there is a big difference whether the homebuyer applies for verialbe rate or a fixed rate mortgage. Anyone applies for veriable rate mortgage now will be qualified based on three year posted rate. When the homebuyer applies for a fixed rate mortgage, if less than three years term, three year posted rate will be used; if for three years or longer term the real discounted rate will be used. The new rule says anyone applies for a high ratio mortgage will be qualified based on 5 year fixed rate. Everyone assume it means 5 year posted rate. The tricky things is some credit unions aready started to qualify all clients based on 5 year posted rate. My current bank also said starting on April 19, we will use 5… Read more »

DoDo1975
DoDo1975
10 years ago

I think an interesting analysis would be to graph the amount a family with static income and no other debt, adjusted for inflation could borrow based on the changing amortization lengths and GSD TDS ratios over the last 10 years. I am planning on using $120k as this is about the income need to qualify for a median SFH TODAY with $50k down! To do this properly, I am hoping someone can provide me with the dates the GDS/TDS ratios changed as well as all dates when new amortization lengths starting being implemented. I also need to know if prior to 2002, the 3 year fixed rate was still being used to determine eligibility. I suspect the correlation between this graph and the benchmark SFH in Vancouver will be high. Going from 8% 3 year rates with 32% GDS and… Read more »

DoDo1975
DoDo1975
10 years ago

According to the finance department here presently the prevailing 3 year rate is used and the new rules will probably see the prevailing 5 year rates. According to Google the definition is as follows: Banks decide the rates of interest that they will pay on deposits, and the rates of interest they will charge their borrowers, on the basis of the prevailing base interest rate, which is in turn decided by the monetary authorities or central bank, the Bank of England in the case of the UK. Commercial rates will be affected by the term of the loan/deposit and the credit rating of the borrower/lender. Therefore it will be the central banks 5 year rate that is used. This has the present 4.15% going to 5.39%. A quick calculation shows that a family with absolutely zero debt making $90k a… Read more »

Drachen
Drachen
10 years ago

@browntown:

I get the feeling that inflatable beaver is the only kind you ever get Browntown…

browntown
browntown
10 years ago

oh yea eh nutslaps! better call in hellocopter ben to study a few canadien icon!

"inflatable beaver"

"t. ho's roll up the rim"

"sid cosby"

"cmhc"

vantownsucks
vantownsucks
10 years ago

Vancouver is the shitiest city on the planet and that my friends is why "Vancouver real estate will go down".

Drachen
Drachen
10 years ago

The realtor doesn't care who pays the commission, he's not there for the buyer OR the seller, he's there to make a quick buck. If convincing the buyer to waive terms will make a sale go more smoothly realtors will jump to it eagerly.

They make Blackwater employees look cute and cuddly.

patriotz
10 years ago

@duru2000:

Being in the elevator at my new rental place with a guy and his realtor. Their conversation was around how to put an offer on a property and she stressed that there should be no subject on the offer and she will take care of the bidding…

The realtor is being paid a commission by the seller. So whose realtor is it really?

You wouldn't talk about a guy and "his" car salesman would you?

Anonymous
Anonymous
10 years ago

realpaul, you really do have a way with words. I swear you have a s… fetish but i do enjoy reading your informative comments.

I agree with your points. Thank you for the informative link.

Something huge is coming to fellow taxpayers and it aint pretty even though the olympic has been packaged up nicely with red mittens and smiling faces.

realpaul
realpaul
10 years ago

The largest and most desirable freemarket on the planet expects further decelleration in home prices. http://www.bloomberg.com/apps/news?pid=email_en&a… David Ingram reminded me the other day of the huge pick up in ARM foreclosures that are swelling the 'bad debt books' and looks to take a whole lot more banks down with the ship. Remeber this stat dwarfes the sub prime by a factor of ten. He says to wait on Coral Gables, it will get cheaper yet. Waterfront with a dock under 300,000. And little Vanasswipe is going to go go go forever? Tell me another one Dave. And heres flaherty trying to get the budget out of the way before a new session of Parliament screws him and before the new unemployment numbers come out on Friday? More debt, more spending? This does not look good for the taxpayer. BC has… Read more »

Purp
Purp
10 years ago

@ Drachen — "…Doesn’t matter…" Of course it matters in this context since the conclusion of the post is a 41% reduction in buying power by the end of this year. If the mortgage rate assumptions are faulty, then so is the result.

asp
asp
10 years ago

Carney dropped rates very quickly to artificially low levels. In these types of emergency situations, he will raise them back to normal very quickly as well.

From what I read in the world of economics, going from 0.25% to 2.25% by the end of this year is very possible.

But the 5 year mortgage rate is not chosen by the BoC. It is chosen by the bond market, not the government.

Absinthe
Absinthe
10 years ago

@Anonymous: On qualifying people with variable vs. fixed, etc. – this is just one anecdote, but I know that my MIL, who banks with a major bank, was looking at her properties last year and thinking of making a move, and her bank qualified her by suggesting that some of the regular monthly debts she had "didn't matter". She found it all a bit suspicious: didn't end up doing the move she'd considered making, because of her own prudence, but she definitely felt the process was a lot more lax than it had been with her first mortgage experiences (which happened pre-80s surge, I believe).

I have one acquaintance who qualified variable a bit back and was laughing/baffled at the time that there was no way in hell he could qualify fixed term. Didn't ask what his great plan was.

Drachen
Drachen
10 years ago

@John:

Doesn't matter. Prices have risen to nearly unsustainable levels even at the current interest rates, the market has a matter of weeks or months, in fact the threat of increasing the lending standards will probably keep the market afloat LONGER because it will sucker a few more buyers in, 'before the government interferes'.

New regs and interest rate changes will increase the pace of the fall but I for one would be very surprised to see prices still on an upwards trajectory when either of those measures is finally implemented.

Disbelief
Disbelief
10 years ago

40

That is just the stupid level of blind faith that has manifested this current crazy boom. Complete stupidity driven be fear and a lack of common sense. Unbelieveable. I just wish the CMHC wasn't on the hook for all this bad management of funds.

I heard on 1130 that the bankruptcy rate is down by 5% based on the economy getting better, I see on MSN that the bankruptcy rate has climbed over 25%. Whoever does these calculations must be related to superlauder or superduperbull.

Nobody knows whats going on, the dope must be very strong these days.

John
John
10 years ago

I also think a 2% interest rate jump by the end of the year is a bit steep and very dangerous to the overall economy. 2% by the end of 2011 – I can see that happening.

Purp
Purp
10 years ago

@ Patriotz: "…interest rate policy will be driven by tomorrow’s events, not today’s intentions. Both in the US and in Canada…" — Agreed. But what do you think of the assumption in this post that rates will jump 2% in the final 6 months of 2010? I would say the chance of that is close to zero.

duru2000
duru2000
10 years ago

Being in the elevator at my new rental place with a guy and his realtor. Their conversation was around how to put an offer on a property and she stressed that there should be no subject on the offer and she will take care of the bidding… both of them asians, the buyer looked like a poor guy, well spoken but with 9to5 job. I couldn't stand her for such a bad advice she gave him, how can you buy a shoe box without even inspecting it? 2012 doesn't come too fast when the sellers are going to pay for my chosen inspector, just to put an offer…

funwithmath
funwithmath
10 years ago

Great illustration of how the rule change will affect borrowers and therefore sellers. Thanks for sharing the math.

best_place_on_meth
best_place_on_meth
10 years ago

@davers:

The 5% in the examples was the actual 5% based on that mortgage.

The mortgage amount was 95% of the total price of the property.

patriotz
10 years ago

@White Payer: Didn’t Bernanke say interest rates are going to stay low for a long time? You mean this Bernanke? Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve… Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31. Bernanke's testimony suggests that he does… Read more »

jesse
10 years ago

@best_place_on_meth: If the yield curve remains at 2% spread from 3yr-5yr that will have a significant impact. It wasn't too long ago when there was only a few bps difference from 3-5! When you factor in that the yield curve from 3-5 is likely to flatten anyways when the BoC eventually raises rates, the impact is going to be felt regardless of the CMHC policy change.

If you re-run your numbers assuming ING posted rates are used, it's around a 15% principal reduction from current levels. TD posted is a 1% spread from 3-5 which would be 10%.

My guess is they'll take whatever policy they're doing for the existing criteria and transfer it over. I assume the discounted curve is around the same slope as the posted curve.