Preparing for falling prices

Canadian Mortgage Trends has an article about getting your mortgage approved before prices fall.

When home prices do fall, it makes it tougher for certain people to qualify for a mortgage—especially for refinances. When prices start dropping, appraisals come in lower, insurer valuation systems become more conservative, and lenders tighten up in general.

Vince Gaetano, a broker with Monster Mortgage, tells the Financial Post that people are already trying to get approved “before there is a correction in the real estate market.”

Of course prices may fall in the rest of Canada, but we all know they won’t fall here in Vancouver right guys?

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jay
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jay

@Waiting:

Looks like I used Buy-Or-Rent-Example-Values.xls instead of Buy-Or-Rent-Zero-Values.xls

Using the default rent and housing increases in that spreadsheet gives the result I posted.

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Waiting
Member
Waiting

@jay: I appreciate giving this a go, but I fail to see how you got these figures. I posted EXACTLY what you did without any changes to rent increases/housing increases/decreases to see what happened… The result

http://vancouvercondo.info/forum/topic/jays-figur

jay
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jay
@Bored: @jay: "haha I don’t believe it… Can you post the excel sheet somewhere? I want to see what you used for your figures to come up with this 12 year thing… ie. interest rates, not putting in maintenance fees and setting rental increases high per year… so many variables to fudge for your own benefit. The idea is to make it as close to your own personal situation and not hypothetical…. ie. Most people move every 5-10 years (you can put that in there), maintenance costs (I bet you put 0)." I left maintenance fees at the default 1% and I wasn't fudging anything. Let me know if I messed something up unintentionally, but here are the numbers: Initial Weekly Rent of $518 House Price of $618,750 $200,000 Current Cash In Bank 20% Deposit 2% Cost of Buying 3%… Read more »
jay
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jay

@patriotz:

@jay:

…buying into real estate and staying in for your lifetime (which, speculators aside, is what a most of people do) isn’t such a bad investment, even at peak prices …

@patriotz:

"All I have to say to this is…

USA! USA! USA!"

Not really applicable when you look at my statment in context:

" … with the caveat that you can actually afford it, and still afford to pay into your RRSP, TFSA, etc."

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patriotz
Member

@jay:

…buying into real estate and staying in for your lifetime (which, speculators aside, is what a most of people do) isn’t such a bad investment, even at peak prices …

All I have to say to this is…

USA! USA! USA!

Bored
Guest
Bored

@jay: I just used all your figures and even if you use 5% interest rates for 25 years (never happen, historical is 7), Assume housing does go up 2% a year… Still comes out better to rent (even at 12, 14, 25 years) by a substantial amount. Come on stop being a pumper and tell the truth. I used a post tax salary of 62k. Maintenance costs of 1% (you'd be lucky to get that in an avg van home).

Bored
Guest
Bored

@jay: haha I don't believe it… Can you post the excel sheet somewhere? I want to see what you used for your figures to come up with this 12 year thing… ie. interest rates, not putting in maintenance fees and setting rental increases high per year… so many variables to fudge for your own benefit. The idea is to make it as close to your own personal situation and not hypothetical…. ie. Most people move every 5-10 years (you can put that in there), maintenance costs (I bet you put 0).

jay
Guest
jay
@Bored: Thanks Bored. Great calculator. I was using stagnate's numbers. Price of 618,750 Rent of 2250/month (518/week) When I use your calculator with a 20% deposit, 200,000 in the bank, and 5% post tax return on investments it works out better to buy after only 12 years. If I assume prices drop 20% this year and stagnate for 4 more years, it's still better to buy after 14 years. And if I assume prices drop 20% this year, 10% in 2011, 10% in 2012, stagnate for 2 more years and then rent and house prices go up by 3% a year, it still works out better to buy after 25 years. Hold for another 25 years (moving twice over that time) and you're about a million ahead by buying. A great investment? Maybe not. But, it just shows that renting… Read more »
jay
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jay

@davers:

Thanks davers, but I'm not ignoring the money saved every month. My original post was simply explaining how stagnate arrived at his calculations.

In post 162 I was just refuting patriotz statement that "The owner NEVER comes out ahead"

There are many scenarios where the owner will come out ahead, but I understand, as you said, it will depend on long term appreciation of the house, return on investments, etc.

davers
Guest
davers
@jay: You are ignoring the money saved by renting every month. The first month of owning (and the first few years) a very small percentage of payments actually pay down the debt. I worked it out on the place I rent and the first month of owning would cost 1700 in 'wasted' money (interest, strata and property tax). The rent is only 1200. Thus I save 500 bucks by renting. Over time this will decrease, but if I took all that saved money and put in other investments it would be earning me money. In order to be truly ahead you have to have more in equity than you would have in savings if you rented. Also you have to be adding more to the principle of the mortgage every month than your invested money would be earning. Of course,… Read more »
Bored
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Bored

@jay: We have calculated the appreciation/principal invested of your purchase vs renting… Please visit:

http://excelexperts.com/Buy-Or-Rent-Calculator

Enter in your own place..

It's basically a real estate planner for yourself, you can enter in all sorts of variables.. just try it

"A-Sharp" Accountant
Member
"A-Sharp" Accountant

@jay:

"Do you honestly think that the house will be worth nothing 25 years down the road when the mortgage is paid off?"

Of course not.

Buy a Property now for 500k…in 25 years, you can expect it to be worth 1,046,889 (assuming rent increases 3% annually and assuming that current price/rent ratios persist).

And yes, this is a BAD investment.

Just a question…What discount rate are you using in your calculations?

realpaul
Guest
realpaul

#153, the coming double dip may lead to an even steeper curve when the gloves come off and civil service wages are rationalized as they are being elsewhere. You won't be 'willing' to work for less ( which I think is a nonsensicle chicken and egg argument, wgaes started low and have never come up to international norms) you'll be forced to work for less while costs continue to spiral up…classic stagflation…coming to a mortgage payment near you.

http://in.reuters.com/article/idINIndia-497673201

jay
Guest
jay

@patriotz:

"The owner NEVER comes out ahead. You are ignoring the accumulated deficit of renting versus owning which has to be compounded year over year. Who do you think has been paying that deficit until the costs meet, Santa Claus?"

Sure, but you're ignoring the accumulated principal that comes from owning versus renting.

Do you honestly think that the house will be worth nothing 25 years down the road when the mortgage is paid off?

As I said earlier, there are lots of other variables to consider, but there are plenty of scenarios where the owner comes out ahead – most simply involve more time.

"A-Sharp"
Guest
"A-Sharp"

@Debunking Economics:

I'm not adapting M&M to house pricing. I'm applying it to capital structure and the investment decision.

I am merely stating the obvious, which is lost on 90% of real estate investors. When financing an investment. Equity has a cost.

All debate aside, I'm sure we have both rolled our eyes many times as RE investors have said: "yeah, if I put down XX.XX% this is a good investment".

Debunking Economics
Guest
Debunking Economics

@jesse: I suppose the "Rich Dad" classes would go well with my Ph.D. in Economics. Total straw man Jesse. Don't hide behind out-dated theorems.

"A-Sharp"
Guest
"A-Sharp"

@jesse: Jesse says:

"How you finance an investment should be independent of whether the investment is worthwhile. Except in the wonderful magical world of housing."

Bingo. The investment and financing decisions are separate.

The "Joe howmuchamonth" types are interested in "cash flow" which is independent of yield. Cash flow is a simple way of looking at it (inflow vs pmt), but it is a perverse mix of the two decisions, that really clouds up the true economic substance of the investment decision. In the short term, cash flow/liquidity is the most important thing, but in the long term it always comes down to yield.

jesse
Member

@Debunking Economics: Does borrowing money increase or decrease your return? Go take some "Rich Dad" classes and let us know.

patriotz
Member

@Anonymous:

Correct. What the paper gives is an explanation for higher rent/income and higher price/income, which are historically a fact in Vancouver compared to other Canadian cities.

But you still have the same price/rent on a sustainable basis.

patriotz
Member

@stagnate:

fairly typical ratio for yaletown, basically 300 to 1. financing the total amount on a 25 yr. amortization it would come out almost equally first half of the amortization the renter ahead, second half owner

The owner NEVER comes out ahead. You are ignoring the accumulated deficit of renting versus owning which has to be compounded year over year. Who do you think has been paying that deficit until the costs meet, Santa Claus?

Anonymous
Guest
Anonymous

@Debunking Economics: You fail. Investor doesn't care professional takes pay cut. They want ROI in Vancouver just as much as ROI in Ottawa.