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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July 3rd, 2010 at 8:35 pm
@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.
“One open house had one visitor, and the second two visitors. House ask price is $760k. The agent is going to re-list it as a starter home to try to draw more interest.” « Vancouver Real Estate Anecdote Archive Says:
July 3rd, 2010 at 10:22 am
[...] July 2010 · Leave a Comment 900KCrackHouse at vancouvercondo.info 29 Jun 2010 8:53 am [...]
“He’s a CA who moved here from Winnipeg about 5 years ago, and just loves the city. He’s one of the few people that agree RE here is due for a crash.” « Vancouver Real Estate Anecdote Archive Says:
July 3rd, 2010 at 10:20 am
[...] July 2010 · Leave a Comment Krazy Kanuck at vancouvercondo.info 29 Jun 2010 12:47 pm [...]
July 2nd, 2010 at 8:01 am
@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/for.....ys-figures
July 1st, 2010 at 10:55 am
@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% Cost of selling
1% Annual Maintenance
0% I will add value each time
0 Mortgage Broker Fee
5.00% Post Tax Investment Rate
4.90% Mortgage Interest Rate
left hypothetical rent and housing increases at defaults
move after 12 years
time horizon 12 years
RESULT: $3291 better off buying
I think the numbers I used are valid:
As I said, price and rent were stagnate’s numbers.
2% would have been almost exactly my cost of buying
1% is currently higher than my home’s annual maintenance (in Kelowna, not Van)
5% post tax investment rate would mean getting 6.4% from capital gains, or higher if returns aren’t all capital gains
I have a 3.2% rate hold for 3 years or 4.9% for 10 years.
The spreadsheet also doesn’t allow for varying rates. I would probably take a lower rate now and accelerate payments early on which would further help the buying situation.
And as I noted:
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.
I agree that I don’t know what mortgage rates I would be getting 10 or 20 years down the road, but I believe historical rate of 7% is the posted rate, not a discounted rate, and Bank of Canada now has it’s hand in the mix to keep interest rates lower than historical norms.
In both those scenarios, I was using time horizons that equaled the time between moves. That is valid too – I intend to live in the next house that I buy until my kids leave home, which will be over 20 years. That was my main point: moving is expensive, but if you “buy and hold” by living in a property then it will almost always make financial sense eventually, even when buying at a peak.
If you move every 5-10 years then that wouldn’t be true.
And finally, I’m hardly a “pumper”. I was actually a little surprised at just how much the “time” variable will affect the calculation (highlights the value of paying down principal as quickly as possible, especially early on in the mortgage). I am (was) a home owner that has sold two properties this spring and just signed a one year lease yesterday. I figured I could save some money when I do get back into the market down the road, and am still hoping that I am right
July 1st, 2010 at 10:36 am
@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.”
Sellers Wedded To Imagined Gains – “Can’t get more than 250K”, “How much you’ve paid?”, “150K, 2003″ « Vancouver Real Estate Anecdote Archive Says:
June 30th, 2010 at 11:17 pm
[...] June 2010 · Leave a Comment Raguz at vancouvercondo.info June 29th, 2010 at 2:47 pm [...]
“I work in the insurance industry and I see a lot of suspect transactions.” « Vancouver Real Estate Anecdote Archive Says:
June 30th, 2010 at 11:16 pm
[...] June 2010 · Leave a Comment ‘Kim Jong-il buy 3′ at vancouvercondo.info June 29th, 2010 at 4:46 pm [...]
June 30th, 2010 at 6:23 pm
@jay:
All I have to say to this is…
USA! USA! USA!
June 30th, 2010 at 6:05 pm
@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).
June 30th, 2010 at 5:26 pm
@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).
June 30th, 2010 at 3:37 pm
@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 isn’t always the best answer.
I know that this will throw some people into fits here, but 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 … with the caveat that you can actually afford it, and still afford to pay into your RRSP, TFSA, etc.
The only way you could possibly come out way ahead by renting in the long run is if you were an amazing investor.
The best combination is of course renting and eventually timing the market, but as I’ve heard many times before: you shouldn’t try to time your investments …
… not that it will stop any of us from trying
June 30th, 2010 at 2:38 pm
@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.
June 30th, 2010 at 12:23 pm
@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, this all depends on what you assume your investments will earn and what appreciation you will get on your house.
June 30th, 2010 at 11:13 am
@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
June 30th, 2010 at 11:09 am
@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?
June 30th, 2010 at 11:05 am
#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/.....7320100630
June 30th, 2010 at 10:45 am
@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.
June 30th, 2010 at 9:33 am
@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”.
June 30th, 2010 at 9:22 am
@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.
June 30th, 2010 at 9:21 am
@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.
June 30th, 2010 at 6:41 am
@Debunking Economics: Does borrowing money increase or decrease your return? Go take some “Rich Dad” classes and let us know.
June 30th, 2010 at 2:44 am
@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.
June 30th, 2010 at 2:40 am
@stagnate:
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?
June 30th, 2010 at 2:35 am
@Debunking Economics: You fail. Investor doesn’t care professional takes pay cut. They want ROI in Vancouver just as much as ROI in Ottawa.
June 29th, 2010 at 11:45 pm
@Patrick:
You’re that fella from the 80′s insurance commercial!!!
You know, the one with dad answering the phone, telling mom that “it’s Patrick, he just bought life insurance!!!”
June 29th, 2010 at 11:38 pm
@“A-Sharp” Accountant: There is a paper out of UBC Sauder that says that in certain cities, there is actually a wage discount for skilled professions.. that is people are willing to work for less in order to be able to live in a city like Vancouver.
See: http://strategy.sauder.ubc.ca/.....r_city.pdf
This may also suggest a factor in resolving your question regarding low yield.
June 29th, 2010 at 11:34 pm
149 @Patrick: “To know someone who owns more than one property is very rare.”
That’s because they were all wiped out!
June 29th, 2010 at 11:28 pm
@jesse: This seems like an idiot-savant’s application of something arcane like the Modigliani-Miller theorem to house pricing. (aka as junk science) Do not be fooled by bogus finance and economics theorems.