Why renters rule the housing market

Until renters can take out a mortgage to pay their rent they’re limited by income to how much they can pay. This is different than buying because mortgage rates and easy credit can change ‘affordability’ enabling people to take out larger loans and ‘afford’ higher prices.

Since rent tends to be more stable and directly related to the local income it puts a theoretical ‘floor’ on how far house prices can fall. As soon as it’s cheaper to buy than rent you should have investors who can do math buying up property.

Of course there are other complicating factors: psychology, ease of credit and liquidity.

Bloomberg has an interesting article looking at the situation in the USA after their housing bubble popped.

Many people who are technically homeowners are really renters. They put little if anything down. In many cases, the equity is negative when, for example, home-improvement loans piggybacked on first mortgages and brought total indebtedness to more than 100 percent of the house value. Many also planned to refinance their mortgages with cash-outs due to appreciation before their mortgage rates reset upward or, in some cases, even before they skipped enough monthly payments to be foreclosed.

It’s easy to be in a negative equity situation if you buy at the peak with very low down payment.

Of course it’s different in Canada right? The CMHC even introduced rules in 2008 eliminating zero down payment mortgages and now requires everyone to put down a huge 5% down payment..

So now we call it a ‘cash back mortgage’ and there are so so so many ways you can get a zero down mortgage in Canada today and be on your way to negative equity!

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/dev/null
Guest
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Isn't the TD 5% cash back mortgage a zero-down in reality? I could borrow $25,000 from someone, take out a CHMC-insured $500,000 mortgage and use the cashback to pay back the short loan. I only needed a downpayment for a few days. Is that right or am I missing something?

M-
Member

You've got it right– anybody can become a wealthy homeowner, doesn't matter if you can't save a dime!

Devore
Member
Devore

Was is CIBC, I think, that had the 7% money-back mortgage? How about 102% financing, being underwater right from day 1. Well, I'm sure they were all credit-worthy, because our banks are just so much better than other countries.

You have to ask
Guest
You have to ask

All the big 5 offering 7% cashback. I believe 7 is the maximum.

A bank lender
Guest
A bank lender
You donnot need to borrow $25000 from anyone because the banks give you 7% cashback on the complettion date. Suppose you buy a property $1 million, you can get a CMHC insuranced mortgage for $950000. You need to pay CMHC insurance 3.1% = $29450 based on 30 year amortization. You are allowed to add this premium to your morgage and it becomes $979450. You can get 7% cashback based on this amount which is $68561.50. You pay $50000 for the downpayment and need $18000 for BC property transfer tax. So you have $561.50 extra money for your legal fee. If you can bargain the bank to pay the legal fee for you (if you come to me I will pay it for you), you get the $561.50 free money to buy a million dollar home. If your income is high… Read more »
Newcomer
Guest
Newcomer

How much income do you need to qualify for the $561.50, with the million dollar home thrown in as a signing bonus?

Devore
Member
Devore

According to the official CMHC calculator, you'd need about $15,000 monthly income to qualify for a $950,000 mortgage, at 3.1% for 30 years. Your monthly payment would be $4200.

Newcomer
Guest
Newcomer

As a household income, that's not an awful lot, but a lot more than most households in Vancouver earn. And, of course, a million dollars doesn't get you much house.

/dev/null
Guest
/dev/null

$180k is "not an awful lot"? You're making me feel bad about my career choice. Do you mean bankers in London or???

patriotz
Guest
patriotz
"Many people who are technically homeowners are really renters. " Well that's true but not in the sense the article implies. If you have a mortgage you are renting money from the lender. But everyone who owns a house, whether it's paid for or underwater, is long RE to the same extent. You are the person who is responsible for all property expenses. You get the capital gains or losses. You are not renting the property from the lender. The person with the mortgage is also short fixed income in addition to being long RE. Someone with a non-recourse mortgage could be said to be like a renter in some ways, since the lender does not have a claim on his assets beyond the RE. The real point, of course, is that if you are paying more to rent the… Read more »
jesse
Member

There are some provisions for recourse, namely a ruined credit rating, so it's not just handing in the keys and walking away, there are still consequences.

Don Lapre
Guest
Don Lapre

First!!!!!!!!!!!

Bob Loblaw
Guest
Bob Loblaw

If you don't rent money and re-invest in a ZIRP environment you will be left behind. Sorry.

Scott
Guest
Scott

And sometimes when you rent money to buy real estate in a zirp environment you get left behind as well, just ask the Japanese.

SunBlaster
Guest
SunBlaster

RE is very simple, be smart about investing and have money at the right time. I can't believe so many people get this wrong.

The only way this can go wrong if you're dumb about investing, have no money and it's a wrong time.

Anon
Guest
Anon

I find this comment format much harder to follow than the previous one. Maybe it just takes some getting used to?

Not much of a name
Guest
Not much of a name

Agree. Even using the "last activity" there is a lot of scrolling to get to the new comments.

Dave#1
Guest
Dave#1

Anyone know how the $10K money back works with presales?? A guy I work with just bought 3 more, 2 at blue mountain and austin, and 1 in poco. The 2 at blue mtn in coq are with/for his daughters. Would he qualify still (made the deal about a month ago) or is it when closes?? would this make people close early on presales just to get the money??
thanks…..Dave

patriotz
Guest
patriotz

A presale is not actually a sale of RE – because you can't buy something that doesn't exist and has no title – but a commitment to buy RE in the future.

I cannot imagine this rebate applying to anything other than actual closings. And you can't close until the property actually exists and has a title.

Will it apply to presales made in the past and closing in the near future? Beats me.

jesse
Member

You have to close or complete before April 1 2013. If the presale completes after that you get no rebate. Be warned when reading the fine print on presales that are *supposed* to complete before then. Often they get delayed.

Jack
Guest
Jack

"Since rent tends to be more stable and directly related to the local income it puts a theoretical ‘floor’ on how far house prices can fall."

Not really. When prices are falling people will still sit on the sidelines even if the monthly payment is cheaper.

Dan
Guest
Dan

Sure, that's why prices undershoot as well as overshoot. I think that's why it says 'theoretical' because in reality psychology plays a much larger factor.

patriotz
Guest
patriotz

Even with undershoot there is still a floor, the question is how big a discount to rental value it will be. Even if most of the potential buyers are scared off there are others who will buy as a cash flow investment.

I should point out that even the theoretical floor is below rental value because an owner needs to be compensated for higher risk.

Note also that in Vancouver owning has not been significantly cheaper than renting since the 1930's (as opposed to somewhat cheaper, which was the norm before the 1970's and has occurred at market bottoms since). And I don't expect it to be significantly cheaper at the next bottom.

Jack
Guest
Jack
"Note also that in Vancouver owning has not been significantly cheaper than renting since the 1930's (as opposed to somewhat cheaper, which was the norm before the 1970's and has occurred at market bottoms since). And I don't expect it to be significantly cheaper at the next bottom." Yes but we have never seen a bubble like this. The one in the 80s was only about a year where this one is looking like it could be close to 10 years. That is a lot more buyers caught up in this thing. There could be a generation that never buys again. It has also been a while since we have not had the tail wind of declining rates. Just wait till we get the head wind of increasing rates. Add in other world financial problems and the 30s could look… Read more »
paulb
Member

New Listings 239
Price Changes 96
Sold Listings 135

TI:14664
http://www.laurenandpaul.ca

McLovin
Guest
McLovin

I don't like this new format as much. I liked voting people into oblivion.

Makaya
Member
Makaya

Agree, it was nice to vote down the trolls and much easier to follow conversations. And I also have another problem. The new VCI can no longer be accessed from my work computer. There is a filter and this site doesn't make it through.

VCI Admin
Admin

Hmm.. That's odd. Can you no longer access the site at all from work, or is it just the comments you can't access?

McLovin
Guest
McLovin

I can no longer access it at work either. It comes up as a malicious website

VCI Admin
Admin

That's probably a result of the hacking problem we had. Hopefully now that the site is rebuilt and upgraded it will be removed from those filters. If any of you know what filters are being used at work let us know and we'll attempt to contact the filter co to have the site rechecked and the blacklist removed.

Best place on meth
Member
Best place on meth

I'm inclined to agree. I liked it at first but after trying it out for a day I'm having a hard time following the newest posts.

jesse
Member

February 2012 data
Average Sales 120
Total Sales 1795
Average Listings 273
Total Listings 4088
Average sell/list 44%
Days in month 21
Days elapsed 15
% days elapsed 71%
Expected sales 2,513
Expected listings 5,723
Max daily sales 155
Min daily sales 38* (likely software bug delayed entries)
Max daily listings 325
Min daily listings 234

February 2011 data at same point in month
Average Sales 152
Total Sales 2276
Average Listings 285
Total Listings 4276
Average sell/list 53%
Days in month 20
Days elapsed 15
% days elapsed 75%
Expected sales 3,035
Expected listings 5,701
Max daily sales 219
Min daily sales 81
Max daily listings 350
Min daily listings 227

February 2011 month end data
Average Sales 157
Total Sales 3,140
Average Listings 282
Total Listings 5,648
Average sell/list 56%
Days in month 20
Days elapsed 20
% days elapsed 100%
Expected sales 3,140
Expected listings 5,648
Max daily sales 219
Min daily sales 81
Max daily listings 350
Min daily listings 227

Previous sales volume
1999 1634
2000 1634
2001 1781
2002 3008
2003 2760
2004 3066
2005 3068
2006 2941
2007 2859
2008 2676
2009 1480
2010 2350
2011 3097

Sales numbers fluctuate from year to year; it’s hard to make highly confident predictions looking at past trends. The data are too “noisy”. But FWIW, 2008 started off “normal”. Then the sadness, the terrific sadness, came starting April.

jesse
Member

cr – lf bifurcation
sorry

M-
Member

Ummm, because I'm being facetious.

RippedtoShit
Guest
RippedtoShit

frack hopefully we see an explosion of listings in the coming days

mortgage rule changes expected shortly

Best place on meth
Member
Best place on meth
Makaya
Member
Makaya

Thanks pope. Like this version much better!

thetamax
Guest
thetamax

I love the story in the Vancouver Sun. 15K down payment on 295K place…awesome…

… he purchased for $295,000, in March….My down payment is $15,000, so it will add up to about 10 per cent of the cost [of the home], which almost doubles my down payment….

http://www.vancouversun.com/business/First+time+buyer+bonus+will+make+bigger+difference+suburbs/6194441/story.html

Makaya
Member
Makaya

Who said it was difficult to obtain a mortgage in Canada?

From the Sun:

“An American fugitive convicted in absentia of sexually assaulting boys in Arizona has been arrested in Canada more than 10 years after he fled the United States.

And the Canada Border Services Agency says that Steven William Dyer, 44, may have been living in Vancouver most of the time he was on the run, buying two Lower Mainland houses after assuming the identity of a Canadian citizen.

jumpin in
Guest
jumpin in

This one just went down $100,000.
http://www.realtor.ca/propertyDetails.aspx?propertyId=11591555&PidKey=283963299

If I remember well, it is now close to the price a year ago.

Bad house, so-so neighborhood. I would buy it for $300 000 max…

Bailing in BC
Guest
Bailing in BC

I over heard someone today talking about some media report on Squamish RE. I think it was by Sarah Daniels (is she with Global?) Did anyone see, hear, read it? I’ve been trying to find it but I can’t seem to find a link to it. Thanks

Bailing in BC
Guest
Bailing in BC

Testing. Testing. I seem to be having trouble posting.

Devore
Member
Devore

Well, this is a first.

I don’t follow.. what’s so “first” about it?

Oh btw, only thing missing now is the ‘reply’ like that automatically inserted a link to the post.

Anonymous
Guest
Anonymous

@ thetamax,

Followed the link to the Sun article you posted and found this story in the side bar.

“Savvy buyers from Asia find B.C. attractive” http://www.vancouversun.com/business/Savvy+buyers+from+Asia+find+attractive/6036598/story.html
It’s another weak HAM article. But not surprising given the footnote on the piece– Submitted by the BC Real Estate Convention. WTF?

VMD
Member
VMD
Member
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