Category Archives: equity

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!