Dangers of the ‘wealth effect’

Here’s some interesting commentary on property tax assessments and the downside of the ‘wealth effect’ by Chris Olsen of CTV’s Olsen on your side. The ‘wealth effect’ is what happens when people feel richer due to higher assessments and are more willing to go into debt based on those paper profits without considering the potential downside.

Most regular Vancouver real estate blog lurkers will know all about our very poor affordability index compared to other Canadian cities and the related downward pressure put on prices, but its a great basic primer for those that haven’t considered such things. Excerpt from the link above:

The less affordable houses are — the harder they are to sell. That puts more pressure on housing prices to fall. RBC predicts the Vancouver housing market is near a turning point — where prices will begin to fall. The signs are all there. The number of sales is down. The number of houses on the market is up. So that’s the reverse of what we’ve been used to. Now there are more sellers than buyers. So RBC is saying that house prices are going to drop. By how much is the big unknown. Nobody knows. Hypothetically, let’s say they fell by a third, that would only bring prices down to where they were two or three years ago. We’d still have the most unaffordable houses in the country. Which brings us back to the original point. Given all these indications that house prices could fall – it’s dangerous to borrow against the value of your house when that value is expected to drop by an unknown amount. Remember — you’ll still have to pay back whatever you borrowed.

Chilean housing debt


You think vancouver is in a tricky spot for real estate? At least we don’t have housing debt protestors setting themselves on fire. Thats whats going on this reuters news photo.

A man doused himself in fuel and set himself alight outside Chile’s presidential palace on Thursday to protest housing debt. He survived and was arrested.

Television pictures showed the man in flames before he jumped into an ornamental pond in front of the La Moneda palace in the heart of the capital of Santiago. The water extinguished the fire, allowing police to fish the protester out of the pond and arrest him. He was hospitalized with burns over 11 percent of his body, local media reported.

Indebted house owners have staged a series of protests in Chile against what they see as extortionate rates they have to pay to service their mortgage debts.

Thanks Jaime for the link to the horrifying picture.

More million dollar houses.


Todays Vancouver Sun leads with the cheerful headline House millionaires double in the province. Are these people that own or owe a million dollars?

Most new paper millionaires own single-family houses. There are 38,027 such homes worth more than $1 million according to 2007 property assessments — 18,459 more than a year ago.

And the number of condominiums assessed at more than $1 million increased by almost three quarters to 3,260 properties.

As BC real estate association chief economist Cameron Muir (née CMHC) points out this is based on the july 05- july 06 assessments which saw some of the biggest price increases. Prices for the last six months are doing something strange – they’ve actually been dropping in many categories since a price peak in september 2006.

Muir added that assessment increases are only “paper profits.”

“It’s the equity in your home. Today it may be high, [but] the market may change and it may not be so high in a few years,” he said.

Is that the most pessimistic Muir quote yet?

Extrapolations.

Property assessments are out now and we’ve seen an astonishing 25% increase in prices from july to july. If we extrapolate those gains into the future we’ll see an average home price that is 8,000 times the average Vancouver income before too long!

On the other hand those assessments are six months old and if we were to extrapolate the price change month over month based on the last months price reductions we’d see the average house sell for twelve dollars in just a few years.

Extrapolating is tricky business!

Hot Tip: Buy Now!

The Province has published a list of top tips from financial professionals, most of these are the handy standards like diversify, keep an eye on interest rates, etc. There is one stand-out hot real estate tip from Carey Ellingson, a Scotiabank branch manager in Sherwood Park, Alta.: BUY NOW!

Ellingson says the new mortgage options of zero down payment and amortization periods up to 35 years can help first-timers to buy a home before prices rise out of reach. He expects real-estate prices in some provinces to rise further. If you are a borderline buyer today, “the longer you wait, the less opportunity you will have,” Ellingson says. “Take the leap of faith” and buy while you can.

In some provinces price may rise further! You can take that to the bank, so buy now before you and everyone else is priced out forever. Certainly don’t waste your time trying to save up a down payment!

I’m guessing once we reach the ‘price out’ stage all home owners will be billionaires and there will be no more buying and selling of houses? First we sell to locals, then maybe Americans (as long as their economy doesn’t take a nose-dive) and then to countries further afield, perhaps even buyers from other planets! The Japanese might have an advantage here with bold 60 year mortgage terms.

Now some of you ‘sceptics’ will think that a bank representative would encourage ‘zero down & 35 year terms’ simply because it means several hundred thousand dollars more in profit from each customer. This is simply not true!

A long amortization period can enable low monthly payments initially. But as your income rises, Ellingson advises you to “pay it off early” and save interest costs.

His tip doesn’t advise on what to do if your income drops or sees an interruption in the next 35 years, but if you’re bold and brave enough to buy in Vancouver right now I’m sure you will be able to see your way through any adversity.