First, the people whose email I quoted yesterday – you know, the ones who could pay cash for a $2 million fixer-upper in Vancouver but have wimped out – would like to respond. They claimed to have made a 45% gain on real estate in a couple of years, which some bloggers thought was a dog that didn’t hunt.
“The email was real,” sez they. “Property bought for $885k and sold for $1.3m. It is a unique property. You can covert the existing structure into three units and build three additional units on the property. Therefore, it is a development play and not a SFH (although it could be). Generally, children do not ask for advice. We sought advice in an attempt to make a reasoned and informed decision!”
While we’re at it, they also say this:
“The benchmark price for a detached home in Richmond BC went from $884k in Oct 2010 to $1,037k in January 2011. Something is driving that market … and it is probably not horny RE virgins. Would a bank really lend someone a million $ with only 5% down? At some point don’t you have to ask who the hell is buying all of the million $ plus homes? You know how much the average family makes in Vancouver. You know the average cost of homes in Vancouver. The former can’t support the later. It makes no sense to me. Who the heck has the facts? It makes even less sense to me that the majority of the sales are very high leverage transactions. Forget the banks for a moment, who on earth would take on a million dollar mortgage and sleep well at night? I would suggest you would need to be fairly well off to do that or f*&^%ing stupid. Have some fun – go to MLS and do a search in the entire GTA for detached homes over $2m – the number is 286. In Greater Vancouver, that figure is 433 – over a much smaller land area.
THIS WILL NOT END WELL ….”
You bet. That’s exactly what I have tattooed on my stone-hard but surprisingly pliant and sensual butt. It’s a poignant reminder.
Now, let’s clear up something else. Interest rates. Tuesday morning the Bank of Canada does nothing. April 12th will likely be another story. So will May 31st and July 19th. In fact, by August it’s possible we’ll have had three hikes, with the prime at least 3.75% – or a fat 25% higher than now.
Some people doubt this, saying the central bank can’t risk the dollar rising or cutting the housing market off at the knees. But neither matter. The loonie’s damage to exporters, manufacturers and tourism has been done. Oil has seen to that. Meanwhile Mark Carney, the guy with his finger on the rate trigger, is as aware as anyone real estate must stop being a casino. When people are paying $1,037,000 for a vacant lot beneath the flight path at YVR, and the average SFH in Toronto is $755,000, we’re all nicely screwed.
But inflation will take the official blame for rate roulette. Especially because of this week’s GDP numbers. With the economy growing at an annual rate of 3.3% (thanks mostly to crude), there’s no doubt Carney will be laying an egg for Easter. This means people coming up to a mortgage renewal might want to lock in. And it certainly means anyone in the middle of a house deal should take some time off. As I’ve said here for months now, things will look a lot a helluva lot different in July.
As I’ve also said, this will be the start of a long trip back to normalized interest rates. Before the world ended in the winter of 08-09 and we got emergency money, the average five-year mortgage over the previous twenty years was 8.2%. My first mortgage in the Seventies when I was a child was 12%. They even got to 20% a decade later, when five-year mortgages were temporarily suspended and everyone had to borrow short.
In other words, 3% money is an aberration. It’s about to end. And those who bought homes only because they could afford them with cheapo loans better have a grow op in the basement. Sadly, not enough of us are good with plants – an excellent reason why housing will be a crappy place to have the bulk of your net worth.
But don’t believe me just because I’m hot. Here’s Derek Dunfield, a professor from MIT who also thinks rising rates will take their toll. He said this days ago:
“The historically high levels of household debt present two possible problems for the Canadian economy. One scenario is that interest rates rise, house prices drop, and more people begin defaulting on their credit card debt and mortgage obligations.”
“An equally worrying – and perhaps more likely scenario,” says Dunfield, “is that interest rates go up a little, and more of people’s disposable income goes to repaying their debt, leading to a significant reduction in consumer spending. Since personal spending on consumer goods and services accounts for 58 per cent of the Canadian gross domestic product, this decrease would provoke a ‘made in Canada’ recession.”
How likely is this? Well, household debt now equals $1.5 trillion, which is three times the national debt. Families owe (on average) $1.50 for each dollar earned. The average downpayment on a house has shrunk to a pathetic 7%. Nine out of ten new mortgages taken last year were for 35 years, because people couldn’t afford any other. And housing prices keep rising while savings vanish.
I hear 40% of all US realtors have vanished, kinda like barn owls or spotted turtles. American families have lost $5 trillion in wealth, since they once thought real estate would always go up.
Those around you may claim they never saw this coming. You have no excuse.