Updates. First, the continuing saga of moldy cowboys.
Days ago I told you about the travails likely facing a slew of people wanting to buy, sell or mortgage properties in the wrong parts of Calgary. Those are the soggy bits, of course, that prime real estate along the shores of the Bow River where the waters leapt their banks three times in the last eleven years.
As I expected, everything is back on the table. That includes almost 1,000 deals where buyers and sellers had a transaction pending when the rains came and the rivers swelled last month. Unknown are the number of homeowners (plus those in poor, drowned High River) who have mortgages coming up for renewal.
The issue’s simple. What are the houses now worth?
This question’s deeper than it seems. The concern on the part of mortgage lenders, plus insurers like CMHC and Genworth, is not just for those places with trashed basements and ruined drywall, but for property values in wide swaths of land where nature is pushing back. That led this week to lenders like Scotiabank sending mortgage brokers a list of postal codes within which every deal is to be reopened and all properties inspected or reappraised. Says the bank: property owners will pay for it.
For example, if you live in Calgary in a house in a hood in a zone with a certain prefix (T2N, T2P, T2R, T2T, T2S, T2G, T3B, T3C, T2V, T2H), you’re affected. The value of your home may be reduced, which means the buyer qualifies for less in the way of financing, which could blow up your deal. Also of concern, as I mentioned, is what this does for mortgage renewals. And in it lies a lesson about real estate and the lenders most people rely upon.
Let’s revisit my example. A home valued at $600,000 has a $480,000 mortgage. The appraised value drops 15% – devalued because of its location in a flood-prone zone or (more likely) due to a general market decline. The maximum loan-to-value for a conventional mortgage is 80%, which means the mortgage company will renew only $408,000 (that’s 80% of the new value of $510,000). But the homeowner owes $480,000, which means he or she has to pay $72,000 in order to retain the mortgage.
This is not a far-fetched scenario. Every time a mortgage comes up for renewal in Canada, it’s open for negotiation. Just because you kept your payments current and gave [email protected] home-made fudge at Christmas is no guarantee the loan will not be reviewed, reduced or denied. It does not take a flood to do this, as the US experience demonstrated. But I guarantee 99% of Canadian homeowners will never give it a second thought, and never prepare.
Why? Because real estate always goes up. Everyone in Calgary knows that.
Which bring us to BC, with trepidation.
Yeah, yeah, I know what all those posters said here two days ago about the tsunami of horny HAM pushing Van-area real estate values eternally higher. Despite the fact 94% of buyers are Canadian residents, with 88% being local, it’s always easier to blame others for something you just did yourself – like getting suckered into the housing vortex in a dysfunctional market.
At least Kate admits it.
I got sucked into the real estate market about a year and a half ago with ideas of someday “moving my way up” and having a ritzy condo somewhere in Coal Harbour in Vancouver, and basically living the dream. I gave up my 1 bedroom apartment in Olympic Village that I was renting, to chase the white rabbit, and ended up buying a 1 bedroom place in New Westminster. Went from living by the water and biking to work, to living in the ‘burbs and driving 45 minutes to work each way. And for what? The idea that has been fed to me since birth that if you own a place you’ve really made it, you’re independent, and it WILL pay off. Real estate is an investment after all….
Fast forward to a few months ago, where I met my wonderful boyfriend Jason (who is a dedicated reader of your blog) and he started giving me facts that I simply can’t ignore. So I got in touch with some real estate agents and the news I received was not pretty. I purchased my place in the fall of 2011 for $206,000. Today? It would list at $190,000 – and that’s still no guarantee it would sell at that price. That’s not even close to enough for me to break even. I’d walk away with probably between $15,000 – $20,000 in debt. It makes me sick to my stomach. But the burning question is – if I wait until this time next year, will my place then list for $170,000? Do I “wait it out” as they say? Or do I cut my losses and get the “F” out?? I’m stumped!!
If Kate lists for $190,000 and is lucky enough to sell for $180,000, she’ll net about $170,000 after commission, break fee and legals. If she bought with 5% down, she’ll need a cheque for at least $25,000 on closing day, and also will have forfeited her $10,000 down payment. That’s a loss of 350% in two years – plus she surely paid more a month as an owner (mortgage plus strata fees and taxes) than it would have cost to rent the same digs. The negative ROI is, thus, staggering.
And the answer to her question? Simple. Get out. The losses accrue monthly. There’s no reason to anticipate a recovery in the coming years, and many to expect worse. As thousands of young Kates realize real estate’s a dangerous asset they were seduced into, the market will shred.
Did I ever mention this won’t end well?