Too good to last

MJ11

In 1975 I built my first house, and took a mortgage to do so. The two-storey Cape Cod cost me a whopping $66,000 to construct, and the mortgage rate was 11%.

A decade and a couple of houses later, I’d assumed a mortgage at 8%, and felt lucky as hell. That was when home loan rates topped out at 22%, GICs were paying 19.5% and the banks stopped loaning five-year money.  Borrowers were lucky to get a two-year term.

Another decade later, and the five-year mortgage rate was just over 7%. In fact, the average half-decade term over the past 20 years is 8.62%. Today you can get a fiver for as little as 2.55%, and in the 4% range at the major banks.

The point is this: Money is cheaper than a Made-in-China BBQ. Mortgage rates are between one quarter and one-half of the average of the last twenty years. At the moment, this is because central banks around the world, acting under political pressure, have artificially and temporarily depressed rates in order to encourage borrowing. And it’s worked. The sheeple are at the trough.

Cheap money has yielded another consequence: Real estate prices have become more inflated as a result. Just a year ago, the five-year mortgage rate was north of 6%, and the housing market was doing a slow crumble. Today that mortgage is half as much, and we have multiple offers. House prices have not changed much, but the cost of debt has.

Two conclusions are inescapable: Real estate is in trouble when rates return to historic norms, unless prices take a plunge. And, people who are worried about their mortgages today should start lining up organ donors.

Like Reg:

I have one question I’m in a 5yr closed variable with 4yrs left my rate is prime -.75%. I increased my payments by 20%. I owe $300 000 I might get $540 000 in a good market if I sold.
Should I stay in the rate I have or lock in for a 5 yrs fixed. I could get 4.5% right now – HSBC is my bank.

And Doug:

You have been saying to lock into a 5 year fixed rate mortgage and to not worry if we have 1 year left, just do it then.  Our mortgage runs out in 2013, variable open at prime minus .75 and are paying 1.5%.  I have watched the RBC rates for the past 2 months and have not seen a change, but intend to keep watching and speaking to our Banker.  I think we should hang on to this rate as it is good.  For many of us, can you tell us if we should change to a fixed term or not in these scenarios (or other scenarios) and
cover off a lot of us at once, please include additional insights like the current rate on the mortgage, prime minus??, prime plus?? If you feel it is appropriate:
<1 year left on variable – wait as you said previously
1-2 years left? 2-3 years left? 3-4 years left? 4-5 years left?

As Bob Dylan said, in BC, we have fools to the left of us, jokers to the right, stuck in the middle with you.

On the great debate of locking in now or staying VRM, the answer is the same: If you are nervous and sweaty, lock in. If you’re comfortable waiting until next Spring (since more hikes are unlikely, and a bond market burp is), then stay variable and save some money. If you are a newbie buyer up to your pits in debt, definitely lock in.

As for Reg in year one of a five-year closed loan at less than 2%, dude, are you on drugs? Why would you voluntarily double your mortgage rate when there is no imminent threat? Yeah, rates will be considerably higher in two or three years, and you’ll face an inevitable decision on the benefit of early renewal. But not now. Just keep that ultra-low rate pumping along and worry instead about erectile disfunction or world peace.

And Doug, with a 1.5% mortgage, the same comment. With a VRM, prime-minus mortgage you’d have to see a doubling in the prime rate to even come close to the current five-year level of interest. So, what’s the rush? Why hurl yourself  into the cauldron of rising debt charges now when you don’t have to? Chill.

Face it, times like these, with mortgage rates a fraction of what they were, and will be, are a rare opportunity for everyone to be throwing cash against debt, increasing monthly payments, making prepayments, going weekly and eschewing stupid spending in favour of attacking debt. Five years and ten years from now we will look back with misty lids and quivering lips and wonder what we all were thinking.

Especially those who thought it would last.

Realtors with Balls Dept.:
'Only 164 houses left under $500,000.'

99 comments ↓

#1 Kathleen on 07.13.09 at 8:23 pm

“Stuck in the Middle With You” is a song by Joe Egan and Gerry Rafferty and performed by their band Stealers Wheel. I know, totally off topic but I had to…sorry :)

#2 Lost in Kelowna on 07.13.09 at 8:34 pm

In Need of a intervention….

What should a person do if they have their mortgage on a line of credit at prime…Interest only payments.. We are paying our mortgage at 2.25% interest only, but have accelerated our payments to 3 times what the interest only payment are, on weekly payments.If prime doubles or climbs in a year or two. Wouldn’t it better to continue hitting debt and then lock into a fixed mortgage when prime climbs over 2.25%???Should we lock in right now even if our interest rate is 2.25% and a 5 year rate is around 3-4%??

Thanks…

#3 Harold on 07.13.09 at 8:38 pm

It wasn’t Dylan, it was Stealers wheel which wrote those lyrics.

#4 TJ on 07.13.09 at 8:45 pm

Here is a telling few numbers from San Francisco. I know this is America, but this carnage is like ignoring the rumor of the Huns sacking a City in Gaul, while we sit around the fire here in Rome, enjoying yet another flagon of lead seeped wine.

I can’t shake the feeling that we have a long way to go in our Real estate correction.

If you don’t have a job, who wants to buy a house?

Even if you have a job that is only part time, or less….who can even afford to eat, much less buy or maintain a home. It’s crazy.

In the States today, it was also announced that Washington and those generous banks are trying to engineer a way for the unemployed to still stay ‘in the real estate market’.

Oy Gevalt.

Even serving as a decorator showcase isn’t helping multimillion-dollar houses find buyers in San Francisco’s Pacific Heights neighborhood.

Each year, interior designers in the city redecorate a home for public display to raise scholarship funds for University High School. Owners put the past three houses on the market after the charity event but haven’t yet sold them.

All three are in Pacific Heights, the enclave near Presidio national park that is home to U.S. House Speaker Nancy Pelosi, oil heir Gordon Getty and author Danielle Steel. Designers decorating this year’s four-level Georgian home, now on the market for $10 million, tried to keep its price down by using more plywood and less glitz.

“There was talk about toning things down because people would be offended,” said Orlando Diaz-Azcuy, who designed the entry-level dining room. “I deal with the high-end market, and the business is not there.”

Only 14 houses and condominiums in the 94115 ZIP code that includes Pacific Heights sold in the first quarter, according to MDA DataQuick, a research firm based in San Diego. That’s the fewest since it began tracking in 1988.

The median house price in the area plunged 59 percent in the four months through April to $785,000 from $1.9 million a year earlier and is down 65 percent from 2007, MDA DataQuick said.

http://tinyurl.com/l3pybk

#5 NS on 07.13.09 at 8:58 pm

Given all the talk about cheap mortgages, on a purely financial basis, is it best to buy a historically overvalued asset at historically low rates, or buy the asset after a 10-15% price “correction” with historically average rates?

If the average home in hot spots like TO, Vancouver, Calgary fall 10% over several years, and you have a low interest rate on your mortgage, are you not better off than the average renter in these areas who are still waiting for the infamous crash?

Even with a slow bleed in prices over several years, the 2009 first time homebuyer may end up financially ahead than the 2012 buyer, particularly if they have budgeted for a doubling of the interest rate at renewal time (yes, I recognize that the overwhelming majority of buyers today do not think like that…)

#6 AppleCrunch on 07.13.09 at 9:30 pm

“The sheeple are at the trough” – Garth
——————————————-
I wonder, who are the real sheeple? The ones taking the free money or the ones not?

#7 Mike Hunt on 07.13.09 at 9:39 pm

I wonder what will happen when rates jump and massive amounts of people have to walk from their homes. What I fear is that the Federal Politicians would panic…and start bailing them out with tax-dollars. It really p****s me off when the rewards of risk are individualized and the failure of a risky decision is nationalized.

The only people who should get bailed out from a rate jump are people who were forced to buy a home now.

No such people? Thought so.

#8 History on 07.13.09 at 9:41 pm

According to family and friends I am the only one who thinks the sky is falling when it comes to real estate. We in Regina are leading the country in jobs and our home values just keep on a risin like the sky is the limit.
Well I have been there, done that, 1982 to be exact and remortgaged at rates out of site. Payments outstripped value.
Hope to never see that happen but here we go again. Only this time it is home values that will plummet and not resurface as a small rise in interest rates will make affordability unattainable.
So yes I guess the sky is falling in my view; but only mine, here in Regina.

http://finance.sympatico.msn.ca/investing/news/businessnews/article.aspx?cp-documentid=20738750

#9 NS on 07.13.09 at 9:42 pm

“Five years and ten years from now we will look back with misty lids and quivering lips and wonder what we all were thinking.”

++++++++++++
Great…looks like the inevitable crash has been given another lease on life for another 5 years.

Been sitting on the sidelines since 2005. If I wait for the crash after all these renewals in 5 years time, I will have been waiting for 10 years for the crash that “logically” must happen…..10 years, I could have paid off my mortgage…

That statement was in reference to interest rates. Be more careful in your reading. As for a housing ‘crash,’ I have always argued that prices on the national average will correct by 15%, with up to a 30% drop in certain markets. That may not be not a crash, but it is inevitable. — Garth

#10 Joseph on 07.13.09 at 9:52 pm

I was certain that real estate values up here in Canada would take a big hit as they did in the USA. But your statement, “Real estate is in trouble when rates return to historic norms, unless prices take a plunge… ” seems to imply that real estate prices in Canada will not be in trouble any time soon. If so, then your premise and book underlying the inevitability of the Canadian housing crash now seems to have become alot more distant. Barring an uninterruped economic downturn, the premise of your Greater Fool book now falls into question for the short term, at the very least. This blog is beginning to remind me of a radical candid camera TV show a few years back in which the contestants were spoofed in a meticulous lie, and then the host would jump out at the end of the show and say to the contestant “You’ve just been X’ed!!!” I think the fiscal policy makers have successfully managed to prop up real estate prices here in Canada for quite some time, and you, I and all of the bloggers, for all intents and purposes, have just been “X’ed”. If all this blog’s usefulness will now simply be to discuss whether we lock in at a low rate at a 5-year term (if we are “nervous and sweaty”) as opposed to keeping the mortgage short term and variable, then this blog has lost much of its purpose. This is too bad and we should have known better. I don’t know how they did it, but despite these blogs and the warnings of excessive debt, the US real estate collapse, etc,, the financial planners have somehow managed to keep Canadian real estate prices afloat.

You are being deceived by the short term. Bad mistake. — Garth

#11 Nostradamus jr. on 07.13.09 at 9:53 pm

1/>>Re/Max said on Monday a recent surge in housing sales, particularly in Canada’s biggest cities, is “a clear signal that the housing sector has shifted into recovery mode.”<<

…Should read…""ONLY"" in Canada's biggest cities.

http://www.financialpost.com/news-sectors/story.html?id=1786722

2/
Government jobs in Toronto, capital of Ontario, Canada's newest Welfare Province…. and World Class jobs, available only in Vancouver.

3/
…To my fan club organizers, dd and Homeless in North Van…..When Garth repeats postings by Nostradamus jr…..blog readers best take note.

#12 Nostradamus jr. on 07.13.09 at 9:59 pm

>>Canada targets Mexico, Czech Republic (Refugee)asylum seekers.

OTTAWA – Canada is taking steps to dam the flood of asylum seekers entering the country from Mexico and the Czech Republic by slapping visa restrictions on visitors, Immigration Minister Jason Kenny has announced.

The move is aimed at what the federal government believes are the thousands of bogus refugee claimants that have attempted to move to Canada from the two countries in the last few years.

In 2008 alone there were 9,400 Mexican asylum bids, a number that is three times more than that of 2005. It represents 25% of all the refugee applications that Canada received last year.<<

http://www.thestar.com/news/canada/article/665512

…The refugee problem has started…glad that Ottawa actually has a plan.

I predicted this nearly 500 years ago.

#13 JT on 07.13.09 at 10:21 pm

#5 NS

I guess Americans asked themselves that question when they signed up for subprime, prime, alt-a and option arm(such as pick-a-pay). Afterall, US home prices were going to go up forever. So having a loan with an unsustainable reduced interest rate made sense – allowed you to get into a home that you actually couldn’t afford at normal rates.

…. connecting the dots yet?

#14 debtfree on 07.13.09 at 10:36 pm

From reading all these post I realize I’m in the wrong blog as this is all about fiat money . I’m into real money . You know cash , equities , passive income . So I will bow out . On a lighter note this sunday we went the local flea market and found a copy of “after the crash ” poor thing .It was really beat up dog eared ,margin notes . Anyway I’m going to donate my copy and keep the one I got for One dollar at the flea market. On the subject of ozzie …..I got the link to your book that I payed full price for ( I hate full price ) on ozzies page .. so go easy on ozzie . If you want to play with me , see me at play at stockhouse.ca or agoracom.com. I love my real estate ( I have lots ) but I get my fun money in the stock market . gung hai fat choy .

#15 Onemorething (aka DaHKkid) on 07.13.09 at 10:48 pm

Went for a paddle in Deep Cove today followed by a few bev’s at the Raven. Really a nice place to live if you can work your own hours I guess and need the peace and quite.

Actually spoke to a local guy doing renovations just close too the house I’m renting. He claims reno’s are down over 70% based on his booking this YTD.

He said things are tough for this market as his clients would rather just wait things out to see what happens. He is a bit worried however I dont see one FOR SALE sign around Deep Cove.

I told him, you really have to be in the absolute minority to list a house around here it seems. He says he knows the financial stability of most of his clients and the SH*T hits the fan he’s looking to buy.

I said hold on brother, you might just get your wish and what else can you do but look for good liquid investments and sit in the weeds. He Agreed!

#16 Basil Fawlty on 07.13.09 at 11:00 pm

Interesting perspective on Gold in this Jim Sinclair interview from last week. Warning: anti-gold bunnies may become squeamish, and feel like doing bellyflops into an empty pool!
http://www.summit.co.za/video/face2face/20090710

#17 Lance on 07.13.09 at 11:50 pm

Keep the rate… save a bunch of money by living like a pauper and drop it on the principal. Then when rates start to inevitably climb in 2-3 years, lock in if you feel nervous (or ride it out if you feel brave) and be glad that you reduced your debt exposure when times were good.

#18 Bilbo Bloggins on 07.13.09 at 11:57 pm

What you’re seeing right now is a whack of FTBs getting suckered into home OWE-nership.
They think low interest rates are the same as The Bay scratch & save sales event.
So they’re leaping in head first armed with downpayment money from generous boomer parents.

A big chunk of this wealth is going to be vaporized when the market continues it’s correction.
Sad thing is, those buyers won’t give a crap. It wasn’t their money to begin with.

#19 Dave on 07.14.09 at 12:23 am

I don’t know what everyone here is talking about. Prices in Toronto are down significantly. Maybe the homes that are selling have people that are panic purchasing, but the asking prices in general are down. I went on MLS tonight for the first time in 2-3 months. The fall is continuing and will only get worse.

#20 $fromA$ia on 07.14.09 at 12:47 am

Good thread Garth,

Garth, inflation will come after all this money printing/cheap money. The homes will be worth the maybe 20% less at most offset by the heavy inflation that will be ahead. What I am trying to say is that when everything else goes up with inflation, already inflated homes will hold their prices and not rise with in inflation but actually devalue by staying the same devalued price.

Whats your take on my concept? You know the government likes inflation because it can pay its own debts off faster with devalued dollars.

#21 Ed on 07.14.09 at 2:57 am

What rates do you think the banks will have (estimate of how much higher) after October 1, 2010?

The current posted rates are:
Prime: 2.25%
VRM: 2.75%
1 Year Closed: 3.25%
3 Year Closed: 3.75%
5 Year Closed: 4.25%

Any Idea what these rates will be in late 2010′?

#22 Mike (Authentic) on 07.14.09 at 3:04 am

#5 NS on “Given all the talk about cheap mortgages, on a purely financial basis, is it best to buy a historically overvalued asset at historically low rates, or buy the asset after a 10-15% price “correction” with historically average rates? ”

You are assuming a very mild correction of 10-15% when the US (our closest compairson country next door) has suffered 50-70% “correction”.

Say you think Canada is “different” then let’s split the drop in half at 42% in Canada (15%+70%/2).

So, what looks better to you?

A $400k house at a 4.25% 5yr fixed mortgage
A $232k house at a 8% 5yr fixed mortgage

London, Paris, LA, New York, Japan, Berlin, all “better world class than Canadian cities” have had RE drops greater than 15%. Look what is happening around the world and stop and think.

Mike

#23 Mike (Authentic) on 07.14.09 at 3:08 am

Garth, as a daily reader and poster on your blog I forget to express my gratitude and appreciation of your blog as often as I would like to. But I wanted to take this opportunity now to do that and say your blog is really helpful to many out there and it is a great read each day.

Please keep up the great work you are doing, it’s always very informative, educational and thought provoking.

Mike

#24 Nostradamus jr. on 07.14.09 at 6:58 am

Homeless in the North Shore

“I am simply sitting back on my six figure war chest,”

…did you read this?….

#14 Onemorething (aka DaHKkid)

“I dont see one FOR SALE sign around Deep Cove”

…Homeless…

1/
What is happening to your Six figure $$$ stash as you watch your Govt spend, spend, spend, with $$$ they haven’t got?

2/
What are the results as we watch the majority of U.S. States get set to implode and eventually “Reset” their debts?

3/
If you think the U.S. is in deep doodoo, what do you think happens to all the foreign nations who hold US Treasury Notes?

#25 JO on 07.14.09 at 7:29 am

Mortgage rates have come down, but as far as the fixed rate, longer term rates, the central banks have been LUCKY that the bond market investors have bid up bond prices so hard due to the credit crisis. Gov’t bonds tend to do very well in the early and late stages of a major credit crises as real rates go high; hence the acceptance of a low coupon rate on the bond. If the 5 yr bond is earning 3 %, in current economic conditions – with high unemployment and shrinking credit outstanding, the real rate of return is higher than 3 % and guaranteed repayment of principal – currency value aside for now. However, in every credit crisis, the middle stage, which we will be this fall and into 2010/2011, will see a vicious bond market decline which should drive 5 yr fixed rates and longer rates into 7/8 or more. This will happen whether we have deflation (more likely) or inflation. So I say lock up in the next 2-3 months if you are risk averse. The inevitable bond market bear will wreak havoc with the economy and especially home prices. Also, be very cautious with the corp bond funds you may own, especially the “high yield” or junk variety.
JO

#26 pjwlk on 07.14.09 at 7:33 am

Oh look! “Blue skies on Canada’s economic horizon”

“Canada’s painful recession appears close to an end after the economy received two key votes of confidence yesterday suggesting the turnaround…”

http://thespec.com/News/Local/article/599462

#27 just a guy on 07.14.09 at 7:44 am

Mike (Authentic) – you could skew your response even more by pretending there will be a 60% correction in Canadian house prices…or 80%….wow, pulling numbers out of the air is fun! It’s all meaningless, but it really makes for an exciting analysis!

#28 Central Toronto Homeowner on 07.14.09 at 7:49 am

The market seems to be back. Multiple offers in my neighbourhood and low inventory. Many SOLD signs around. Prices have gone up since January.

#29 Devil's Advocate on 07.14.09 at 8:20 am

79, Au, Gold, 196.966569

“When government really screws things up people will turn to a currency that has no liability and no nationality.”

Economics is the back-story of all history. Money has evolved through many different forms since the trading of shells and inscribed clay tablets. Fundamentally, however, it is “trust” that is the only true measure of value in a fiat currency. Especially today, when our monetary systems have evolved to become so reliant on credit, has our economy become so fragile and vulnerable. “Credit” is derived from the Latin word “credo” which means “I believe”. We are loosing our faith.

Our economy continues to evolve. Every 20 years or so there are small but noteworthy changes and every 80 to 100 years there are significant changes. We are due for a significant change. These changes are not a bad thing, they are an adaptation of our economy to social change as individuals and groups strive to take advantage of developing opportunities or attempt to disadvantage the unfairly advantaged. Economics is the reaction not the cause. We are at the precipice of a significant socio-economic evolutionary change.

This change will be a reaction to government economic malpractice. “When government really screws things up people will turn to a currency that has no liability and no nationality.”

#30 pbrasseur on 07.14.09 at 8:21 am

Another great one from Ambrose, now that’s what I call journalism!

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5811343/Europe-digs-its-economic-grave-while-the-ECB-answers-to-no-one.html

#31 TS on 07.14.09 at 8:35 am

pjwlk on 07.14.09 at 7:33 am
Oh look! “Blue skies on Canada’s economic horizon”

“Canada’s painful recession appears close to an end after the economy received two key votes of confidence yesterday suggesting the turnaround…”

http://thespec.com/News/Local/article/599462

Unfortunately the two sources quoted in this article (the Conference Board of Canada and the Bank of Canada) have a habit of producing inaccurate economic forecasts on a regular basis. There is nothing in recent history from these two organizations to assume that these current forecasts will be any more accurate than they have been in the past. My advice… ignore them.

#32 dd on 07.14.09 at 8:36 am

#11 Nostradamus jr.

…Canada targets Mexico, Czech Republic (Refugee) asylum seekers. Believes are the thousands of bogus refugee claimants that have attempted to move to Canada from the two countries in the last few years…
The refugee problem has started…glad that Ottawa actually has a plan…

Listen you idiot, enough with you petty thoughts. Can’t you just stick to the real estate topic?

#33 Samantha on 07.14.09 at 8:42 am

I was thinking about the title “Too good to last” in the context of a conversation I had yesterday with my brother.

We discussed the erosion of the “middle class”, McWages, and the possible outcomes for future generations seeking shelter. The scenario at the end of our discussion was grim.

The “middle class” developed after WWII. No one listened to the poor, and the rich “upper class” were content with the status quo. That was the power and importance of a middle class in our society – quality of life improved because of their voices, earnings and tax contributions. They demanded better conditions and they were heard, largely because their tax dollars and disposable income kept the administrative and economic wheels greased.

Now approximately 50 years later, the “middle class” is in it’s death throes. McWages, out sourcing, and the cost of living are decimating the middle income earners. We haven’t raised the bar. It has been lowered, and now people are desperately trying to limbo underneath it. Not much room left.

If real estate prices do not reduce to historic norms, and if incomes are insufficient to put the “realistic” back into “real” estate, will Canada follow the path of other countries where the mortgage is never paid off and the property is simply handed down to future generations?

If the unwise real estate transactions made in the last 5 or so years and apparently perpetuated today, finally implode, what will the banks do with these properties? Bail outs as in the USA? Will the banks and/or government become the landlords of future generations?

I wondered if my brother and I, and others like us, were the last of our kind, people who bought homes when it was possible to pay off the mortgage. A time where home ownership was very much an achievable goal. Has that time passed?

Does the real estate bubble have more substance that what we originally thought? Is it substantial enough to forever change our concept of homeownership, just as it changed many people’s concept of a reasonable price to pay for real estate?

Will future generations rent the relics of greed and foolishness past and become rootless, portable workers moved from one city to the next to fulfill job quotas?

It may take time, but these musings are possible. I never thought I would see real estate transformed into such an unrealistic proposition.

“Too good to last” – Future generations may wish it had never started.

#34 HJ on 07.14.09 at 8:42 am

Here are 100 homes that you could propably get for less than $500 … families use to live in these places, rather sad …

http://www.100abandonedhouses.com/

Great short video on the housing bubble …

http://nickgogerty.typepad.com/designing_better_futures/2009/07/puff-the-house-dragon.html

#35 JT on 07.14.09 at 8:46 am

I find it awfully funny how much confidence people have in real estate. GDP has shrunk – and mortgage credit has grown 10%. Inflation is nil. Yet this supernatural force has everyone believing real estate is going to jump 20% in value over the next year. It’s not sustainable.

You really can pull the wool over people’s eyes. For one the financial collapse did not cause the housing market to drop. Prices stopped moving around December 2007 – 7 months before oil peaked at $147, nickel was trading at $10,000 plus a tonne and Canadians thought they hit the commodity motherload. Corn, Wheat, Milk, potash were all trading at double the prices today.

We are living off an excessive amount of fiscal and monetary stimulus that is not sustainable. In the next few years, the United States for instance, will have to raise taxes, raise interest rates, cut government spending, and resell over $1 trillion in bonds purchased by the treasury (which will dramatically increase bond yields).

The only reason you can have interest rates so low is because there is an international financial crisis. Since every developed country in the world has low interest rates, it’s not a problem.

Soon some countries will start to lift interest rates to avoid inflation, speculation and to reward savers for their money. When this occurs there will be a large currency shift as investors pull away from low interest rate countries and put their funds into countries that pay higher rates. Currencies with higher interest rates will appreciate as investors vie for their denominations. The opposite will happen to those who do not lift rates. This is nothing new. This is one large reason we don’t always have interest rates set to zero.

Nations will need to protect their currency. Artificially low rates will crush a currency in the long term. A rebound implies that rates must go up – a very low prime rate of 6% should be something the optimists should expect. When rates go up to 6% and housing starts to plummet, expect the banks to start charging you well above prime to compensate for their risk. A variable rate mortgage of 7 or 7.5% sounds high relative to todays rates, but in reality it is very low, and it assumes that nothing crazy happens with the currency markets (such as a US dollar collapse – which will happen if the US loses its reserve currency status).

#36 TS on 07.14.09 at 8:51 am

http://www.moneyandmarkets.com/my-case-against-most-retailers-2-34714

The above link will take readers to an interesting piece about rising consumer savings rates in the US and a corresponding drop in consumer spending. Since consumer spending accounts for 70% to 72% of the total US GDP this indicates a further erosion in the US economic recovery efforts and ripple effects hitting Canada since about 80% of our exports go to the US.

As US retailers continue to falter we should expect to see more pressure on commercial real estate with defaults rising. This will put additional pressure on the US financial system and will impact our big banks since most of them have significant presence and exposure in the US market.

As Garth has indicated in his blog postings, the economic fundamentals do not support a continuation of low interest rates. As credit losses mount from commercial real estate we can expect rates to rise as banks try to cover their losses, and credit to tighten which will also drive up interest rates.

Other business headlines (British Airways fighting for survival, key vote to keep Air Canada afloat, oil falls below $60) indicate how weak global economics are. As far as commercial real estate goes…. the Chair of the US Congressional Joint Economic Committee recently called the US commercial real estate market “a ticking time bomb”.

Right now the media and quasi-experts are trying to spin anything into a good news story. The underlying economic reality is much different than what is being reported in the MSM. We are in for more rough road ahead.

#37 David Bakody on 07.14.09 at 9:08 am

It appears many still do not get it! GT has stated the obvious over and over again ‘KISS” Keep it simple stupid ….pay down debt and save wisely ….. do not buy toys you do not need …. hello even the multi billionaires are now time sharing mega yachts renting them out to want-abe’s a friend and businessman once told me “A sale is not a sale if you do not need it” I tend to buy quality but I buy it on sale when I need it.

#38 Mike (Authentic) on 07.14.09 at 9:19 am

#26 just a guy “…there will be a 60% correction in Canadian house prices…or 80%….wow, pulling numbers out of the air is fun! It’s all meaningless, but it really makes for an exciting analysis!”

Thanks Guy, I do try to make my comments exciting. :)

I rely on history to be a great teacher, if you are not a student of history “you” are doomed to repeat the past. I used 50-70% USA correction because that is just recent history (see California, Florida, Texas) of a 50-70% peek RE$ drop. While Canada isn’t C,F or T, I’d sure pay for a house in C before buying RE in Canada!

So the numbers are not really pulled out of thin air, more like the “air of the just recent past”.

Mike

#39 My_View on 07.14.09 at 9:21 am

I disagree; rates will stay relative, as if the BOC will shoot themselves in the foot. How much were homes going for in the late sixties and seventies? It use to take only one income earner to boot. Fast forward today and 2 – (3) people have to work, maybe have 1 or 2 kids when you’re in your thirties. Give me a break, the boomers created this mess, at least when they wanted to buy a home it was either a semi or detached. Now, we are stuck with garage sized pie in the sky homes with granite, yes I know we are a generation of wanting everything now.

#40 Devil's Advocate on 07.14.09 at 9:39 am

What needs to be understood is that “credit” is a relatively new economic tool. While mankind has always subconsciously understood the concept of “opportunity cost” only relatively recently has it become such a commonly accepted item of commercial trade. Indeed it has become the most essential lubricant of commerce today such that it is a most essential component of our economic engine. Without credit our economy seizes and spirals into the depths of recession or depression.

Credit is inflationary. Inflation is the nutrition of government. Government does not know how to deal with deflation as deflation does little to fill the government coffers. Deflation, to government, is a uncontrollable siphon as opposed to inflation which is more like a tap which they can regulate the flow of through monetary policy.

There is nothing wrong with deflation. Deflation is the result of technological advancement and economies of scale. Deflation is the fall of prices to meet demand thus opening up more market to the supplier. Inflation occurs when demand outstrips supply. Which would you prefer? Deflation affords more what only a few might otherwise enjoy.

What is happening today is not a “Credit Crisis”. What is happening today is the consequence of the unveiling of a Ponzi Scheme of credit run amuck. We are being constantly lied to. There is NOTHING wrong with our economy. The economy is reactionary, it is individuals and groups trying to improve their lot in life taking advantage of what opportunity is available to them. Give them unbridled access to credit at historically low rates of interest and of course they are going to bite off on it. Tell them the economic outlook is rosy and, as long as they believe the source credible, they are going to believe it and strive to keep abreast. But is it all so? Is the SPIN from credible sources? Is our government not to be suspect in that they rely on inflation to survive when deflation might be better for you and me, if not hold an equally rightful place on the scale of supply and demand? Demand is constant to some degree. We all want things. Some just can’t afford them. But bring the price down to a level we can afford them and we will fill the garages and back yards of our newly bought homes with stuff. Or conversely give us access to credit and, if we want it bad enough, we will borrow against our future to get it. So tell me, which would you prefer; the actual real earnings ability to buy something cash today or the credit against future earnings to have it today? Why has the cost of living risen so much lately? Inflation. Deflation is when the cost of living (CPI) falls… that does not mean wages fall equally.

Our economic systems are seriously screwed up at the most fundamental levels. There is no foundation and it is bound to collapse like a house of cards. How can such a Ponzi Scheme continue?

NOTHING will improve until we individually and collectively learn to live within the constraints of our personal and collective economies rather than betting on our individual and collective futures believing that fortunes await us. Wealth, or lack there-of, is a reality, here and now, as a consequence of your past not your future. In any event, if we do not learn this, we will surely get there one way or another. It’s just that you will not like so much the consequence of the market correcting itself as it corrects you along with it.

#41 Got A Watch on 07.14.09 at 9:47 am

I like Ambrose, he was telling the bearish truth long before the rest of the MSM, one of the very few who have a grasp of reality.

Yet he falls down everytime when it gets to the correct actions to take to solve this global financial crisis. He always calls for more, larger, wider Keynesian Klaptrap – which is counter-intuitive to solving the problems he discusses.

The simple fact is that a ‘Debt-to-GDP’ crisis cannot be solved by going deeper into debt. More debt can’t help the overly indebted. More credit can’t solve the problem of nations, companies or individuals who have already maxed out the credit card.

The problem is that all debt has to be repaid, or defaulted on. Whether the Central Bank of a nation or economic bloc, or an individual citizen. If you can’t make the payments to service the debt now, increasing the debt won’t help.

This crisis CANNOT be solved by Government/Central Bank intervention, despite what idiotic politicians and Central Banksters might believe.

Karl Denninger over at The Market Ticker today states the plain and obvious truth, that the MSM and politicians and Banksters and even most citizens just don’t want to hear:

“There is only one way to re-base the economy and get it to grow on a sustainable basis: Consumption must be paid for by current income and some fraction of current income must in addition be put into capital formation.

There are only two ways to get there:

1. We can withdraw all of the political support for the lying that has allowed this debt to accumulate in the first place, calling it what it is: accounting fraud. This will in turn force massive bankruptcies to take place among both individuals and financial firms. Once that process is complete we will have cleared the excessive debt from the system and the economy can then grow organically as a consequence of productivity gains and production, with those who were imprudent appropriately punished by the free market, and those who were prudent rewarded by it.
2. We can continue to allow those who made imprudent loans to lie about the value of these “assets”. There will be no sustainable economic growth so long as the excess debt load remains. There is a high probability that at some point we will enter a “death-spiral” where interest expense exceeds excess income at which point we will literally suffer an economic collapse, and there is absolutely no way to determine exactly where the “tipping point” is. A foreign creditor could trigger such a collapse at any time were they to withdraw their support of Treasuries, for example, either as a consequence of a choice or an economic crisis at home that forces them to stop buying.

Those are the only two choices folks. The math is never wrong and it is crystal clear.”

This commonly held belief that you can just bail out every irresponsible idiot and carry on without any consequences, is the root cause of why this crisis has dragged on more for than 2 years now, and why there is no end in sight yet. When these idiots capitulate and allow the real market forces, not the faux markets they support, to function as they should, we will be on the road to recovery. Otherwise, without a change of course, we could be in for another 10-20 years of this slow grind down, just like Japan, where every solution but the politically incorrect right ones have been tried.

#42 Got A Watch on 07.14.09 at 10:04 am

Mish posted “Housing Update – How Far To The Bottom?”, looking at the Japanese experience.

He puts the USA real estate market still in the “Never A Better Time To Buy” phase, based on the ‘Japan Nationwide Land Prices model’.

He concludes: “The Case-Shiller charts suggest that the worst may finally be over. However, so far all we can say is that things are getting worse at a decreasing pace. This is not the same as getting better. Indeed it may take 2 years or more to cross the zero-line in the second Case-Shiller chart. That would be consistent with a bottom in 2011.

Thus I see no reason to switch from my long-held estimate of a 2011-2012 timeframe for a bottom. Furthermore, even once housing does bottom, do not expect a V shaped recovery. Housing prices are likely to remain weak especially in real (inflation adjusted) terms for another decade. For a clue as what to expect, take a look at the period from 1991 to 2000 in the first Case-Shiller chart. Expect a similarly long “fat tail” once housing does bottom.

If you are a believer in hyperinflation, then housing is a “sure thing”. Indeed it was a “sure thing” last year and 5 years ago as well and we know how that turned out. Looking ahead, hyperinflation beliefs might still be very costly given the charts, history, and economic fundamentals suggest no such thing.”

If Canada is lagging 18-24 months, as I see it, we will reach our real estate bottom here about 2014-2015, on track from previous projections. Mish’ Japan chart is labeled with the psychological stages of real estate, and we are heading to “It’s Better To Rent”. That represents the rejection of real estate, revulsion at a market bottom, when no one wants to get involved with the asset class that used to be so in favor.

#43 Pet on 07.14.09 at 10:13 am

If you’re going to lock in at 4.25% for 5, why not just go 5.25% for 10

#44 Homeless in North Shore on 07.14.09 at 10:21 am

Nostra 23

As for my war chest, I am a bit of a market timer, as best as can be in these uncertain times. I liquidated my portfolio in June 2008, simply because the orgy of debt in the West was becoming overwhelmingly obvious. I locked in my earnings at just under 5%.

While inflation is a risk, I banked (literally) on it being 2 years off from June 2008. That is still my approach. So yes, there is the potential for it to be eaten up if we get “hyperinflation.” But I believe there is a bigger risk that inflated RE in Vancouver, where income to price ratios hover at an unsustainable average at 1:8.3, will collapse first….

#45 Munch on 07.14.09 at 10:28 am

My new bumper sticker

“Stupid Must Hurt!”

You like?

#46 rory on 07.14.09 at 10:46 am

Hey all …thought this quote was priceless when I saw it yesterday.

“The problem with socialism is that eventually you run out of other people’s money [to spend].” – quote attributed to Margaret Thatcher.

And today I see this video on US socialism compliments of zerohedge. The video is a little too ‘American’ for my taste but the message is there – reduce.

http://zerohedge.blogspot.com/2009/07/us-sliding-into-socialism.html

So how does this apply to us …think of the federal NDP party in control of everything …every one is entitled to have it all …scares the crap out of me…IMO.

#47 Munch on 07.14.09 at 10:58 am

A “bad” Canadian – who would have thought?

http://www.montrealgazette.com/Angry+Earl+Jones+investors+face+uncertain+future/1785237/story.html

#48 Maureen on 07.14.09 at 11:00 am

Should I or shouldn’t I lock in? Most lenders will offer a 120 day rate guarantee (4 months) with an opportunity to take advantage of a rate drop prior to closing if that should happen. If you are worried about locking in or not…have a mortgage broker get an approval for you with another lender for the 120 days. If you leave your current lender you will have to pay a 3 month penalty if you are in a closed variable rate. What you will have is a rate guarantee which you can leverage with your existing lender if you choose to early renew and rates have risen in that 120 day period. Alternatively, you may decide to pay the penalty and go to another lender if your existing lender won’t cooperate. If you have an insured mortgage (CMHC) your premium can be ported to another lender.

#49 MikeB on 07.14.09 at 11:01 am

CREA now proclaims that the day of low ball offers is now over in Canada. Strange I don’t even recall it ever happening from my experience.

http://watch.bnn.ca/clip193192#clip193192

#50 Herb on 07.14.09 at 11:09 am

Rory,

and the problem with capitalism is that eventually you run out of other people’s money to line your pockets with.

#51 jussupow on 07.14.09 at 11:16 am

A lot on nonsense on the blog. I especially like the infatuated FTBs fuck us out. C’mon! Does anyone really run the numbers? Look at w08 in Toronto. Just last month 100+ sales for an average 800000 plus (and well into 700000s median if you like that one more). First time buyers n’est–ce pas? Nonsense. It is business as usual and even better so. All the bears, savers and contrarians go to hell. I bet NS you are one of those – contrarians. You’ve been waiting all this time clearly seeing the picture down sough and been amazed by the stupidity around you. But time goes on and that nagging and uncomfortable feeling creeps in. wtf? it defies all the logic and hard numbers? How is it that the orgy goes on and on and on? But yeah, ok, we are two years behind them I’ll keep on waiting and take on the chin. Then boom, naah – pooooh, the very sweet sound of the popping bubble. Yeah – flexing my vultures muscle and sharpening my teeth. Getting up earlier in the morning pumping up on schiffs, orlovs, denningers, taes and garths of the world. Feel vindicated, here I come speculator be damned. Those awful spring numbers gonna make them scream and shiver and capitulate… well well well the spring the bubble and the feeling of being persecuted and paralysed are back. Bears in panicky retreat. Those two years made up for a very welcomed buffer – more than enough time to re-inflate. We are now three years behind out neighbours with many more to come. In fact everything sells and it has never been so good! So here. You have it. You (and I) screwed.

With time bubble will start giving up again. Up and down up and down getting in line with wages and rents… but is going to take awfully long. 10 years. maybe more. The powers that are (and that be) are doing (will do) everything to keep it going. Those bold prediction of 15-30% down are meaningless (as with any prediction for that matter) if one does not attach a time frame to it (at least stoneleigh and denninger are being specific about what they are talking about). So Don Quixote a ferocious giant awaits you up the hill. Get up on your horse. Lift up your javelin. Ready? I am not going to follow you this time. You see I have found a peaceful place that I am comfortable with. I am, comfortably numb.

Next time, post with respect. This site is provided to you free, and in a professional manner. Be respectful or go and be numb by yourself. — Garth

#52 just a guy on 07.14.09 at 11:19 am

Well, Mike, of all 20 major urban centres in the US, Phoenix has fallen 54% from the peek….and that’s the most of any. Other cities, such as Dallas, Denver, Charlotte have fallen 9-15%. So, perhaps you are skewing the numbers a little? 70%? The numbers I quoted above are from the Case-Schiller Index (not seasonally adjusted) and as of April (the most recent observation).

#53 613 Happy where I am on 07.14.09 at 11:27 am

Let us not forget the flip side of high interest rates…

People could actually live on the interest generated by their savings (without touching the principle), which helped alot of seniors on fixed incomes and other people who were savers as opposed to spenders.

Nowadays it just doesn’t make sense to save… I am told I should have at least 6 months of wages saved for some unforseen situation… Most people would rather invest the money (real estate/stock market/futures/commodities) rather than have it sit in the bank earning close to 0% interest.

My theory is that the reason why the Canadian real estate bubble hasn’t burst is because there is still space for more air inside the bubble… prices did not rise as spectacularily or as quickly as other countries… The air may drain out as the economy worsens but the burst everyone is waiting for may not materialize.

In any event, there will be a correction in the market soon , especially as all those boomers in their suburban McMansions realize that this economic mess we find ourselves in has changed the way people look at housing.

I think this is already happening to a degree… the big house used to be a way of gloating and flaunting wealth, but not as much now… And if there is a flood of resale homes caused not so much on market conditions but by the boomers finally coming to their senses and realizing that they have way too much house, then we will see a price correction…and only then…

#54 VOODOO on 07.14.09 at 11:55 am

#2 Lost in Kelowna on 07.13.09 at 8:34 pm
——————————————–
No one has a crystal ball. You need to ask yourself “is our economy going to grow in the near term?” If yes, then by how much? If no, hang on to your prime rate. Remember Japan had a ‘lost decade’ where interest rates were kept at ZERO. Re-ask yourself the economic growth question every 3 months.

#5 NS on 07.13.09 at 8:58 pm
——————————————————
I’m not so sure if buying today would get you ahead.
Let’s assume 0 downpayment, 25 yr am. with monthly payments.

$300,000 mortgage today @ 4%: payments of $1578; after 3 years you will owe the bank $277,625. ($22,375 principle paid off)

Fast-forward 3 years with higher interest rates.

A 5% price reduction would mean the same house could be had for $285,000. ($15,000 principle savings–buying now appears to be better)

A 10% price reduction would mean the same house could be had for $270,000. ($30,000 savings on the principle–this demolishes the idea of buying now to reap the benefit of paying down principle)

A 15% price reduction would mean the same house is now valued at $255,000. (a whopping $45,000 off the original principle!!)

A mortgage @ 8% on $255,000 would require payments of $1946. This is a higher payment than if you buy now but you GET THE HOUSE at a hugely discounted price.

AND, your payments on the $277,625 (the mortgage that remains in the first example) would be $2118, and you’d be underwater on the mortgage.

If rates are going to go up, and housing prices coming down, the winner it seems is whom that waits.

#55 Shawn on 07.14.09 at 12:02 pm

Garth, please tell us where to get that 2.55% fiver.

I would take that, mortgage my house and go into Bank preferred Shares at over 5% and make free money.

Five year governement bonds yield 2.4%. See
http://www.bankofcanada.ca/en/rates/bonds.html

Therefore any bank that lends five-year money at 2.5% is brain-dead. They should instead put their cash in goverment bonds.

ING direct is usually the lowest commonly available rate and is now at 4.39% for 5 years UP from 3.99% a couple weeks ago.

I highly doubt the big banks will go under 4.5% at best.

The last mortage sale I saw was ATB in Alberta at 3.5% and they quickly pulled that offer after two weeks (supposed to last a month). I think this was becasuse mortage rates were moving up in June.

Go here. — Garth

#56 rory on 07.14.09 at 12:05 pm

#49 Herb …good one …corporate fascism …gotta be a better balance somewhere.

We have all lost our way…me thinks some basic rules we used to practice, if brought back, will self correct things – like 20% down, 25 year ams, 3.5 times salary, ban naked short selling, control leverage by banks, derivatives and CDS become transparent, mark to market accounting, no off-sheet balances, govt’ have to have balanced budgets, prosecute banking and accounting fraud etc….and more basic stuff like this …the KISS concept…IMO.

#57 Seanmhair on 07.14.09 at 12:25 pm

Old enough to remember those days of yore. We thought we were lucky to lock-in @ 13.5%. Shortly afterwards, rates started climbing to the skies. Too many of our friends & colleagues found themselves faced with outrageous renewal rates & surly unsympathetic banks. Many of them threw the keys in the mail box or at their loan officer and walked away.

It was at that young age that I lost any remaining faith I held in the banks, never to trust them again. The heartache & despair they wrought on families was unforgivable. Those jumping on the wagon today would do well to review this no-so-ancient history.

#58 highway61 on 07.14.09 at 12:29 pm

http://www.calgaryherald.com/business/real-estate/Calgary+housing+market+road+recovery/1788406/story.html#Comments

#59 Rai on 07.14.09 at 12:31 pm

Well somehow I have been actively following the prices of a Semi-Detached in Brampton.From the peak of 2007-08.I find there is only a vey marginal drop in prices, say around 5000.So where is that huge huge drop that every body is predicting. When will it happen.Media reports are abound that the turn around is around the corner.So in other words the RE market barring a few cities never really dropped.
Or is that cties like Miss. ON and Brampton ON were never really touched to that a great extent. As these 2 cities have a huge migrant influx and consequently many first time home buyers. Who have kept the demand going.

#60 Nostradamus jr. on 07.14.09 at 12:38 pm

…dd…

“”Listen you idiot, enough with you petty thoughts.
Can’t you just stick to the real estate topic?””

… lol, who’s the idiot?

1/
You dd, for failing to understand the ramifications of how Politics affects Real Estate values.

2/
…and I have a thick skin as to the double standard for the profanity allowed by some on this board.

#61 Chincy on 07.14.09 at 12:43 pm

#39 excellent post

#62 Mike (Authentic) on 07.14.09 at 12:49 pm

51 just a guy “Phoenix has fallen 54% from the peek”

I did say 50-70% to be fair, so please cut me some slack over the latest “old data” you are using ok? (as Case/Shiller lastest data is April data, which July data might show 70%).

And I never said 80% either, just like you never said Canada home prices should go down 93% from peek.

Mike

#63 dd on 07.14.09 at 1:03 pm

#59 Nostradamus jr

Ya … it will only take a couple more posts until you start foaming at the mouth because you haven’t said something nasty about immigration lately. We know you can’t take being restrained by Garth. You’re probably getting the shakes by now.

#64 dd on 07.14.09 at 1:06 pm

#33 HJ

..Here are 100 homes that you could propably get for less than $500 … families use to live in these places, rather sad …

Is this Deep Cove, BC?

#65 Kelly McMae on 07.14.09 at 1:16 pm

#50 jussupow on 07.14.09 at 11:16 am – Wow. Thanks for the “contribution”.

As for the original topic it still comes down to affordability for my family, and our median level family income does not reasonably support the possibility of home ownership at this point.

Regarding the buy now with low rates vs. wait and buy when the rates are higher, I’ve run some numbers and it seems the general level of payment stays the same, only the original purchase price of the home potentially changes. (assuming price decline)

$400K at 4% fixed now over 25yrs is about $2100.

Suppose a conservative %15 market correction, and rates have moved to 6%.

$360K at 6% fixed over 25yrs is about $2200.

Not a lot of difference, other than the lower principal buy-in. For me I’d rather an original lower purchase price allowing for greater future appreciation. I’d also enjoy the benefit of actually growing a sizable down payment as I rent for cheap $900 month, allowing me to reduce the original purchase principal even further.

This of course assumes houses prices will decline, which sounds inevitable if rates happen to climb. Perhaps a gamble if you’re in a position to buy, but once again, for me, it’s a matter of affordability and that reality is has yet to manifest.

#66 AppleCrunch on 07.14.09 at 1:37 pm

“#54 Shawn
Garth, please tell us where to get that 2.55% fiver.

I would take that, mortgage my house and go into Bank preferred Shares at over 5% and make free money.”
——————————————————–
There’s no such thing as free money. There is no guarantee in bank preferred shares…

#67 just a guy on 07.14.09 at 1:38 pm

Mike, you did say that you would “cut the drop in Canada by half” since it’s different here….and used 42%. That implies an 84% drop in the US (or 15% + 70% = 85% actually).

Again…”maybe July will show a drop of 70%” is just making things up. You want recent history, I gave it to you. No need to just randomly make up numbers to prove some sort of point. Neither of us knows what interest rates and home prices will be five years out. Interest Rates…almost certainly higher. Prices…almost certainly lower. Aside from that, making up numbers to answer a question (with the intent of biasing the result in favour of something you already believe) is disingeuous at best. Extrapolating Phoenix data (and making up a July data point) to make an assumption about the entire Canadian real estate market is intellectually dishonest and doesn’t answer NS’s question.

#68 Jake on 07.14.09 at 2:38 pm

dd,
Relax man. NJ’s actually been contributing some meaningful stuff lately. You, on the other hand, 0/3 so far today.

Now, back to the most important thing on earth…..real estate. Having been in a builder/buyer/ seller/speculator since before the boom, I concur with Garth that current rates are too good to last. That being said, I also believe prices are not sustainable at their current levels, and that increasing rates will be compensated by lower prices. It is not right that the Real Estate professionals are giving the impression that this is the opportunity of a lifetime again. People, in general, are inexperienced, vulnerable and impressionable when it comes to real esate. Why are the experts trying to stir up the same frenzy that caused this mess in the first place? As a former speculator I contributed to the problem of unaffordable real estate in Alberta. I came out on top but now that prices are totally out of reach for the majority of my friends and family, I feel like an ass. Let’s hope for a return to the old normal rather than the establishment of a new “normal.” May I bleed the equity that I did very little to gain.

#69 PTDBD on 07.14.09 at 2:47 pm

Govt. to pay mortgages for delinquent owners?….
http://www.reuters.com/article/governmentFilingsNews/idUSN1429265720090714

#70 smw on 07.14.09 at 3:07 pm

#35 TS

To add to your comment on commercial RE ticking time bomb, it was said on BNN today that Goldman Sachs has up to 700 million in commercial RE loses.

http://online.wsj.com/article/BT-CO-20090714-711255.html

Empty commercial real estate is really bad for job growth isn’t it?

#71 Shawn on 07.14.09 at 4:01 pm

Thanks Garth for posting this great link to the interest rates in response to my post 54 above

http://www.ratesupermarket.ca/best_mortgage_rates/

The the 2.55% five year rate is actually a variable rate., the lowest five year closed rate they show is 4.12%

To number 65 AppleCrunch, who does not believe that borrowing at 2.55% closed if it were available and investing in bank preferred shares at over 5% would be free money.

You are right there would be some small risk. But once in a while as now there can be some tremendous deals.

Right now might be a good time to break the rule of neve borrow to invest. Just pick the investment very carefully.

Buffett talks about buying dollar bills for 50 cents. While others ignored the bargain as not theoreticall sound, Buffett got rich.

The academcs say to Buffett, yeah well how you got rich may work in practice, but it will never work in theory.

They can keep their efficient market theory, I prefer the money rather than the theory

Click my name to visit my web Site…

#72 glw on 07.14.09 at 4:12 pm

Just a comment. I read this website / Zero Hedge / Market Ticker and others and even understand a bit of it :). I just throw up my hands – crawl into the corner -assume the prenatal position – turn the electric blanket up to 10 and suck my thumb. None of this makes any sense – I’m 66 and have never been so confused and puzzled in my life. All I can think to do is remain 50 /60% in “cash” and hope for the best. I remember 74 oil crisis / early 80’s / early 90’s but never have I been so frustrated by the lack of any logic to it all.
Oh senility – take me now !!!

#73 Samantha on 07.14.09 at 5:00 pm

Maybe our musings (re #32) aren’t so far off the mark….

“Obama mulls rental options for homeowners”….

http://www.reuters.com/article/marketsNews/idUSN1429265720090714?rpc=77

#74 Chris L. on 07.14.09 at 5:15 pm

I’ll be quoted in the Guelph Mercury newspaper tomorrow (Wednesday) regarding my thoughts and plans (ex-plans) on the burn house. I think the city is happy to put the house in motion given that it has been sitting for so long. I will see if they post it online and post a link.

#75 wayupnorth on 07.14.09 at 5:21 pm

On a daily basis I read Mish’s site along with Automatic earth, Market ticker and Nathen’s economic edge. Over the last week they are all coming to the same simple conclusions:

ALL ECONOMY IS LOCAL, starting with your community, the region you live in, your provence, your country and finally the world.

If where you live has enough jobs for the local population that pay enough to afford local house prices then those prices will remain stable or rise as more people want to live there.

One site explains quite well the relationship between wages and real estate and how wages are 30% behind where they were 30 years ago but house prices have doubled twice since then. Which makes todays house prices more than 5 times what a falling wage base can afford in the U.S. Anybody care to figure out the relationship in Canada?

If your local region produces and sells as much as it consumes then the economy is stable. If it produces a surplus it grows and if it consumes more than it produces it will be forced to lower services etc. and will have corresponding reductions in real estate prices and standard of living.

The length of time communities that borrow to make up the short fall between what they consume to what they produce is cumulative as we are making future purchases now rather than later. As the world has been living beyond its means for twenty years or so that means we have twenty years of paying off all those purchases before we can start consuming on the basis of our local economy again. (or being stupid and borrowing again)

The world does not produce enough wealth in a year to lend out the current borrowing needs for all governments for much longer. The poop is about to hit the fan and we will have to deal with the accumulated pile of debt we have ammased over the last generation sooner rather than later.

Garths predictions while a bit rosy are pretty accurate but like any human being he can’t give a date for any specific one only a generalization. So the decision to buy or sell comes back to your local community. Is it a net producer or a net borrower. If the former then it it should reman fairly stable and if the latter it will drop by how much more it consumes than it produces. Also more importantly is the price/wage level in the area a realistic one? if not there will not be much sustaining those price levels for long.

Warning one of those sites last night recommended not having any sharp objects nearby and more drinks handy before reading on. If you have never read them before I recommend a barf bag be handy just in case!

#76 jess on 07.14.09 at 5:24 pm

efficient market?

I say Hallelujah that some authoritative body has finally stepped forward to investigate, in a small way, how Wall Street takes advantage of information for its own advantage,” said William Cohan, a former JPMorgan Chase & Co. investment banker and author of “House of Cards,” about the financial crisis. “The fact that they control Markit and it provides information about the prices of credit-default swaps and they’ve benefited from this for many years without any challenge or investigation was outrageous.”

http://www.bloomberg.com/apps/news?pid=20601109&sid=ahcdJoyFIDsk

#77 eddy on 07.14.09 at 5:51 pm

easy credit is good. cheap, easy credit is double plus good.
but it’s not for passive consumption, or people who want to sit and wait for price appreciation

#78 POL-CAN on 07.14.09 at 5:55 pm

OT but interesting enough to post….

If you have ever wondered why the more things change, the more they stay the same, take the time to watch/listen for a few minutes…. A different and interesting take….

Tariq Ali – Obama, Pakistan and the US empire

http://www.youtube.com/watch?v=7oYdvQZVvrU&eurl=http%3A%2F%2Fleninology%2Eblogspot%2Ecom%2F&feature=player_embedded

#79 Toronto C9 Renter on 07.14.09 at 5:58 pm

to #71 GLW….

I’m with you! (although I flatter myself by calling it “sceptical” rather than “confused and puzzled”)

Fact is, when one is retired or close to it, the question of how best to invest your life savings becomes very real, and all the friendly advice and “expert” opinions are just so much noise.

For a 30-something with maybe 50k – 200k savings, a 10% drop is a dissapointment. For a 60-something planning to live off their life savings, a 10% drop can be a catastrophe!

#80 don bool on 07.14.09 at 6:02 pm

#10 Joseph on 07.13.09 at 9:52 pm

I don’t know how they did it, but despite these blogs and the warnings of excessive debt, the US real estate collapse, etc,, the financial planners have somehow managed to keep Canadian real estate prices afloat.
===================================================================================

I don’t know how they did it ?

Id like to take a guess! We,ve been trying to sell my wifes deceased mothers condo in Comox for approximately 7 months now. People around here are on hold, and even if you drop the price substantualy it makes no difference. We look at Toronto and they,ve been having bidding wars there. Realtors and the MSM have been pumping the GTA for quite some time now. Don,t miss out! lowest rates on record. Obviously this tactic worked and real estate is in a uptick. Buy before the market passes you by!
Yesterday, I see the Bank Of Canada giving a glowing report of, we can see the end of this nasty recession. Just look at the positive reports from the buisness community and realtors. In the paper there,s front page stories of how Vancouver is entering the same scenario as the GTA. They claim bidding wars are beginning here also. After all! Goldman Sachs,(who our illustrious Goldman plant Marc Carney, and Harper appointment to the head of the Bank Of Canada) are amazed at the turn around to profit for this firm. You rob the USA public with billions of dollars in bail out for these guys and they use it to create wealth for themselves and their clients. Then you pay back the robbed money with a thank you and glowing reports.
The pump is in the beginning stages here, and i would suspect the public will fall for it hook line and sinker. I bet that in a short time the condo sells. After all, there,s never been a better buying opportunity ! right! Good show! Moms condo will sell, i hope, for a decent price.
Mean while, what,s being ignored is the continual jobless numbers and companys are not making widgets because people are not spending. This looks like a last ditch effort to pump up the confidence level, and get people to part with their hard earned cash. Who knows! It might just work! At least for the short term anyway.( untill the next election call maybe!) Fundamentally though, not much has changed since the crash, and untill this does, this rally won,t have legs.In my amaturish opinion, the possibility of a major correction, and everyone heading for the exits if this pump and dump scenario doesn,t pan out, is very real. Think I,ll just observe from the side lines thanks. Great entertainment though.

#81 David Rockefeller on 07.14.09 at 6:28 pm

#48 MikeB

You weren’t making lowball offers? What’s the matter with you? Our last house was offered at $299k, and we bought it for $232 in 1999. I never pay full price, that’s for smucks. We sold it for $385k four years later.

#82 Barb ... reader, Calgary on 07.14.09 at 6:28 pm

#32 Samantha : “.. We haven’t raised the bar. It has been lowered”

Samantha, I enjoyed your post — very realistic thinking — it’s the same conversation my husband and I have had for decades. We came from lower middle class and worked in financial-related industries that gave us a good look all along, at the real world. We all, thankfully, bought houses we could afford and that were paid off — such an old-fashioned concept now. It was a given that leveraging to the hilt would be simple insanity — none of us would ever do what these homebuyers are allowed to do today — gargantuan mortgages. Did these people not pay attention to childhood fairy tales? We’re not supposed to trust wolves in sheep’s clothing — the bad guys — the formidable gang of elite crooks who wrap themselves in corporations, banks and other assorted disguises. Seems the bad guys today have a great set-up, they roll the dice, set the rules, run the media, welcome the innocent into their den.. Sigh.

Perhaps the middle class will strike again some day. The few left will finally pay attention and try to get back to what we had originally fought for. The future is only glum if society never faces the facts about who the crooks really are and that we always have to be vigilant and fight for what is right.

#83 Nostradamus jr. on 07.14.09 at 6:33 pm

Homless in the North Shore

Ha…you still believe that…

“North Van is the poor man’s West Van”

…Friend, its all good…the North Shore is an entity all to itself.

Check out Lower Lonsdale Waterfront redevelopment…what, like a dozen major hi rises… all pre sold

http://www.metrovancouver.org/planning/development/livablecentres/Pages/northvancouver.aspx

and before you mash at me without ammunition, here are the most current three “Poor Man’s” North Vancouver solds out today…

MLS# V767123 Sold $2.1

MLS# V773656 Sold $1.6

MLS# V747637 Sold $1.45

…Chris in England…best wishes to you and yours in your new country.

btw, can you help me please?…I’ve given birth and I need someone to cut my umbilical cord….dd is still attached to it.

#84 Vancouver_bear on 07.14.09 at 6:58 pm

#82 Nostradamus jr. on 07.14.09 at 6:33 pm

Can someone shut this Nostradumbass realtor down once and for all? Garth?….anyone?

#85 Two-thirds on 07.14.09 at 7:01 pm

“Inflation below zero? It’s happening now, but won’t last long, economists say”

http://finance.sympatico.msn.ca/investing/news/businessnews/article.aspx?cp-documentid=20750932

Deflation is here, according to this article, but it is blamed squarely on gasoline price drops from a year ago.

Derek Holt states that inflation won’t hit Canada for the next 3-4 years. But nowhere in the article it is said clearly that deflation will be with us during the above-mentioned period.

So which one is it, then? For that matter, which definition of inflation should one adopt? As far as I know, inflation = increase in money supply, but the velocity of money matters as well, though I do not know exactly how it applies in a strict sense…

Gotta love the sneaky reference to the “health of the housing market” in this piece… They had to squeeze it in there, to somehow soften the blow of reality.

#86 Homeless in North Shore on 07.14.09 at 7:06 pm

“North Shore is an entity all to itself”

Ahhh Nostra, my delusional friend…

By the way, the “poor man’s West Van” was in direct reference to your inferiority complex for not living in West Van. And dear Nostra, we both know that West Van properties do make the North Shore look poor in comparison….

Now if you were spouting off at the mouth that West Van was the fiancial, leisure, super dooper next capital of the world. After all, it is where all the stock brokers, junior mining execs, law firm partners and RE “moguls” live – the only place with actual money in BC….

But keep dreaming, and maybe one day you will be in the best place on earth…lol

#87 Bailing in B.C. on 07.14.09 at 7:23 pm

#80 David Rockefeller on 07.14.09 at 6:28 pm
Our last house was offered at $299k, and we bought it for $232 in 1999. I never pay full price, that’s for smucks. We sold it for $385k four years later.

I paid $265k full price on a duplex which I sold 4 years later for $498K. The buyer talked me down from $519K. Sign me up for that smuck program, it’s great.

#88 Herb on 07.14.09 at 7:36 pm

PTB Ducks @ #68 and Samantha @ #72,

first, you buy “tarnished assets” off the books, relieve guilty bastards of their greed, and give financial institutions the chance to pay themselves first, establish healthy reserves for a change, and then perhaps put the surplus into circulation. And then you have to face a fact: there is a mass of homeowners who can’t pay their mortgages on renewal or job loss, and you have to do something to keep them in their homes because the market just can’t stand any additional housing supply.

If people who could not pay outrageous renewals or meet payments on account of loss of jobs had been helped initially, there would have been lots of money in circulation. They would have met their obligations, banks would have received mortgage payments, and there might have been money left over to keep the economy moving. But no, the taxpayer of last resort had to pay the top of the food chain first, and when not enough trickled down, now can print more money to keep the bottom alive.

That’s what happens when you put the financial cart before the economic horse! Government is in the hands of fools (in politics) and villains (in business).

#89 Sue on 07.14.09 at 7:37 pm

#61 Mike (authentic):

Forgive me for being the spelling police, but I’ve seen this several times in the comments on this site, and it’s supremely irritating:

It’s “peak” as in a mountain top, not “peek”, as in an exercise in voyeurism.

Thanks for putting up with my rant.

#90 Samantha on 07.14.09 at 8:31 pm

#81 Hi Barb,
(and enjoyed your post, too)

“It was a given that leveraging to the hilt would be simple insanity — none of us would ever do what these home buyers are allowed to do today — gargantuan mortgages.”

So true Barb. I just can’t believe how much perceptions have changed and how quickly.

When Bill and I bought in rural Manitoba (**and we are NOT the Samantha and Bill from “The trap” and “Prey” – Yikes!**), we set a limit on the total purchase price based on our income/means and not the monthly payment, plus we went in with 30% down on a $35,000.00 house.

Yet even our town has experienced “bubble creep”. Houses doubled and in some cases tripled in price out here, starting in roughly 2007. I really like our house but I sure wouldn’t pay 70K or 100K+ for it, not in a rural town where the historic prices are no where near this level.

My brother and sister-in-law plan to transfer ownership of their house to their two young adult children and then rent for their retirement years. It is an unusual strategy, but they are taking this course of action so that my niece and nephew will have the security of shelter in the years to come without a huge mortgage.

Both of these young people work hard, but are low to average wage earners, so buying a home in a reasonably safe area is not viable for them, even in Winnipeg. The thought is that they will be able to afford maintenance and taxes while continuing to save for their futures. If they are sensible, this strategy will give them a fighting chance, and hopefully keep the “wolves in sheep’s clothing” at bay.

#91 Across The Fence on 07.14.09 at 9:05 pm

#1 Kathleen Thanks!!! “Stealers Wheel” I was looking for that one !!!

#92 Bottoms_Up on 07.14.09 at 9:23 pm

Garth how about a running unemployment ticker at the top of your blog. If Canada is losing say on average 30,000 jobs a month, you could have it going up 1000/day or 42/hour or 2/3rd/minute….

#93 Nostradamus jr. on 07.14.09 at 9:36 pm

“”And dear Nostra, we both know that West Van properties do make the North Shore look poor in comparison….””

…Huh?….

West Van is the North Shore…it makes up half of it.
You thinking of the Vancouver West?

Vancouver…Bear

…..I’m not a realtor…go munch on some berries and don’t forget to use the Charmin.

#94 Barb ... reader, Calgary on 07.15.09 at 12:19 am

“Gov’t is in the hands of fools in politics and villains in business”

— Herb @ 87
_______________________________

Right on, Herb.

#95 Homeless in North Vancouver on 07.15.09 at 1:47 am

Nostra, the reference should have been North Vancouver vs West Vancouver, nor Vancouver West.

You reference North Vancouver in the overwhelming majority of your posts, and I responded to a comment on homelessness in the North Shore.

Regardless, West Vancouver really is an entity unto itself, far superior to North Vancouver for all of the reasons previously stated.

West Vancouver – Next Financial, Leisure, Super Dooper Capital of the Universe…lol

#96 David Rockefeller on 07.15.09 at 7:37 am

#86 Bailing in B.C.

Well, had I not listened to the “doomsayers” that there was a bubble about to burst, I would not have sold in 2004 and keep the place till this year and sold it for $620k (which is what the new owner did). The doomsayers were right, they were just premature. Still, I walked away with $150k after four years, which isn’t too bad.

#97 Future Expatriate on 07.15.09 at 10:14 am

Finally understood the picture. MJ as an entertainment bubble. And every bit as detrimental to those who participated as the real estate bubble. With almost everyone involved victims.

Brilliant.

#98 Vancouver_bear on 07.15.09 at 11:37 am

#92 Nostradamus jr. on 07.14.09 at 9:36 pm

I am bear because I am bearish on housing prices and will pickup your 1.2 mil house for 1/5 of the price pretty soon….just wait…. the tidal wave is coming and will put you underwater, if you can’t see it then do yourself a favor and take some courses on economincs basics. Probably then you will stop making stupid predictions. #94 is right North Van is poor neighborhood comparing to West Van…..
BTW your Charmin is crap as all your predictions.

#99 HOA Management Charlotte on 07.17.09 at 11:34 am

Your observation was really very interesting and very informative. Thanks for the information. I learned a lot.I enjoyed reading it.