The above picture is illustrative of much right now. Markets and economies soaring so headily for the last 6 years or so are paused in a Wile E. Coyote moment, and about to feel the effects of gravity. Everything is going around in circles, and there is not much that interests me enough to write about (in regards to real estate in Vancouver). It's all been said 10,000 times.
Greenspan keeps dropping bombs on his book tour - saying today that UK RE is overvalued.
Tomorrow the US Fed is expected to cut rates between 25-50 bp's, and those expectations seem to be having more of a subduing effect on the markets than a boosting effect. CAN $ is up even more.
Northern Rock in the UK saw a bank run that pulled some 2 Billion Pounds Sterling out in the last couple of days.
Meanwhile, in Canada, the 40 year mortgage trap is set, and ready to snap closed.
Look out below.
5 comments:
I was speaking recently with some people I know regarding 40 year mortgages. I was explaining that the difference in payments between a 25 and a 40 year mortgage was actually not that much, however the amount of interest paid would be much higher.
There was an example in Saturday's National Post. They used the average price of a home sold in Canada's largest cities - $325,881. They assumed 10% downpayment and a 7.19% interest rate for a five year fixed mortgage. I know that you can get mortgages cheaper than that, but the numbers work for a relative example.
Based on a 25 year mortgage, the monthly payments would be $2088.80. Extend that to 40 years and the payments only drop to $1840.67. A decrease of less than $250, or less than 12%.
The total interest paid, however, rises from $333,189 for the 25 year mortgage, to $589,786 for the 40 year mortgage. A difference of $256,597, or 77% more interest.
I told them that I did not think that it was worth it. I made a comment about people and how instead of being in debt for half of their lives, could now have the privilege of being in debt for their entire lives.
This didn't seem to register with them, as the reply I got was that if that's what it took to get them into a house, then it would be worth it.
Statistics seem to suggest that more and more people are taking these longer term mortgages. An RBC report from last week stated that as much as 50% of new insured mortgages (less than 20% down) and 25% of refinancings are going for amortizations of more than 25 years.
I wonder how many people in their 30s and 40s are still going to be paying a mortgage when they are in their seventies and eighties? Do banks even allow you to take out a 40 year mortgage if you are over 25 years of age? If so, many people could be carrying their mortgage with them into retirement. Certainly not what I would call financial freedom in one's golden years.
A lot of people are still locked into the notion of either buying now, or being priced out forever.
The math behind your comparison of 25 to 40 year mortgages or the slightly more esoteric price to earnings for RE are not particularly tough to grasp. In fairness, the only places that talk about this are obscure blogs. You won't hear anything like this from MSM, or the bulk of RE agents, or in polite conversation with people at cocktail parties.
For many Vancouverites real estate has ceased to be simply about dollars and cents and has become primarily a matter of social status. Most are capable of doing the math, but consciously or not put a very high premium on "getting into" the homeowner social class. It's a very scary thought to them that they might be forever condemned to be untouchable renters.
"You won't hear anything like this from MSM..."
Not often, but the National Post piece c.o. referred to was pretty good. It even included one "bullshit" quip.
http://tinyurl.com/3x8cu9
Lets not forget that with good credit and little other debt you can get a CMHC insured mortgage at 44 percent of your GROSS income. That is before any fudging of the numbers.
Read the comments for this post:
http://tinyurl.com/2b7tnm
It scales down from there but the standards have been substantially loosened.
I've done the math and at 44 percent of my income a lot of things have to go exactly right to be able to do that long term.
"For many Vancouverites real estate has ceased to be simply about dollars and cents and has become primarily a matter of social status. Most are capable of doing the math, but consciously or not put a very high premium on "getting into" the homeowner social class. It's a very scary thought to them that they might be forever condemned to be untouchable renters."
It never ceases to amaze me how nearsighted people are, and how short their memories. Renting now or for the next couple years doesn't equate to "forever", nor does it make any sense to treat the recent run-up of prices as "the new normal" and extrapolate it into a scenario where regular people with regular jobs flat-out cannot afford to buy a house.
Furthermore, Vancouver isn't that special. Your options aren't to take on as much debt as the banks will allow and buy a crappy little condo or be a no-good dirty renter forever. There's a whole country out there where, for less than the price of a one-bedroom concrete box, you can buy a genuine house with an honest-to-god yard in a good neighbourhood. And odds are the job market is better too.
Right now I'm sticking it out because I have faith in the market, and because I have a good job that's letting me sock away tens of thousands of dollars a year and will put me in a good position when prices come down. If I believed that the current trend was going to continue forever, or even that prices were just going to level off, I'd have moved to Halifax or Alberta years ago.
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