Hot Real Estate
Posted by Gail | Filed under Home Buying, In the News
The majority of questions I am getting these days are about real estate. Is the Canadian market over-heated? Is this a bad time to buy? Are interest rates going to go up?
Yes.
The only reason we haven’t seen a rise in interest rates so far is because Europe is in free-fall and the Bank of Canada is desperately afraid to do anything to rock the Canadian boat.
Of course interest rates are going to go up. Ask me when and I’ll probably shrug. Who knows? I don’t, and I’m done trying to guess. Every time I think the rate will tick up, some crap happens that creates the justification for rates to stay low. In the mean time our real inflation – the increases we’ve seen in gas, food, and other day-to-day expenses – keeps climbing. (Inflation is usually the reason the Bank of Canada raises interest rates.)
An article in the Globe last Tuesday says that Toronto’s hot condo market shows signs of cooling. The Globe reports that prices are softening and new projects are being reviewed or put on hold. One of the banks also said they expect to see a 15% drop in real estate prices in the Toronto area. What no one is really talking about is the fact that CMHC is bumping its head on it’s legislated ceiling: once it hits that number, it won’t be able to insure any more mortgages.
Banks are unlikely to extend credit to people who have anything less that a Triple A rating when it comes to new home purchases if they can’t back those loans up with CMHC insurance.
Will the bubble burst? A slowdown in the condo market, CMCH topping out, and record levels of debt tell me that something is going to change.
Should you be worried if you’re already in a home? Not if your payments are within reasonable parameters and you can manage your them. And not if you’re in your home for the long term. Remember what comes down will eventually go back up.
If you squeezed yourself into too much home and your payments are glutinously gobbling more of your cash flow than they should, an increase in interest rates will hurt. If you’re flipping, you might get caught holding the bag. If you’re trying to squeeze yourself into the market before interest rates go up, remember that if property values drop off you may end up owing more than you own.
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June 19, 2012 at 7:11 am
How about if you are retirement age and own your home outright? Are prices going to drop so dramaticaly that the nest egg contained within their four walls becomes appreciably lower? Should the older population sell, invest short term and wait for the interest rates to rise? Is the difference between rental expense and home ownership expense so big that it is better to sit tight and hope you live long enough to ride it out? So many questions lol.
June 19, 2012 at 7:40 am
I often wonder if it would be better to sell my home and rent. I’m mortgage and debt free, and could rent for what I pay in utilities, taxes, and upkeep, and what I put aside for future replacements and repairs. I could then invest what I get on the sale. Would this be a good move?
June 19, 2012 at 8:26 am
It was someone on this site who put up a link to the Greater Fool website about a year or so ago. Since then, I’ve been reading his blog everyday. Garth Turner offers a good contrast to all of the media pumping BUY BUY BUY.
I still own multiple properties, but they were bought using investment valuations and not because “its the best school zone!! so I have to pay $200k over asking!!”. The math is simple:
Monthly Rent x 12 = Annual Revenue x 10 years = Value
Plug your house into that equation and you’ll know if you are overpaying because of HYPE and not value. You will notice that APPRECIATION of the house’s value is not included in there anywhere. Because there is no guarantee houses will go up, just like there is no guarantee any other asset will go up.
Also, everyday, read Gail’s blog to manage finances and debt and Garth’s blog to keep the media pumping in reality.
June 19, 2012 at 8:29 am
Oh, I forgot to ask.
Gail, it would be fantastic if you team up with Garth Turner on some articles. There are several people in his comments section which follow the Gail way of Debt Free Forever, so it would be a good crossover.
Thanks!
June 19, 2012 at 8:41 am
I have to disagree about Garth.
http://www.canadiancapitalist.com/garth-turners-dodgy-advice/
YMMV
June 19, 2012 at 9:42 am
I have to agree with lizm about Turner’s dogdy advice as well. I also wouldn’t say that he offers a radically different opinion when the globe is saying some of the same things now. (Now he might say he was saying this 6 years ago, but then again he was wrong then too).
Also Gail I think the reason no one is talking about the legislation issue is because once they hit their limit, they’ll just pass a resolution quietly raising it. Housing drives a lot of this economy and there’s no way they’re going to let a legislation issue be a problem.
June 19, 2012 at 11:08 am
Interesting that just yesterday on the Calgary news it was stated that lakefront property in Sylvan Lake (a couple hours north of Calgary) that just a few years ago STARTED at $1.3M can now be had for $750K. The majority of these homes are not lived in year round but rather are summer vacation homes.
They also claimed that many young families were now getting into this market with the reduced price. I was surprised by that….what “young family” has $750K to spend on a second home? If this is true then I’m assuming that these people don’t mind carrying a lot of debt, which is likely the norm these days.
June 19, 2012 at 11:24 am
Add to that the fact that the average down payment has fallen to just 7% and you can see where all of this is going. While Real Estate will always be heavily localized, some people are going to get hosed big-time.
The government won’t raise the interest rate. What they will do instead is sick the OSFI on mortgages, making them harder to get, restricting appraisal criteria and cutting out the risky or higher LTV loans altogether. They will also lower the cap on HELOCs to try and take the starch out of the market without raising rates.
June 19, 2012 at 12:16 pm
As a Realtor (20 years) I would say that No matter what, the best time to buy or sell is when YOU are ready. Prices? Areas? Interest Rates? Must Haves? these are all different for everyone.
The rates go down and there is a flurry of activity as people want to “catch the low rate”. Rates go up and there is a flurry of activity as people want to “catch the rate before it goes up higher”.
The rates will go up as Gail says, but No One knows when.
If you listen to Gail and live Within Your Means (2 people really don’t need a 5 bedroom home do they?), get rid of consumer debt and pay down your mortage when possible, you are doing okay. No matter what you will need a place to live. Whether your own or rent, you have expenses so the question is really what type of lifestyle do you want?
@mybabyjohn, values may very well drop, then again they may continue to climb. If like many retired people, you have more house than you need (or want) then consider selling and moving into something smaller. Renting or owning is a completely personal choice. Why not buy a small condo and travel the world? Buy a bungalow and rent out the basement? Rent an apartment and spend your summers in a cottage on a lake somewhere.
It’s really a lifestyle question and if you have your mortgage paid off and you are retired you finally get to do something that You want to do.
June 19, 2012 at 2:15 pm
History will repeat it self, and has PROVEN that the contraction of credit reduces the price of houses, this happened in California, Florida, Ireland, Spain, Dubai…
It’s just a matter of time in Vancouver/Canada. If you are considering buying do your homework. Does renting make sense, crunch the numbers and factor in possible rate hikes. Don’t do what looks good do what works good. Can you rent it out, does it take animals, will it rot…be careful out there, once the bank gets you its their terms…..for years.
June 19, 2012 at 7:03 pm
I agree with Sylvia. As a Realtor also I find it’s people who are just refusing to settle down and stop spending. We can blame the government or CMHC or whomever the flavour of the week is, but what it comes down to is US. Consumers! When people stop trying to beat the Joneses let alone keep up, maybe, only maybe, will things settle and not be so dire. It becomes nauseating to continue to tell people that they cannot afford a $400K home on a $50K income but they refuse to see that. And it doesn’t help when the banks approve them sight unseen for that home.
Live within your means. Period.
June 19, 2012 at 8:29 pm
@Linda-
Why, why, why…be thankful and proud you are debt-free on house and home fronts! =)
Renting you will likely worry & fret over rent increases, it’s not your place so you can’t do as you like etc., landlord hassles,…
Debt free is “it”, plus you OWN! That’s where it at.
Plus add in moving costs etc. and moving costs AGAIN if you don’t like your rental..and on and on would all come out what you’d hypothetically invest from your sale.
(We are steadily paying down our mortgage..can’t wait to be free and clear. )
June 19, 2012 at 9:51 pm
@Linda
Debt free is great, are you happy where you are? Can you rent it out and will it pay for itself as well as a possibly a more practical home for yourself. The thing i beleive is most important is time, as you can not take a house with you. Renting can be a good experience or poor one, just like buying into a home and finding out your neighbours a nightmare, at least when your renting you can leave. I have owned and rented, you do contracts that are binding, and can put in a back door. A paid for house can be a great asset, you don’t have to live in it to benefit.
June 19, 2012 at 11:19 pm
Does a drop in house prices equal the rise in interest rates? It’s impossible to know what those numbers will be. That’s why I agree with Sylvia that the best time to buy is when your ready. I remember a friend who bought a house in 2007 that she could barely afford because she was worried she would be priced out of the market. I try to think of her evey time I read an article like this and begin to worry that interest rates will sky rocket or we will go back to 20% down.
June 20, 2012 at 12:33 am
As a realtor of 22 years, I am still constantly worried about my clients and how much risk they are willing to take. I routinely caution them to do some real estate planning for life and be conservative- calculate if they can still afford their home if interest rates go up, teach them how to consistently work at getting their mortgage paid and still they want to jump off the cliff like lemmings. As a realtor I have had people say to me oh how come you live in such a modest house ? I remind myself I have been mortgage free for 15 yrs and have another investment property and no debt…no need to coerce anyone into making a deal! Buying or selling real estate should not be a gamble.
June 20, 2012 at 8:28 am
At the guys who commented about Garth, I think I should clarify. Garth’s overall message is to be diversified, don’t have all of your eggs in one basket (whether real estate, one great stock, or a big pile of gold). He also offers the admittedly extreme counter point to Global TV and CREA that real estate is going up, up, up.
I hear the Mortgage Alliance commercials every morning on the local radio station that real estate is a great investment and that people should buy now before the rates rise.
IMO people should read all extremes and use that to help themselves stay in the middle. As I said, I read his blog daily, but also Gail’s. I have no debt (small car purchase on my LOC which will be gone this month) except for the mortgages and I own a couple of properties (unfortunately real estate is more than 40% of my net worth). But anyone who thinks the last ten years will continue is kidding themselves. If it wasn’t for cheap credit, most people would not be able to afford the mortgages they have.
I personally know 3 families (with nice houses and cars) who buy groceries on the LOC. I send them to Gail’s website everytime I talk to them.
June 21, 2012 at 10:10 am
Linda, why don’t you rent out part of you house and save money that way? Income suites can bring in a lot of extra money if you’re smart about it.
June 21, 2012 at 6:00 pm
Canada has a unique time lag of 6 years to the US housing market. So, that means 2012-6=2006 which implies we are in the year 2006 of the US housing cycle. Right when things got really bad down there.
Look out belooooow!
June 21, 2012 at 6:53 pm
I would love to hear Gail talk about those new mortage rules announced by the government today: http://business.financialpost.com/2012/06/21/tighter-mortgage-rules-will-help-save-canadians-from-themselves/
I was reading on another website that the consumers’ associations were saying that the big work to do was on consumer debt, not on mortgage and that this move from the government was more to protect the banks than to protect the taxpayer.
Anyway
Just saying 
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June 22, 2012 at 1:36 pm
I’m still on the fence about buying real estate. I’ve been renting for 7 years now since my separation and don’t want a mortgage at age 57. At least I have lots of savings and no debt. I’m renting a nice condo and my landlord is wonderful.
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