Junius at vancouvercondo.info 22 Jun 2010 12:40 pm -
“I personally know 8 people with investment properties that are currently slightly above or slightly below their operating costs. Even a 10% change in the market would put all of them under. A 20% change or more would force a sale. This is coming. It is only a matter of time now.”
I dont get it. Unless their employment changes, mortgage rates change or the rent changes, I dont see how the price affects costs.
The price of the place only has a psychological effect unless the bank refuses to renew the mortgage.
If the place doubles in value and you cant make payments, you sell. If it halves in value and you cant make payments, you sell. If you can still make payments the price (up or down) cant force a sale.
It is a combination of all of the above. Rents are going down. 2 of the properties I mentioned are high end, short term who have traditionally rented to the film business. They are not getting sufficient rentals to carry them.
The point is in all cases they are running at or near a loss. If it becomes clear that the market is turning and will continue to go down none of these people have the resources to carry these properties for an extended period. A few more months, sure. However if it becomes clear the market has turned and will not rebound they will have to unload.
@davers – I think the RE game has really been running on leverage – properties as collateral vs. debt. So there are those who need/will need more debt to keep their properties up going forward, and those folks are in trouble pretty quickly with a turn around.
davers – “I dont get it. Unless their employment changes, mortgage rates change or the rent changes, I dont see how the price affects costs.”
You’re correct, price doesn’t affect costs. If they made a bad investment, it was at the time of purchase. They could do some math to figure that out now, but most people will just continue on. A capital loss may force them to reassess their position, and that will cause recognition of losses. It’s entirely psychological, but most people don’t maintain calculated positions so this is a factor.