“I had an interesting chat over the campfire with some friends on the weekend. They are in their mid to late 30s, two kids, renters. A few years ago they were looking at buying a house in the suburbs where they live. They were priced out despite having a household income slightly above average. We got to talking about the coming crash and I told them that their dreams of home ownership may come to fruition in the next five or six years. Those houses that were unattainable at 500k+ may drop right back into the 250k zone they were at only 5 years ago. They informed me that they had made their peace with renting and the math on a 25 year mortgage no longer worked for them. They have plans to take their early pension option and travel. Even a 25 year mortgage won’t be paid off in time for them to have the freedom they want.
I’m not sure I totally agree with the logic that simply because you wouldn’t be mortgage free at retirement, means buying isn’t a sensible option at the right price, as they could still realize some gains if they were to buy near the bottom of the bubble cycle. But I thought their energy and attitude towards real estate was telling. They were looking to buy when their kids were 3 and 11. Now the youngest is almost 7 and the oldest can see University on the distant horizon. This bubble kept them out at the precise time they were most eager to jump in and by the time it runs its course, they will be thinking about downsizing, not buying into a money pit. I wonder how many other families will follow a similar path. Seems to me this bubble burst could be amplified by the thousands of prudent families who stayed on he sidelines during their most urgent nest years only to be in a completely different head space when the prices come back into reasonable range.”
- Lexlimo, by e-mail to VREAA, 3 Sep 2011
Even though this family will do fine financially, they have had to compromise through the bubble. In more typical times they would have been able to buy fairly easily at 3.5x income (or thereabout), and the whole subject of RE wouldn’t have taken up unnecessary space in their lives. It’s yet another example of the very significant inconvenience that this bubble has caused.
Perhaps more noteworthy, Lexlimo raises a very interesting idea about how the length of the speculative mania may result in a whole group of prospective buyers essentially ‘side-stepping’ the whole act of buying. It’s a persuasive argument, even though it likely only involves a smallish minority (most families have not been ‘prudent’). Thanks for the post, Lexlimo.
- vreaa
just because a mortgage is not paid off at the time one wants to retire doesn’t mean the home can’t be sold with equity gained. Are people here understanding that you need to pay a mortgage off entirely before you sell your property?
No, we don’t believe that there is any reader here who is so ignorant of the basics regarding equity and debt that they would believe that.
What is problematic is how many retirees have larger mortgages than investments outside of RE… in other words, their entire net-worth (or more) is tied up in RE.
Yes, they are solvent, yes, they can sell their properties for net gain, BUT they are very vulnerable to a significant drop in RE prices.
Weird that no one ever told them they don’t have to have a 25 year mortgage. They might even opt for paying it off in 5 years like I did mine. Of course that’s just foolish
who does that?
Is this your question: who buys their first home, in 2011, in Vancouver, and pays it off in 5 years?
I dont think they believe the mortgage has to be paid off, but they just dont want to continue paying one after they retire.
I dont really disagree with that logic either. If I retire I dont want to be paying a mortgage because too much of my pension would be going to making payments and I wouldnt have the freedom to do what I want. Sure I could sell, but if for whatever reason I dont want to sell, I dont want to have to compromise my quality of life after retirement.
Of course the common wisdom right now is that real estate is a great investment. As we see in the States now, the common wisdom is that it isn’t and even people who can afford it are not buying. The answer of course is that a personal residence is not ever an investment. It’s something most people need for the rest of their lives because it’s too cold to live outside. Rent or buy cheaper is better for your pocketbook.
You have to love the sheeple.
Yeah. What would contrarians do without them?
Yeah so the math here — food for thought — is that if they wait 10 years that their mortgage amortization should be reduced by 10 years, all else equal. That means their affordability calculation is a moving target and any loan principal they can prudently undertake decreases with time.
I should add that outstanding mortgages, using maximum amortization schedules, of people well into their 50s and 60s is not uncommon, this according to my friend in the mortgage brokering business. They are renting from the bank and getting what they think is a free call option, but make no mistake the plan is to “resolve” outstanding debts at some point, likely when the paychecks stop.
In all honesty and without the usual anger I have toward the BS-spewing real estate industry and its mainstream media minions, I have to say it really does depend on the individual(s) and the scenario. My girlfriend and I are just over 50 years of age. We bought in 1999, and sold in 2010. We were lucky when we bought and smart when we sold. We’re now renting and crazily happy to be spending as little as we are.
Plus, our investments – much of which came from selling when we did – cover many of our expenses. Plus, we go biking and hiking on the weekend rather than dropping mega-bucks at Home Depot and mega-time fussing with make-work repairs and renos.
I’ve said it before and I’ll say it again: It’ll truly take a 50% drop to get me back in. And if that doesn’t happen, I just do not care. Renting is not nearly the chasm of emptiness the Legion of Doom (realtors, TV, radio, newspapers) make it out to be. In fact, in our particular situation, it was the ONLY sane move.
food for thought for Rachelle and others who compare US to Canada with respect to real estate.
US immigration = .3% of total population/yr
Can immigration = .8% of total population/yr
US cities over 500K population = 102
Can cities over 500K population = 9
So which country do you think is going to feel the effects of immigration more?
Also, there are far more hospitable climates in the US to immigrate to than Canada. Here is a graph of “hardiness zones” in N. America. Canada has one area, the lower mainland of BC which is not considered cold. By comparison, US is about 60% “warm” climate.
http://en.wikipedia.org/wiki/File:USDA_Hardiness_zone_map.jpg
These stats are food for thought. Draw your own conclusions about how these might effect real estate choices and values.
Well, Rollie it’s pretty clear what you are strongly implying when you say “Draw your own conclusions about how these might effect real estate choices and values.” You’re bullish, obviously.
BTW, how did BC immigration look 1980-2005?
Somebody who bought RE at the 1980-1 peak, had to wait until 2005 to break even, in real terms.
So even though our population increased, the real price of housing didn’t…. miraculous!
The point is that, hand-waving claims about limitless demand do not trump the downside risk of a market that is so overbought it is breaking records regarding distance from fundamentals (price:income; price:rent; etc).
vreaa,
I suggested you draw your own conclusions and you have. I hope this helps with your decision-making.
“These stats are food for thought. Draw your own conclusions about how these might effect real estate choices and values.”
yeah – immigration is helping to drive up prices and this is part of the speculative bubble. Just as the land restrictions near Vancouver help drive up prices. (and, of course, low interest rates have also contributed.) This does not make that market stable.
It leaves the market open to a crash if, for example, N. Roubini is right about a slow down in China in the next 2-3 years. Likewise, the market could crash if interest rates rise.
I agree Yank, take away immigration and this market will correct in a pretty significant way. Are you anticipating a change to immigration policy or a rezoning of our agricultural land reserve? If you have insider info perhaps you can share.
“take away immigration and this market will correct in a pretty significant way”
As a comparison, inventory in the REBGV at the peak of the “troubles” in 2008-2009 was around 20K. In the late-90s it was well above this, close to 25K I think, and sales about the same. It was not a fun time to be a Realtor; there was a large outflow of population to Alberta and immigration into the province was low.
Slower in-migration would cause significant distress on the market but it’s not necessary to cause a crash. It’s also not necessary to have a massive immigration policy change to have lower in-migration, at least historically.
nope – I’ve got no insider info. I’m just intrigued by the Vancouver housing market dynamics. And I do wonder if I am wrong about my own predictions.
But I’ve got some speculation/ analysis. Nouriel Roubini (the economist who called the US housing collapse) suggests that China is heading for a slow down in a few years. What happens if the money pulls back? Because the fundamentals are so skewed, a slow down could cause a cascade effect with investors selling.
Likewise, I think rising interest rates will disproportionately affect the Vancouver market. I would expect that rates will be held down at least 2 years because the US (and the Eurozone) is in a slump. But if rates go up? Very unstable situation.
I’m also watching the Australian housing market right now, which I think has some things in common with Vancouver’s market.
If they plan to travel continuously through their retirement, then being stuck in home ownership will be a burden. If you own a house, you’ll have to rent it out and worry about upkeep. Or they could put stuff in storage and rent whenever they are back in town.
Its telling that they are enjoying a campfire with their children. If they owned, they’d probably spend their vacations renovating while their kids play x-box.
Our family’s in pretty much the same boat. Wanted a yard for the kids; renting one. Watching the years go by, I’m reconsidering whether it’ll ever make sense. Maybe: but my big attachment to ownership was to have a single place for growing up memories. At this point, my kids will be grown first – but we have had stability anyway. So it all worked out, regardless!
My stongest memories of childhood were of the things I did and the friends I had. The house I grew up in and my parents still own after 50 years was really just a backdrop.
r
if owning a home means sacrificing things that are too important to give up then it certainly isn’t worth it. We all have a different set of priorities and what’s good for one isn’t necessarily good for all. And the set of values changes with time as in the example posted
another briliiant mind that can predict the future.
Pay attention and you’ll find out how it’s done.
LOL. I predict rain tomorrow. That was easy.
On another post I wrote a long winded post about what I thought of the “bubble”. People have asked me to clarify one of my points about why Vancouver is such a desirable place for Asians and especially chinese. I said that it would take an essay, but after reading some of the comments, maybe it’s better that I give everyone a picture.
First, allow me to state my position on the whole situation. I am neither in the bullish camp nor am I in the crash camp. I believe that we are overvalued, but not by much. I think a correction is coming, but I don’t foresee anywhere near the 50% correction that some have predicted here. That is not going to happen unfortunately.
As for the Immigration question, I will address it now. I am a Canadian Citizen who immigrated from Asia when I was young. I have to say, it’s the best thing that has ever happened to me. To understand the core immigration issue, one must examine what is important to rich asian people. Believe it or not this all starts with the one child policy in China. As a result of this policy, Asian families, who normally are very children focused, have become even more so. For anyone who has ever received an education in China, he/she would know that it is worse than hell to go through the highschool final examination (the so called gao kao). Basically, you prepare night and day since the age of 15 till you graduate when you will take a national university entrance exam which will determine your fate for the rest of your life. Like it or not, whether you are rich or poor it does not matter. Everyone needs to go through this. No matter how rich you are, places in the best Universities in China cannot be bought with money, no matter how much. Anyways, no parent wants their kids to go through this. So they must find a way to get them abroad.
Now you ask, there are a ton of places with good education systems, why here? Well, when you only have one child, you really don’t want anything to go wrong with this kid. The only other person that you trust with this child is your wife. So the wife must also immigrate with the child. However, unlike the child who can probably integrate into any community easily, the wife can’t. I am not even 30 and I have to say it is hard for me to drop into somewhere say Germany and integrate easily into the community. Try learning another language when you are 40 and you’ll find out in a hurry that it is not that easy. So you need a huge chinese community where the wife can pretty much not learn english, or know very little of it, to get around. Sound familiar now?
Now, it may sound absolutely absurd to us, but everytime I travel to the states for business or pleasure my relatives get worried. Why? Because there is this nice misconception that the US is dangerous amongst chinese circles. Why? Cause they have guns. Now, remember, the kid is the most important part of the family, do you really want to send him to somewhere where anyone can carry a gun? Not likely.
This really narrows the places down to a few in the world. You are looking at Vancouver, Toronto, Melbourne, Sydney, Singapore. At this point, you have to look at yourself, now imagine that most of your time is spent in the bustling chinese cities where air pollution is a huge problem, where the only thing green you see if likely the little patch of grass the government decided to put there to show the foreigners, where all you see is skyscrapers, etc. You only have about 3 weeks vacation each year, do you really want to go to Toronto? I have not heard one investor immigrant who have ever said they prefer toronto to vancouver. Vancouver is as beautiful as any city in Asia. And here is the kicker, we are a relatively new city, we bring an air of invigoration to some of these people who simply see a better lifestyle here.
Now, you are down to Vancouver and the two Australian cities. Well, unfortunately for us, the Aussies seems to be perceived as more racist than us nice Canadians. At least in some chinese circles. And, asian people aren’t adventurous like their Western counterparts, they tend to want to stick to a tried and true formula. So, as the first wave of rich asians have landed here and shown that their families will settle nicely in this City without much issues. More will follow. They do NOT take the path less traveled, they like the one that has been stepped on by thousands of people.
Finally, one last thing to consider. It is very difficult to get money out of china. If you are very rich, you need to have an excuse to get your money out. Well, guess what, thanks to our abundance of resources, these guys have a nice excuse to get their money out. They can say that they are coming here to buy resources. Much easier sell to the government.
So there you have it, if you look at all these factors, you quickly realize why it is that they don’t go to Miami, or Phoenix, or Portland, hell, or even Seattle, but they come here.
That said, to cool off the bullish camp. A few thousand immigrants does not make up the whole market, so you will still get the swings, but they will come and snap up anything they can get their hands on if we do go down significantly. Because they know that in this is perhaps one of the rarest places on Earth that fits everything they and their peers are looking for. The ones who are here are buying because they know more are coming. There is a three year waiting queue in Beijing for applications. The scariest part is there have not been any significant efforts to market Vancouver abroad. This is all done by word of mouth.
I hope this gives everyone a better picture.
Thanks, Julian, will headline a combination of your two posts.
Yes this explains why Vancouver might be desirable. Pro tip: not all Chinese buy, many rent BECAUSE IT’S CHEAPER!!!!!
Thanks for the comment- much appreciated.
This doesn’t bode well for Vancouver’s future affordability if the structural situation doesn’t change. Rather then normalizing into a city friendly to the middle-class, it may go the route of Monaco.
Thanks for that, Mr. Lee… a pleasure to read.
As for, “… everytime I travel to the states for business or pleasure my relatives get worried. Why? Because there is this nice misconception that the US is dangerous amongst chinese circles. Why? Cause they have guns.”
May I suggest that you remind the extended family of a certain ‘vintage’ YellowEmperor’s axiom:
“Political power grows out of the barrel of a gun.”
Regardless, I wouldn’t worry too much (& perhaps Yank will back me up on this?), ’cause – “If they don’t kill ya first, they’ll show you the best time on the planet.” (besides, most self-styled Yanqui ‘shooters’ are only dangerous if they’re NOT aiming at you).
But yes, as regards YVR’s appeal/desirability to the extended Asian community… indubitably, CriticalMass has a lot to do with it.
Thanks again, Julian!
PS – I didn’t know the gao kao was perceived as being as tortuous as the equivalent Japanese “ExamHell”. Now I do.
true Julian. We haven’t even seen the tip of the iceberg of asian immigrants. .
You know, All… even when one actually has the wherewithal/’readies’ to ‘stump up/bite the bullet’ (without hastening the arrival of transformational assets [aka: familial legacies] or resorting to modal adaptions/’horticulture’)… The ‘value’ proposition of YVR housing – from a comparative perspective vis-à-vis those of you/us who’ve ‘been around the block’ a time or two… Well, it just… ain’t… that.. attractive.
Ok. ‘DirtySecret’ time… Were he not otherwise constrained by another’s needs, Nem’s ideal housing solution would be… either of these:
http://tinyurl.com/6bta34c
or
http://tinyurl.com/6lcwync
PS – both are available, ‘lightly used’, in plenitude… for well less than half of MSRP [and substantially less than a FroogleScot 'makeover' excluding the cost of initial acquisition].
But what’s that saying about recreational sailors? The two best days in their lives are the day they buy the boat, and the day they sell it?
Come to think of it, perhaps we can transpose that saying to owners of Vancouver RE. Or at least to owners of SFHs with “issues”.
Truer words never spoken, FS! TheSecret? You just have to have let go of your ‘quantitative’ and focus on the ‘qualitative’. And, yes Jesse – I know they’re non-productive, depreciating ‘assets’. But WoW! is that ‘depreciation’ ever fun!