Naïve Buyer Logic – “We probably wouldn’t have been able to afford to mortgage a house, or at least not the house we wanted, if we hadn’t jumped on it.”

“Bruce and Denise Perrett, of Port Coquitlam, B.C., got married last year and wanted to buy a house, but they weren’t in a rush.
That all changed when the couple heard Ottawa was tightening mortgage rules.
For the Perretts, locking into a 30-year term as opposed to 25 years meant an extra $300 a month that could go to strata fees or property taxes.
They sprang into action and called their mortgage broker.
“She was right on it, she got us the approval and the next day we were rolling,” said Denise Perrett. “Then we found out we had to have an accepted offer by [July 9] and then we panicked and called our realtor.” …
The Perretts spent 48 hours looking at homes and put an offer that was accepted last week on a property in Maple Ridge that has everything they want.
The best part is that they qualify for a 30-year mortgage.
“We probably wouldn’t have been able to afford to mortgage a house, or at least not the house we wanted, if we hadn’t jumped on it,” Bruce Perrett said.”

– from ‘Home buyers scramble before mortgage rules change’, CBC News, 7 Jul 2012 [hat-tip specialfx3000 at VCI, and jesse]

1. When market rules tighten, you won’t be able to afford ‘x’.
Why stop thinking at that point? ->
2. Others like you won’t be able to afford ‘x’, either.
Therefore ->
3. Prices will have to drop to ‘x-y’.
– vreaa

26 responses to “Naïve Buyer Logic – “We probably wouldn’t have been able to afford to mortgage a house, or at least not the house we wanted, if we hadn’t jumped on it.”

  1. Classic case of unknowledgable people thinking in their own little bubble not understanding that if they can’t afford, probably others can’t afford it too… therefore if no one can afford it, supply increases and prices should go down? Happy I don’t live in Vancouver, that’s one of the craziest housing markets on the planet. But it doesn’t surprise me there are people like this who think prices will go to infinite without looking at prices relative to incomes, gdp and rent.

    Simultaneously all these factors will push home values lower in the next 5 years – ageing demographics, current excess debt levels, tightening and unavailability of cheap credit, record high home ownership rates, declining housing-related employment, lower consumer confidence and spending, indirect and direct macro effects like the Euro crisis and China’s slowdown, all combined with people watching their homes and neighbours’ homes value decrease. I don’t know about you guys but I have popcorn ready for every day of the next 5 years starting July 9. I may throw a little party, but everyone I know already owns a home. It will be a sad party, indeed.

    Anyone know where CMHC’s insurace in force stands? Aren’t they running out of money yet?

    • “It will be a sad party, indeed.”

      Come now, strap on the webcam and have hundreds of fellow bears from around the world enjoy the festivities with you!

      Re CMHC insurance in force, I think it’s around $900BB or so. They will never run out of money because they are underwritten by Her Majesty’s government (i.e. your taxes).

    • I’ll party with you… I sold last year at a great price and am renting a house on a 1/2 acre for a good price. But I agree, watching this show will be bitter sweet. Can’t say I didn’t warn people for the last 4 years… but nobody likes an ITYS’er (I told you so’er). My heart still goes out to people although they got themselves into this mess and have to ultimately take responsibility for their cognitive negligence. Still, I’m looking for ways where I can be of help to my friends as this crisis unfolds. It certainly won’t be easy to have been right and to console those that were wrong.

      • Thanks guys. Happy to have found this site. Like-minded people tend to gravitate toward each other..

        My choice to rent always seems to puzzle other people. No calculations or economic analysis are needed, my co-workers and friends are always certain that buying is always a better choice. My friend just bought a house before the mortgage rule change, and didn’t take my advice. We all work in the science/engineering/technology sector (not in Alberta) but he is completely oblivious to what’s happening in the rest of the (economic) world. He’s the type that truly believe Canada entered and emerged from the 2008 recession unscathed. Actually, he didn’t even know there was a crisis in 2008 and there will (probably) be one from the next country exiting the Eurozone! It’s sad that these are the types of people that are trying to give me advice.. All I can do is be as humble as possible… but it’s frustrating… My point is – the herd thinking is a very strong force. One that I refuse to believe in.

        Regarding the CMHC Insurance in Force, probably close to around $580B? I spent 3 days reading archived material from Ben Rabidoux’s site about a year ago. I was once a believer that house prices can only go up. Boy, was I wrong…

  2. LOL vreaa that’s funny, breaking out x AND y. What, I have to use Math 10?

  3. pricedoutfornow

    I saw this story, I really couldn’t get over how naive these people seemed. Yes, why DIDN’T they take their thoughts a few steps further and think “Gee, if it’s too expensive for us, won’t it be too expensive for everyone else too, thus prices will go down?” Another way to put it-when they go to sell in a few years time (let’s just say they need to move up), there will be fewer buyers to sell to because amortizations are shorter. The exact opposite of what happened when they brought in 40 year amortizations-then, there were MORE buyers out there, because suddenly MORE people qualified for these mortgages. Now, there will be FEWER buyers because fewer will qualify (theoretically). So why rush to buy an expensive property, one you can barely afford (and it looks like from the story, these people are not exactly rolling in dough-the guy looks like a tradesman, hopefully not in new home construction).
    I guess though everyone in the lower mainland has been brainwashed that come hell or high water, prices will NEVER go down! EVER EVER EVER! Which we all know is just ridiculous since average prices are now down 14% (except Global didn’t tell us that fact, it told us the new, made-up HPI number). Argh!

    • Yes, they’re naive. There’s probably no excuse for that. But for whatever reason, that’s how buyers have been shaping up these years. Maybe it’s because most of them are financially illiterate or whatever — who knows. But certainly if their trusted friends are doing the same and they probably went to their friends for advice…

      Well, it’s certainly not hard to connect the dots. Not everyone thinks about their purchases. And even the ones who do are largely using borrowed ideas. So I’m not going to quite say that it’s not completely their fault, but I’m going to give credit where credit was due. Their friends and their family have certainly helped them into this bad situation.

      It’s going to be a sad decade. Remember, as tax payers, we’re not getting out of this scot-free either.

  4. “She was right on it, she got us the approval and the next day we were rolling”

    How could that happen? With the mortgage rule deadline coming up in a week, how is it possible that the mortgage broker can process this buyer’s application in a day? Wouldn’t there be tons of impending transactions? Wouldn’t the broker be swamped with applications? Is this why one needs to be highly qualified to become a mortgage broker?

  5. So… not only did they rush into a huge financial decision in less than 48 hours, they plainly had no time to get the place inspected and almost certainly will be able to watch their rushed purchase depreciate in the next few years, but…

    “The best part is that they qualify for a 30-year mortgage.”

    They get to pay more interest on this badly thought-out purchase for 5 years longer, and get even further indebted! Hooray!!

    *rolls eyes*

  6. Heard the same story this morning at our community association as told by a woman who said they put their house shopping into high gear to beat the deadline. Pulled the trigger on a 3 + 1 bedroom with double car garage that had been listed for just 3 days at just over 300K. Mortgage will be the same as renting in their previous neighbourhood but with double their previous commute time to just over 30 minutes!

  7. Interestingly enough July 9th looks to be coinciding with a potential massive downside move in the market that has been building ever since the 2009 bottom. Sure the FED could prevent it with QE3 (for a bit longer) but I don’t think that a bounce will happen until we see much lower equity prices. July 9th could be the tipping point in more ways then one…

    • Jordan -> Actually, if one is a contrarian one would expect a fair bounce around about now (in ‘risk-on’ assets). This based on data such as mainstream analysts recommending very low stock allocations (a very unusually low 40% cf normal average 65-70%!!); precious metals sector oversold; amateurs having been deserting stocks; etc.
      Ultimately, though, I agree, there will be a very large move down at some point. Just not right now.

  8. This anecdote is so dumb and yet so sad.

    I have to admit that I am depressed after reading – why are our citizens so gullible and naive.

    I don’t have anything else to add beyond above personal feelings.

    • one must look at anything the CBC produces with a jaundiced eye. This creepy national network wants the public to remember July 9 as having significance for future reference. The story is likely a fabrication. In any event, July 9 is upon us. When the banks open at 9:00, the mortgage world changes forever. If you are inclined or experienced, or wish to elevate yourself in life, look at the astrology of July 9, 9:00pm EST or PST, and you will be Blown Away with what you see.

      • excuse me, that should be 9:00am EST or PST. Makes no difference. The object of your consideration is the Moon/Mars in a challenging Opposition. And i’ll stop there, as this forum is not ready for in depth financial astrology.

      • Thanks paul, you’re a gentleman.

        Definition of a gentleman: “Somebody who knows how to play the accordion, but doesn’t.”
        😉

  9. 4SlicesofCheese

    Earlier in the year I mentioned a bull at my work, who knows about my bearish views asked my prediction for house prices for end of the year, to which I said 10 % and he immediately bet me 100 dollars so I took it.

    He came up to me fri and said looks like I might owe you 100, so we kind of got into theories about what is causing the recent declines and he believes it solely has to do with the global economic troubles, namely Europe.

    He believes the uncertainty is causing people to slow down buying.

    I go on to explain the exact same thing I told him a few months ago, locals over extending themselves and local incomes do not support prices and the recent mortgage rules magnify how sensitive locals economic health are.

    But no he still believes what he believes and says I focus only on facts and not the “fuzzy things” his words, such as everyone wants to live here, no land, growing demand etc.

    Sigh

    • That’s okay. At times like that, I get to feel smarter than someone else for once. =) (Hey, it’s rare, so I have to cherish it…)

    • I don’t know why I never thought of that, Cheese. Your idea of making bets is a good one. Instead of me arguing with all the lunkheads I should just make bets and take their money. I KNOW the odds favour my position heavily. A hundred bucks sounds too low to make it worth the time though. It is hardly good punishment. I want those losers to cut my lawn!

      • 4SlicesofCheese

        Its funny, he got so frustrated debating me that he basically said fine whats your prediction, I said 10%(which I thought was conservative) and he was the one who bet me 100.

        He was so sure of himself I think he thought I would have backed down after money was on the table and all the people listening to our conversation.

        At the times he had a little group of bulls around him and they all thought I was crazy. Now most of those bulls are in the bear camp now. Although I dont believe they really know the extent of what is to come, they just parrot what they hear in the MSM currently and right now that is bearish news.

        This is a smart guy too, and had sold in 08. I think he felt he lost out and never should have sold then because prices dropped but of course shot back up to new highs so he now believes Van RE is bulletproof.

  10. Carioca Canuck

    If a mere $300 a month on an overpriced lower mainland crack shack was the difference between buying and not buying for these greater fools, ie: being able to afford a place or not, then they couldn’t afford what they bought anyways.

  11. …locking into a 30-year term as opposed to 25 years meant an extra $300 a month that could go to strata fees or property taxes.

    Hell, who doesn’t want to spend more money on taxes and strata fees? Naturally they “sprang into action”, before this opportunity was gone forever.

    I love how the article was written as though this couple just dodged a bullet. What they don’t mention is that they dodged the bullet by jumping in front of an oncoming freight train.

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