“You might feel differently if you’re a baby boomer who plans to sell the family home soon to help finance your retirement. The same applies if you bought recently and expect rising prices to carry you into a bigger home in a few years.”

“None of this matters to people who own homes they’ll live in for many years to come and thus shouldn’t care much about the current value. You might feel differently if you’re a baby boomer who plans to sell the family home soon to help finance your retirement. The same applies if you bought recently and expect rising prices to carry you into a bigger home in a few years.”
– from ‘Canada’s housing hangover: Real estate boom, meet dot-com crash’, The Globe and Mail, 2 Jan 2012[Hat-tip Nemesis and other readers]

In Vancouver, almost every owner has come to ‘care much’ about the ‘current value’ of their home. – vreaa

20 responses to ““You might feel differently if you’re a baby boomer who plans to sell the family home soon to help finance your retirement. The same applies if you bought recently and expect rising prices to carry you into a bigger home in a few years.”

  1. pricedoutfornow

    I would argue that people WILL care and this will have a significant impact on the economy. Suddenly, people who lived in what they thought were $1 million Vancouver crack-shacks will realize they are not “richer than you think” and it won’t look like such a bright idea to take all that money out of the HELOC since the house isn’t worth what it once was. Consumer spending will sag as people no longer use that credit to buy new cars, take vacations, go shopping and as was suggested here yesterday, even do things like undergo expensive fertility treatments. Recession, anyone?

    • Agree. Many who tell themselves now that they don’t care about the headline market price of their home will end up caring about the loss of imagined wealth.

    • This.

      The 10-figure loss of paper wealth in the lower mainland will only be the trigger to a much deeper and longer-lasting calamity.

      Batten down the hatches, horde cash, and prepare for some sweet deals among the ruins.

      • Like in ten years……it will be a long wait. Better plan on doing something else in the meantime. This drama will take years before the final act plays out.

    • Agreed. Evaporating wealth effect. And dialing back on the HELOC-based consumption may not even be an option for many people. If house prices hit a prolonged downward trajectory, I’m sure banks will be lowering HELOC limits across the board. And they may be forced into it themselves, given the government’s recently imposed reduction in the loan-to-value limit for HELOCs.

      If the “home equity” part of a home equity line of credit is continuously shrinking, it shouldn’t be a surprise if the line of credit shrinks right along with it. And banks aren’t required to loan up to the limit. If they get truly spooked by plummeting house prices, I’m sure they’ll ratchet back loan limits, and loan eligibility, even more severely than they are required to by law. And crank up interest rates to cover their perceived increased risk, as happened in 2008, when many people, including us, got nice little letters in the mail saying the bank was increasing our HELOC interest rate by 1%. Just like that. Most people probably don’t read the fine print. Unlike with mortgages, banks can increase interest rates on lines of credit, including HELOCs, at their own discretion, whenever they like.

      Rob Carrick has been one of the more sensible and cautious commentators throughout the bubble, neither bull nor bear, and probably quite a bit more bearish in private than he is in The Globe. In this latest article, he probably overlooked mentioning the knock-on effect on HELOCs.

  2. and my innate desire to punch one of the smug pricks in the face will be taken care of by reality. Apparently karma IS a bitch

  3. Big cover story in Macleans this weak on the crash. They boldly state that its already here. That will counter crap journalisticieces from local media.

  4. My conjecture is that Realtor/morgage broker/development incomes will be under pressure and that the “write what you know” syndrome will be cause for more distress than many think.
    – Those involved in FIRE will see impaired incomes
    – They are on balance more invested in local RE because they know the mechanics and live/breathe the market daily.
    – They will have more difficulty securing loans if lenders smell income deficiency
    – Ergo they will feel greater need to sell than the casual investor.

    That dynamic will be something to watch in the next few years.

    My advice: A B C

  5. Oh and remember, rates have not gone up yet. If rates were even to rise a tiny bit, be prepared for even bigger drops. When my parents bought in the 80s, rates were 20%!

  6. Naked Pikachu 9000


    Dear Exulted Comrades, the Germans are coming. NK government officials will soon swarm the shores of the Bestest Place on Earth

  7. Chavez's privy chamber maid

    doesn’t mean much to a capitalist hooked on RE. NK will be using the Vietnam model. Sniff around Central and South America if you must speculate on RE, as some of these countries are developing more comprehensive private property systems. In using RE to get ahead you must secure the deed, and the political/judicial/bank system must allow a process

  8. “The same applies if you bought recently and expect rising prices to carry you into a bigger home in a few years.”

    This kind of thinking always boggles my mind. If you’re going to be a net purchaser of RE going forward, you want prices to come down, even if you already own some.

    Lets say I have a 50K of equity in a 100K home, and covet a 200K home. Right now I need 150K to own that 200K home.

    Prices rise 50%. Great I now have 100K of equity in a 150K home! Problem…the home I covet is now worth 300K so I need an additional 200K to get it rather then the 150K I needed earlier. Guess I was rooting for the wrong team.

    • Here’s how it’s worked on the way up:
      Your 50K of equity gets you a 500K home (with 450K mortgage).
      Prices run up, your home now sells for 900K.
      You cash out your 450K equity (50K plus 400K run-up), and ‘buy’ a $1.5M home (with a $1.1M mortgage. 30% down, high-roller!).
      For a relatively brief period, it looks as though you have, indeed, ‘moved-up’ care of your gained equity. Of course, all that has happened is that you have been allowed to borrow more. (But a result of this that there are still ignorant folks out there who think that the key to moving up to your ‘dream home’ is getting into the market asap.)

      Now, the virtuous cycle turns vicious:
      Prices drop by 50%.
      Your briefly-held-in-hands 450K equity turns into minus-300K (you owe 1,100K on a home the market now values at 750K).

  9. Carioca Canuck

    IMHO taking out a HELOC to buy a car, new boobs and a butt lift, or whatever it is you want, is a clear admission that you are living beyond your means, both mentally, and financially.

    Sell the house………….pocket the tax free capital gain, and then rent, or buy a cheaper house, if you’ve just feel like you’ve just gotta “own” RE, and perhaps invest the remainder of the proceeds, and then go use some of the money to buy the car. Or keep the big house, and lease the car.

    Taking on debt to buy a depreciating asset is just plain stupid.

    Oh wait, did I just give you everyone another reason not to buy RE ?

    • But if a boob job allows you to make more money in your career then the debt you take on could be worth it.

    • Taking out HELOC to buy a luxury car is stupid, I totally agree. Look, I’m not one to chastise people for buying luxury goods–heck I spent 70K on my luxury car but the difference is I paid it off in a couple months (this was back in 2008). But I’ve seen, in my profession, TEACHERS driving Mercedes Benzes and BMW X5s, nurses drive Porsche SUVs, and AC flight attendants driving BMWs. Something is seriously wrong here.

      • Dude, I wouldn’t belittle your support staff – same with teachers (not sure about flight attendants). They make decent salaries too even if they’re not doctors. It’s also not what you make, but what you can save that matters. Looking down on other disciplines is a bit elitist don’t you think?

        Anyhow, I do get what you mean.

      • I got $1000 that says those teachers have a car loan/lease. 😉

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