‘How badly would you be hurt in a housing market price correction?’ [The Globe and Mail]

“A question for everyone who thinks houses are an investment: How much would a market decline hurt you? …
Houses are a financial asset that can rise and fall in price, just like stocks, bonds and gold. It’s important to remind ourselves of this after a 25-per-cent price gain between 2008 and 2013 on a national basis and a doubling of prices in Vancouver, Calgary and Toronto over the past 10 to 12 or so years. …

Want to see what a 25-per-cent decline would look like in today’s market? Our Correction Calculator shows you the numbers for the Canadian market as a whole, as well as the Big Three markets of Vancouver, Calgary and Toronto.

The calculator in no way predicts a downturn in housing prices. It’s only a tool for helping people understand how both declines and increases in house prices might affect them.

Be cautious when viewing how a rising market will increase the value of your home. Interest rates are close to rock bottom levels after a 30-year down cycle and likely to rise in the next couple of years. The impact on affordability will be significant.

“I think it’s going to be a huge shock to the Canadian real estate market,” said Craig Alexander, chief economist at Toronto-Dominion Bank. “I do a lot of real estate presentations from coast to coast and an awful lot of young people think these low interest rates are normal. They don’t see anything abnormal about a 3-per-cent five-year mortgage. I always have to say, can you please have a conversation with the grey-haired gentleman at your table about the normal level of interest rates.”

– from Rob Carrick, Globe and Mail, 21 April 2014

Recorded here as part of our series ‘Incredibly Infrequent Posts’.
The idea of a possibly significant correction is getting mentioned more and more in the MSM.
Our outlook for Vancouver RE has not changed. We still foresee a large correction at some point. And, contrary to some guesses on the last comments thread, we have not capitulated and bought or anything bizarre like that.
Markets can remain irrational for longer than one can stay sane.. the Vancouver RE Bubble has been an absolute doozy.
For evidence, check out the graphic below, keeping in mind that the Vancouver chart is running at a trend that is unsustainable, arguably anything from 2% to 5% more per annum than is justified by any related real growth, and that prices tend to revert to means when they correct.
– vreaa

image
– from ‘Canadian, U.S. housing markets defy expectations, price gap hits record’, G&M, 23 April 2014

2 responses to “‘How badly would you be hurt in a housing market price correction?’ [The Globe and Mail]

  1. That chart is scary enough — imagine it with Vancouver data…

    Doozy indeed, vreaa.

  2. Ah, a timely post! Having just received notice from our landlord that our Langley rental house is going to be sold, I came here to find some solace and resolve! I can always count on VREAA for a dose of sanity in our crazy Lower Mainland housing market.

    The question is, how best to handle the situation? As I lay awake half the night after reading our landlord’s email, various thoughts came to me. We have been renting the house in question for the last 5 years (since we sold our condo in 2009), and planned to keep renting here indefinitely (until the housing market drops by 30-40% to reasonable valuations as per Price:Rent or Price:Income). We like the area and the local school, and we are quite settled in this house (although it’s not as big as what we’d choose to buy, it’s ideal in many other ways). Landlord has asked us if we’d be interested in buying it before it goes on the market. We are financially stable, no debt, lots of cash and investments, credit scores > 800, and could easily put 25% down to buy this house at this time. We have also been excellent tenants.

    My instinct is to say no way, but I guess we should at least find out what the asking price would be. The assessed value of the house dropped by about 7-8% for 2014, after having gone up by about the same amount in 2013. But, presumably the price would still be close to the assessed, which as far as I’m concerned is at least 50% over a reasonable value.

    Therefore, where should we go from here? I’m thinking that we shouldn’t panic and start looking for another rental place just yet. For one thing, our current one year lease has 6 months to go yet, so I think that if it sells before then, the new owners will just have to put up with us living here until the lease runs out and they give us proper notice. We could suggest that it be advertised as an “investment property, tenants would like to stay”, in hopes of merely changing landlords. I don’t think we can be booted out before the lease ends unless we stop paying the rent or start behaving very badly. I’ll have to read up on the RTO rules on leasing through ownership changes though.

    I’m not looking forward to the inconvenience of showings and open houses of course. Presumably we aren’t under any obligation to have the place perfect for showings. When we were selling our condo, we spent endless hours decluttering, painting, and staging it, then spent about 2 hours before each showing making it perfect. For a rental place, no way! We have a lot of stuff, and unfortunately for our landlord, the place looks jammed with furniture/treadmill/universal gym, garage full of cars and bikes, etc. Guess morally I should do a minimum of decluttering, clean up my desk, etc. I also worry about who’s going to have a key to the place. Think they have to give 24 hours’ notice before showings of tenanted places. Are we required to leave during showings?

    Additionally, it may not sell in this spring/summer season, as it’s not available for occupancy until the fall. If it doesn’t sell very soon, we could offer to pay a voluntary rent increase in exchange for another year’s lease, but presumably the landlord is under more financial pressure than that, and needs to actually sell. Think the landlord has about 20% equity at the current value, but I think it will likely sell before the price drops 20%. Unfortunately, like everyone else on here, we’ve been waiting so long to see this whole house of cards collapse that I’m no longer confident it will happen in any reasonable time frame, or at least soon enough to put our landlord underwater and make a sale impractical. (not that we want that, we just don’t want to have to move 🙂 Same landlord had it for sale in 2008/9 when prices dropped about 15% in 6 months, (took it off the market when we rented it) and I don’t think the landlord will risk having the price drop significantly again this time.

    I can at least look on the bright side though – we should have about 6 more months here to enjoy the summer, and there is a small chance that a buyer will come along who wants to keep renting it to us.

    At the current prices, mortgage interest and other sunk costs of ownership would be about equal to what we’re paying in rent, so for me there is minimal financial downside to continuing to rent indefinitely. But, I hope this isn’t the start of us having to move annually as we rent other houses for a year lease then find the new landlord has to sell. We’ve always known that undesired moves are one of the few downsides to renting in the current market, and we’ve been so fortunate to have been here for 5 years, which is longer than many owners stay in places they buy! At some price point, (far lower than current), it will be financially worthwhile to buy a house, but that is certainly not now.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s