Sunday, May 31, 2009

Another comment response..

How far do you think housing market can realistically drop? Im a real estate newbie, but I dont think further declines of 20-30% are realistic.

I am thinking it's more 5-10%?I am looking for a relatively new (10yr or newer) SFH in the Surrey/Langley area. I want something with a basement suite for under 450,000. I would be looking at a 375k mortgage, and was doing my affordability calculations based on 5% locked in at 10 years at 25 yr amort. If i am aggressive with my payments, and assuming straight 5% intrest i can be debt free in 13.5 years.

The bank rakes in 123k in interest. Now however, lets assume I wait 1 year. In that years time, i can accumulate 50k more towards the downpayment, and suppose interest increases up to now 7% for 10 years @25 amort. Let's say the interest increase causes a drop of 5% off the house price. That means, I can shave off 50k + 20k towards the mortgage.

So now I have a 305k mortgage @ 7% for 10 years at 25 amort. Putting in the same payment options I would have done for the 375 mortage, im am looking at 11.2 years before being debt free, and the bank earns $128k interest off of me.So, its looking like, do i overpay for the house, or give the bank more money? The numbers favor overpaying for the house.

I had a look at the historical rates you've linked, and the 5% rates hoover around 5-6% for 5 years, so likely I am over estimating the interest rate? But I think given what people are saying about inflation etc, maybe its not unrealistic? Sorry, I frankly do not know too much about the banking/fiancial system or real estate so If i miss something importatnt in my calculations, please let me know!

Anon- no one can tell you what you should do. We are bouncing back from a near collapse of the world-wide financial system.

The pull-back has happened with huge infusions of tax-payer money to bail out the bankers who were irresponsible and helped blow-up this international RE Bubble.

I personally dont see inflation coming for some time, because people are still losing jobs, and big companies are cutting back or going BK (like GM and Chrysler), so I cant see where the demand will come from.

However there is the possibility of a 'black swan event' like a drought or mid-east war that could drive prices of staples much higher. That would be a total catastrophe. Weakening demand and buying power coupled with rising prices is what leads to social unrest- like the Russian Revolution.

I am just putting that scenario up there, not because I expect it to come about, but because that is the only way I can see any major inflation in the short-term.
If that is the case, then we should have these low interest rates for at least a year or so (though maybe not quite as low as today).


Affordability has improved dramatically due to the drop in mortgage the second part of the equation will come into play for RE - the demand.

That depends on many factors...job market strength, in-migration from other Provinces and countries and commodity prices.

Together these will determine the cumulative demand for RE in our Province. Can you forecast one of these? Never mind all of them!

I cant. That's why I laugh when I read bears or bulls picking on one factor and saying this is the cause RE will collapse or rise. Did anyone think the desperate measure taken by the BOC would suddenly prop up RE from Toronto to Vancouver?

Did anyone expect oil prices to nearly double from the lows earlier this year which were sending Alberta into a major recession? Can anyone forecast where they will be in six months?


Therefore you can see how difficult it is to forecast RE which is dependant on all these factors.

However we all make our bets and mine is that we still have a lot of weakness ahead. Canfor has just idled three mills with no start up date, the Provincial and Federal Governments have lost control of the deficits, and cannot even forecast where they will be in three months. I would expect cut-backs and lay-offs to continue for the foreseeable future. All this does not seem to be the makings of a robust housing market.

I think your numbers make sense, however you should also be asking yourself how secure your job is, what will you do if you lose it and go on EI for six months, do you have reserves or family and friends who can help you out...etc.