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Interest rates rising next year, prepare for a world of pain

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  • Mar 22nd, 2017 2:06 pm
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FirstGear wrote:
Mar 20th, 2017 10:13 am
I'm from the GVA which is a lot worse than those figures, and that was my rationale for buying a home elsewhere. In real terms, it's much more expensive when you relate to average incomes in that area too. It's strange as even in a town 1.5
Hours away from Vancouver, you can still easily pay $450-500/sq ft, but people there are happy to make $30-40K/year. You see mostly cheap little vehicles, and people just making ends meet otherwise. Not to say vehicles are a measure of happiness, but it's just a telltale sign that most people are house poor. It's just an odd sight in a place where a good detached easily runs $1M+. The common excuse is to stay in the area as they couldnt ever live elsewhere, especially if you're Asian and like to associate within your own circles- toronto being the only other major Asian center in Canada, but has a harsher climate. Or, people just keep buying in fear of forever being priced out, and when everyone thinks like that, it's a never ending frenzy. Or, you're just a hippie (Vancouver area is hippie central).

To me the struggle to barely afford a $1M house to say you live 1.5 hours out of Vancouver wasn't worth it, so I opted to go somewhere where housing is still expensive on Canadian terms, but about half of that. Lifestyle in other parts is more balanced, so after paying for your home you can at least enjoy other pleasures in life. At least there are economic opportunities here and a hard working person has a chance to make a future.

Toronto at least has a financial industry. Though competitive, there's at least a small high income crowd that makes some of the housing prices make sense. Not long ago West Vancouver's average household income was $82K, while the average home was $3.5M. It's mostly old money that keeps getting passed down and the offspring just feed off it, or find some arrangement within the inner circle, working menial jobs just as something to do.
I agree with most of what you said except for the "cheap little vehicles". I find in Vancouver municipality everyone is driving around in a brand new car and most of these are luxury german or high end import. It's nuts! I think the people that live in Vancouver have money that came from somewhere else that is not truly legitimate and they have no problem spending on it on expensive, luxury items OR there are others that really care about how they look and appearances. I would bet that alot of people have dipped heavily into their home equity to fund their lifestyle because the amount of money being spent on vanity here does not reflect the kind of money people make here. People live like they are from Hollywood but live in a super highly taxed and high cost of living environment. Not sure how this is all going to resolve itself. I suppose for one thing, many people will never truly own their homes outright.
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XtremeModder wrote:
Mar 20th, 2017 8:58 am
Yea that's my only worry however I'm gonna take a random uneducated guess and say I have another 3-4 years of saving before housing becomes more affordable, specifically for first time home buyers and my car will also be paid off by then as well.

The way people live now is beyond me. I rent and I don't mind, I know one person who bought a house with their brother... they used to be able to do simple things like go out on tuesdays after work for cheap wings with coworkers... now they can't even afford to spend that $15. I have another friend who claims to make a LOT of money in their job, no car payments and all that yet I know for a fact have missed a few mortgage payments...

I believe the current market is making many live incredibly stressful lives and living a lie as well. Once the market comes back down and houses aren't worth close to what they are now, it's going to suck for many of them and the people like myself and many others who decided to wait will ultimately end up doing better.

But then the same cycle will just happen all over again.

But what do I know.... I'm just a renter who would prefer not to spend $580K on a house that's actually worth maybe $320K
You are assuming many things here.

1. That the market will go down significantly in the next few years based on Interest Rates.
2. That even with interest rates lower you will be paying significantly less monthly.
3. People will sell their homes at a loss.
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rich24 wrote:
Mar 20th, 2017 10:43 am
You are assuming many things here.

1. That the market will go down significantly in the next few years based on Interest Rates.
2. That even with interest rates lower you will be paying significantly less monthly.
3. People will sell their homes at a loss.
The people that bought when rates went up before are the ones that will be laughing or are laughing now when they sell.

I don't think the market will go down significantly, but there are a ton of people even struggling to make ends meet because they're so house poor.

If rates went up, for many and I could be wrong and probably am, those that can't afford it even more so will either have to sell or have their homes taken by the banks. It's not like it hasn't happened in the past.


Everything is continued speculation. The last time I got pre approved on a mortgage was at 5% interest. And I recently read I think yesterday about 2 major banks going on about rate increases coming so it's going to happen... it's just a matter of when.

Again it's all opinion though.
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XtremeModder wrote:
Mar 20th, 2017 10:02 am
What I meant was, in my area, when the market wasn't insane, houses in my area were $320K-$390K. Now those same houses (many of them are pretty old) are going for $580K or more. One near me is literally falling apart and is priced at over $500K. I don't care if someone buys it... my question is WHY.
Because mass bank robbery due to loose credit.

Even after 6 hikes US rates would be 2%, still lower than 4% long run avg. Still allow for rate cuts if hike didn't work out next few yrs. So at best Fed can touch 4% or hold there but no more.

Plus BoC does not want to follow suit anytime soon. And if BoC doesn't follow, CAD drop, and import inflation i.e. food prices goes up immediately.

If you had $80K cash for 20% down on $400K housing. Then you see at worst case, 3-5% housing growth, sometimes 50% surge and lots of anonymous and independent offers.

Your leverage is 5x:
5x3%=15%
5x5%=25%
5x50%=250%

And the $80K only receive 1% Bank GIC interest and inflation is 2%. So your real return is -1%.

Will you choose -1%, or at least 15% for parking your $80K?
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LongLiveRFD wrote:
Mar 20th, 2017 1:32 pm
Because mass bank robbery due to loose credit.

Even after 6 hikes US rates would be 2%, still lower than 4% long run avg. Still allow for rate cuts if hike didn't work out next few yrs. So at best Fed can touch 4% or hold there but no more.

Plus BoC does not want to follow suit anytime soon. And if BoC doesn't follow, CAD drop, and import inflation i.e. food prices goes up immediately.

If you had $80K cash for 20% down on $400K housing. Then you see at worst case, 3-5% housing growth, sometimes 50% surge and lots of anonymous and independent offers.

Your leverage is 5x:
5x3%=15%
5x5%=25%
5x50%=250%


And the $80K only receive 1% Bank GIC interest and inflation is 2%. So your real return is -1%.

Will you choose -1%, or at least 15% for parking your $80K?
You've left out negative returns because those are impossible?

People keep saying a 20% drop "is nothing" because it just resets prices back X months/years. No big deal.

Well, that loss is a huge deal for anyone who bought <X months ago and now has to sell for a loss when they have to move due to external circumstances. Job transfer to new city. Loss of job. Medical emergency. Family situation changes. Lots of reasons one might have to unexpectedly sell.

Put 5% down and then have to sell for a 20% loss ... how fun is that going to be. Ya, the people who bought X months ago are fine. But a bunch of people are not.
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ace604 wrote:
Mar 20th, 2017 1:52 pm
You've left out negative returns because those are impossible?

People keep saying a 20% drop "is nothing" because it just resets prices back X months/years. No big deal.

Well, that loss is a huge deal for anyone who bought <X months ago and now has to sell for a loss when they have to move due to external circumstances. Job transfer to new city. Loss of job. Medical emergency. Family situation changes. Lots of reasons one might have to unexpectedly sell.

Put 5% down and then have to sell for a 20% loss ... how fun is that going to be. Ya, the people who bought X months ago are fine. But a bunch of people are not.
I know. It used to be foreign speculators, then rich local, and somehow now it's the avg Joe jumping in.

Otherwise, explain the 44% price surge (40yr old bldg) to me: http://condos.ca/toronto/the-pavilion-10-kenneth-ave


Even my concierge security told me the bidding war is back, used to be half dozen offers but now it's like two dozen.

There's only two paths, and if you are wrong you pay:
1. Cliff ahead: What you said.
2. Lifeboat situation: Get priced out, and not much inventory to respond so many condo units surged $50K. 5x leverage, so if you missed this time, you'd save $10K more at -1% growth rate.

My bldg manager is telling me every day, there's some young people begging to get them rental vacancy. According to my agent, 10%+surge in real price, and has not happened last 20yrs.

So I am not sure if the above two extremes can happen simultaneously but likely sequentially. But if you are wrong about your true needs, you pay.

I doubt BoC rate decision along would affect housing price, unless they pulled the credit.
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XtremeModder wrote:
Mar 20th, 2017 10:02 am
One near me is literally falling apart and is priced at over $500K. I don't care if someone buys it... my question is WHY.
The land is worth something, depending on the neighborhood sometimes a lot more than the house.

The first property I looked at many years ago had a small bungalow on it, Sub $150K if I recall. I started asking questions about the roof, furnace etc. The person laughed and said "you are new to this aren't you". I replied "yes".
He replied "Son, this house already has a demolition permit on it."
Less than a year later, there was a new monster house on the property and it sold for > $1 million.

That was my first lesson in understanding what "location, location, location" meant.
I never forgot it.
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choclover wrote:
Mar 20th, 2017 10:39 am
I agree with most of what you said except for the "cheap little vehicles". I find in Vancouver municipality everyone is driving around in a brand new car and most of these are luxury german or high end import. It's nuts! I think the people that live in Vancouver have money that came from somewhere else that is not truly legitimate and they have no problem spending on it on expensive, luxury items OR there are others that really care about how they look and appearances. I would bet that alot of people have dipped heavily into their home equity to fund their lifestyle because the amount of money being spent on vanity here does not reflect the kind of money people make here. People live like they are from Hollywood but live in a super highly taxed and high cost of living environment. Not sure how this is all going to resolve itself. I suppose for one thing, many people will never truly own their homes outright.
Was talking about Coquitlam and east. You'd be surprised at how ridiculous the housing is still. It's not like further west where German cars are typical.

Somewhere else, or "old money". Sometimes it's called "white rich". Some people say Asian money often is earned through sweat and tears in early years (or at least the previous generation did), then compounding takes its course. White rich is where you're just born into it.
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XtremeModder wrote:
Mar 20th, 2017 10:02 am
What I meant was, in my area, when the market wasn't insane, houses in my area were $320K-$390K. Now those same houses (many of them are pretty old) are going for $580K or more. One near me is literally falling apart and is priced at over $500K. I don't care if someone buys it... my question is WHY.
That's not exactly how valuations work. Basically, you can think of it a few ways.

The Realtor:
1) Houses are "worth" what people will pay. This seems obvious, but it's really that simple. A house is "worth" whatever people are willing to pay for it.

The Investor:
2) Houses are "worth" whatever you can rent them for.

This one's a little trickier, but if you rent that $580K house you value at $380K, how much would you pay over the next 7-10 years? Expect your rent to go up 25% in that time and calculate it. If your mortgage+property tax+maintenance+insurance+closing costs is $3000, and renting the equivalent place is $2000 then renting is probably going to be better to the tune of $12,000 / year. However, if renting that place is closer to 75-80% then it's more of a question of whether you feel it's worth it or not. Some people are willing to take a loss for the first 10 years. A good rule of thumb is add 25% to your rent cost and base your monthly costs on that... as rents do go up.

The speculator:
3) Houses are "worth" what you speculate they will cost 5 years from now.

This one is the riskiest, but potentially the most lucrative. It's not really investing, it's speculating, it's like buying a stock that you think MIGHT increase due to other factors. Houses aren't nearly as liquid as stocks, but if it's in a good area and you feel that it reasonably satisfies criteria 2 ( I.E. if you rented it out, you could either absorb the loss for a few years, or you'd break even ) then a house that seems high may have been undervalued at $320k. It's not AS good a time to buy, but if you feel there's still room to grow, it may be a solid investment. It's a risk, but it can be done.

In my opinion, the smart money has either left Vancouver... or is no longer buying in. They saw the writing on the wall last year. They're either holding to see how things shake out this spring, or have sold already. The fact that your average joe is trying to "get in before it's too late" worries me. Rumor has it that Feds are going to introduce a speculator's tax on housing. I think it's a good thing personally. Housing shouldn't be a treat as a commodity, it just guts cities in general. Capital gains should NOT be waived on your personal residence if you are selling less than 5 years after purchase.
I'd love to write history... in advance.
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I think part of the issue is that younger people today have never actually seen two things:
1. Interest rates increase
2. House prices fall or crash

I have seen both events occur and while it is possible that these things may never happen again, history has a tendency to repeat itself (with a twist) and as deluded as our politicians are, they cannot control these things. When they happen, they can go like a runaway train. Just saying.
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choclover wrote:
Mar 21st, 2017 10:58 am
I think part of the issue is that younger people today have never actually seen two things:
1. Interest rates increase
2. House prices fall or crash

I have seen both events occur and while it is possible that these things may never happen again, history has a tendency to repeat itself (with a twist) and as deluded as our politicians are, they cannot control these things. When they happen, they can go like a runaway train. Just saying.
The thing that's different this time is the amount of debt everyone is carrying. People are maxed out. If interest rates were to rise sharply, people would be at risk of losing everything. There would be massive bankruptcies and consumer proposals. Politicians know that and will do everything they can to prevent it from happening. They may not be able to stop it forever, but if they're smart, they will do everything they can to ensure rates rise slowly over a long period of time, otherwise there's going to be massive amounts of debt that never gets paid back.
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Shaner wrote:
Mar 21st, 2017 11:36 am
The thing that's different this time is the amount of debt everyone is carrying. People are maxed out. If interest rates were to rise sharply, people would be at risk of losing everything. There would be massive bankruptcies and consumer proposals. Politicians know that and will do everything they can to prevent it from happening. They may not be able to stop it forever, but if they're smart, they will do everything they can to ensure rates rise slowly over a long period of time, otherwise there's going to be massive amounts of debt that never gets paid back.
I don't think so. People are very adaptable. There will be SOME bankruptcies, sure... just like in the US. It will be all over the media... people will feel like the 3-4% affected are more like 30-40% just like people felt like the 5-6% of foreign buyers was more like 50-60%. People will cut back, they'll trim the fat, and as a last resort sell the house at a loss. Politicians can afford to do this if they drag it out over a reasonable period of time. They've had 3 years of warnings that the fed was raising rates... they should have been trying to aggressively curb debt before now.

Canada doesn't control mortgage rates, remember. The US bond market determines rates.

If they do NOT raise rates in step with the US, the Canuck buck gets crushed as confidence in the Canadian economy... and inflation goes crazy because we import our goods. Exporters will do well for a while, but consumer prices will go up... and fast. We may see an uptick in US tourism and cruise passengers for Alaskan Cruises as the American Economy continues to surge.
I'd love to write history... in advance.
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atomiton wrote:
Mar 21st, 2017 3:29 am
The fact that your average joe is trying to "get in before it's too late" worries me. Rumor has it that Feds are going to introduce a speculator's tax on housing. I think it's a good thing personally. Housing shouldn't be a treat as a commodity, it just guts cities in general.
Agree, agree, agree. Basically just get rid of the capital gains inclusion rate of 50% for house-flipping. We want to encourage real investment with that tax policy, not house-flipping.
Capital gains should NOT be waived on your personal residence if you are selling less than 5 years after purchase.
Disagree ... lots of people have to move for unexpected reasons. If you need to sell your primary residence you shouldn't be punished. If you want to flip your primary residence there should be strict checks on this, and perhaps even exclusions if you own more than one property so you actually have to live there and move in/out. There's still the absent owner / renter home-owner loophole. It's not clear cut IMO.

I think canning the 50% inclusion rate on house-flipping and properly enforcing the primary residence exemption would go a long way.

It's too bad the government didn't act decades ago before they let people use our homes as a speculative stock market. It was all "great" for existing home owners (voters) ... now the kids born into this mess and the people coming of voting age now are the ones paying for the mess. City neighbourhoods becoming soulless no-kid zones as families can't afford to get the space they need and have to leave the area.

It's really too bad they waited so long to do anything.
Last edited by ace604 on Mar 21st, 2017 1:56 pm, edited 1 time in total.
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Shaner wrote:
Mar 21st, 2017 11:36 am
The thing that's different this time is the amount of debt everyone is carrying. People are maxed out. If interest rates were to rise sharply, people would be at risk of losing everything. There would be massive bankruptcies and consumer proposals. Politicians know that and will do everything they can to prevent it from happening. They may not be able to stop it forever, but if they're smart, they will do everything they can to ensure rates rise slowly over a long period of time, otherwise there's going to be massive amounts of debt that never gets paid back.
Ask yourself other than inflation from economic expansion...Why else would interest rates rise sharply?
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atomiton wrote:
Mar 21st, 2017 11:59 am
I don't think so. People are very adaptable. There will be SOME bankruptcies, sure... just like in the US. It will be all over the media... people will feel like the 3-4% affected are more like 30-40% just like people felt like the 5-6% of foreign buyers was more like 50-60%. People will cut back, they'll trim the fat, and as a last resort sell the house at a loss. Politicians can afford to do this if they drag it out over a reasonable period of time. They've had 3 years of warnings that the fed was raising rates... they should have been trying to aggressively curb debt before now.

Canada doesn't control mortgage rates, remember. The US bond market determines rates.

If they do NOT raise rates in step with the US, the Canuck buck gets crushed as confidence in the Canadian economy... and inflation goes crazy because we import our goods. Exporters will do well for a while, but consumer prices will go up... and fast. We may see an uptick in US tourism and cruise passengers for Alaskan Cruises as the American Economy continues to surge.
Yup..Like my thread in off topic...Candian exporters are killing it and the US is hurting from the strength of US dollar

This is how it works and it's great for us to have a lower loonie and the us won't let it get too low since a high us dollar would destroy their economy which is already beginning to happen
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