Financial Jungle

Rising rates could definitely force a correction sooner rather than later. If the rates continue to rise ahead of incomes, I’d expect to see rising numbers of foreclosures.

where would you be able to find statistics on that?

Hi FJ,
With the price of houses so high, can you explain how young people in their mid twenties or early thirties are able to buy house at 350K and up?

From where I work, I only see older couples that bought more than 5 years ago able to buy other properties as they use their equity in their main residence.

Cheers,
FB.

Hi FJ,

Just discovered your site. Love the format.

I’m somewhat concerned about Vancouver affordability as well. Yet one thing that may prolong the real estate bull market is mortgage “innovation.” (in quotes because some people consider mortgage “innovation” to be a bubble maker)

Take long-term amortizations for example. In 2003 Canada didn’t have the plethora of 35 and 40-year mortgage options we have today. These and interest only products are becoming wildly popular because they let middle-class dual earners qualify for a bigger mortgage than you’d expect in many cases.

These products alone may be enough to keep the buyers buying for at least 2-3 years–assuming Vancouver demographics and interest rates don’t change a great deal.

What are the rental rates doing in Van? I would think that they should be going up since buying is out of the question for a lot of people?

This blog is one that believes Vancouver and area is wildly overvalued on an imputed rent basis. If his statistics are true, I would have to agree with him. If you can’t rent out a place for the mortgage + carrying costs, then you have a negative cash flow property that you can only hope will appreciate in value in order to bail you out. Sounds like we’ve heard that story south of the border before (and not too long ago).

Thank you for all the comments.

I cannot attest to the current “P/E” of Vancouver real estate, but based on empirical evidence, it’s sitting at around 27-30. (I just sold my home back in December.) If this is a stock, I’d typically demand a growth rate in the vicinity of 17-20%, but obviously real estate cannot sustain this rapid pace over the long-term.

Melanie, do you have a ballpark figure of the percentage of new home owners having 35 and 40-year mortgages? This type of mortgage is prevalent in the States, since mortgage interests are tax-deductible down South, but in Canada, having to pay interests with after-tax money can be a drain.

It’s true that longer amortization is a short-term fix to affordability, but much of the relief is offset by the recent mortgage rate hike.

We’ll have to revisit this in September if two more rate hikes materialize.

$640,000?? Is that an average two-storey home?
It would be interesting to see what would happen next year when all those 4.55% mortgages come up for renewal. The $14,560 interest bill will rise to $18,208. How many people can handle a $4,000 increase in annual expenses? What if rates rise even further?

Hi FJ, From what I’m seeing over 1/3 of new applications are for long-term amortizations. This is notable because these products are relatively new. In many cases this is the only way certain homewners can qualify for the loan they are seeking.

FJ:

Any guess on how much of this rise is due to foreign monies flooding into Vancouver?

From pure hersey though, I hear that commercial values are not increasing that much (which, if you look at Toronto and Alberta, go up in tandem). If this is true, this would be the nightmare scenario- there is no commercial base to drive the increases for long.

FJ,
Sounds like a formula for a correction. The wage/salary will not be able to increase fast enough. Hopefully rates will drop to help with offset the correction. Fantastic post!

-Josh

Melanie - I’m impressed by the proportion of buyers attracted to longer amortizations. I guess it’ll become prevalent real soon.

Thicken – I don’t follow the Vancouver RE close enough to know the percentage of foreign investors. You’re right about the office space. Where I work, we’re being squeezed into a single floor while new tenants are moving in. Too many condos are under construction and not enough office space. Don’t Vancouverites have to work? Do they simply blog all day at home?

Canadian Capitalist - According to the latest stats from Real Estate Board of Greater Vancouver, the average sales price for a detached is $852k in May; attached $470k; condo $377k. Can you imagine first-time buyers paying $377k for starter homes?

http://www.realestatetalks.com/pdf/VanMay07.pdf (last page)

Josh - Unlike in the States, consensus here is that Canadian interest rates will go up this year. BTW, you site looks so sleek. I love the banner.

Investoid - I forgot to thank you for that link to that Langley financial blog on Vancouver real estate. Very insightful. Makes my article look elementary.

Yes I was a little surprised myself. In eastern cities people seem to be spreading out their payments largely because they “want” more house. In boomtowns like Van and Calgary they seem to be doing it more out of “need”. Mind you, these perceptions are purely anecdotal at this point. CIMBL or CMHC will hopefully have updated stats on these trends later this year…

Ya, I love foreclosures. Sold my home that I paid $220,000 on a foreclosure in 1991 for $680,000, am renting a huge apartment in Yaletown for $1,500 which is valued at $750,000 with the interest that I making on the profit. I figure to wait a year or two and wait for the inevitable crash and then maybe pick off another foreclosure at 50 cents on the dollar and have clear title. All signs point to the inevitable crash, especially the rent to value ratio. It just amazes me how many people are sucked into the hype of the Olympics and the never-ending real-estate rise fantasy. (The Olympics only last a week guys.) Same people that watched the lifestyles of the rich and famous and all those reno shows. Remember that the ones that get rich are the ones that perpetuate the hype and
suck the other’s in . It’s called Capitalism.

Lou - $1,500 for a $750,000 condo? That’s a killer deal. How did you manage that? If we didn’t have a dog, I’m sure we could’ve found a cheaper place to rent too, and yes. The dog is staying.

I’m also a keen observer of the rent to value ratio. It’s difficult to imagine how it can get any lower as bond yields are heading the opposite direction. By my estimate, the rent/yield ratio is approximately 4.8%. After expenses, maybe 3.2%.

[…] Financial Jungle - » Vancouver Real Estate Faces Interest Rate … I just discovered that the new 5-year fixed mortgage rate had risen sharply to 5 … For simplicity, I assume an 80% loan-to-value mortgage. … are not increasing that much (which, if you look at Toronto … http://financialjungle.com/2007/06/04/housing/vancouver-real-estate-faces-interest-rate-hurdle/ […]

Great site that is packed full of some useful financial information especially concerning real estate. I agree that we are moving into a period of rising interest rates and could foresee a downturn in some of the hotter markets. Invest your money in gold and silver instead. If a repeat of the eighties occurs you will have lots of money to invest in real estate when the right time comes.