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lugnut

@look.ca

[Serious] Banking on your home resale price to retire?

One thing this article overlooks is the HUGE numbers of boomers who are currently reaching retirement and looking to sell out from the cities and move to the sticks for their golden years. If you're in the market for a new house these days I think anyone's best bet is to put it off a few years and wait for the bubble to pop. Like the article said, people in Vancouver and Toronto seem to think they are living in the NYC or London, England market

»www.cbc.ca/news/canada/story/201···?cmp=rss

quote:
Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada

But if you're a Canadian living abroad these days, the idea of returning home has become downright frightening. Stories are now routinely surfacing in the Canadian media suggesting collective madness when it comes to affordable living.

Our biggest real estate markets — Toronto and Vancouver — seem to have decided they're really London and Manhattan. Several of our smaller cities are wildly optimistic, too, with year after year after year of six-, seven-, even 10-per-cent increases in property values.

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

Well, I watched America's nightmare unfold, and it appears pretty evident to me that a sequel of some sort is coming to Canada

...snip...

What Shiller was getting at — and what is most alarming to economists and to the Bank of Canada — is the debt Canadians are carrying.

As was the case in America when I arrived here nine years ago, Canadians have for years been so desperate to avoid being left behind by a surging housing market that they've been stretching themselves beyond reasonable financial limits to jump in, thus of course ensuring continued surges.

In the process, household debt has doubled, going from a manageable 75 per cent of household income in the early 1990s to 150 per cent today.

That's just about exactly the nosebleed level Americans were at when everything imploded here in 2006.

...snip...

The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

"That is rather scary," says Don Drummond, a former federal mandarin who also spent many years as the chief economist of the TD Bank.

Drummond says an interest rate of 4.25 by 2015 would not be out of the question, given the levels of economic stimulus in recent years. He also says the bubble in Canada is bursting right now.

...snip...

Americans at least have the option of lifetime payment stability. The gold standard here is the 25- or 30-year fixed mortgage. The interest rate can be locked in for the life of the loan.

In Canada, most mortgages "renew" every few months, or years, and payments can spike by hundreds of dollars a month if rates rise even slightly.

Americans also deduct interest payments from their taxable income. So many people get a big annual refund, which provides a financial cushion.

If you take that tax refund into consideration, prices in Ottawa are now approaching or equal to prices in Washington, DC., a city steeped in wealth and power.

...snip...


Perhaps we should all think twice about taking that second mortgage or loading up the line of credit to buy a new car


capdjq
Premium
join:2000-11-01
Vancouver
Lucky me that I've paid off my mortgage. At 39 and without owning my own Company I could not have done it on a wage. Its quite a relief.


Juggernaut
Irreverent or irrelevant?
Premium
join:2006-09-05
Kelowna, BC
kudos:2
reply to lugnut
That's what Toronto said in '81, or so. The market thundered in at Mach 6. People walked away, and handed the keys to the bank.
--
Better to have it and not need it, then need it and not have it.


elwoodblues
Elwood Blues
Premium
join:2006-08-30
Somewhere in
kudos:2
reply to capdjq
I'm long since paid out also. Makes life real easy.

Robrr

join:2008-04-19
Guelph, ON
reply to lugnut
Makes me want to bring up the age old arguement of buying vs. renting.

Financial Post had a good article on it recently and also included a nice customizable spreadsheet to help you see the differences.

business.financialpost.com/2012/09/14/why-its-better-to-rent-than-buy/


A Lurker
that's Ms Lurker btw
Premium
join:2007-10-27
Wellington N
reply to Juggernaut
said by Juggernaut:

That's what Toronto said in '81, or so. The market thundered in at Mach 6. People walked away, and handed the keys to the bank.

Yes, but you're forgetting that in the early 80s interest rates peaked at over 20%. It's a big difference from 4.5% (granted people carry more consumer debt at the moment).

I'm also someone who had paid out their mortgage. My only current debt is a modest equity loan at ~10% of it's value and currently going down each month.

mr weather
Premium
join:2002-02-27
Mississauga, ON
reply to lugnut
My mortgage is paid off too and I just turned 40. No other consumer debts either. Time to start socking away some real money provided I don't end up on the Freedom 85 plan!
--
"It's all coming down!!" - Mike Holmes


Robert
Premium
join:2002-03-11
St John'S, NL
said by mr weather:

My mortgage is paid off too and I just turned 40. No other consumer debts either. Time to start socking away some real money provided I don't end up on the Freedom 85 plan!

We are aiming for that too. We have several friends "upgrading" into bigger homes. I can't justify going from being paid off in 7-10 years to 25 years plus and increasing the debt load. The thing is, the closer we get, the more we make additional payments. Can't wait!
--
It's one thing to listen to an idiot talk. As soon as you respond, there are now 2 idiots having a conversation.


A Lurker
that's Ms Lurker btw
Premium
join:2007-10-27
Wellington N
reply to Robrr
said by Robrr:

Financial Post had a good article on it recently and also included a nice customizable spreadsheet to help you see the differences.

The only issue with renting is that you need to be able to either live below your means (so you can continue to pay when you retire) or be willing to look for cheaper when you do. I've a couple of friends who rent and seem to spend a huge amount of money. If they aren't saving, where's their safety net?

I don't see my home as a retirement vehicle, but I do see it as a supplement. Of course, I've bought in a market that hasn't seen the rapid growth of others (just over 6% annually). I've certainly spent money on it, however, I've enjoyed the benefit of living here instead of an apartment. I'd have to pay 2x times to rent a comparable home where I'm living now.

Sukunai
Premium
join:2008-05-07
kudos:1
Reviews:
·ELECTRONICBOX
reply to lugnut
I DO tend to laugh at the US and make remarks about Canada a lot.

But it just seems no one has slowed down any where building new homes is concerned. Who the hell is buying all these homes and how?

I've never owned, and while my sister has, she sold last year, and to my knowledge has likely frittered it all away enjoying a bit too much travel and spending maybe to freely, but she wanted to be a renter and not an owner. She makes a decent enough income to live in a decent enough place, but some day she will be promoted to senior and I often wonder if she might have spent too many weekends in Florida and might have been wiser to keep most of the house sale.

My brother owns, and likely owns more than is wise. But he has his and his wife's rather nice incomes. He's older than me and my sister and thus will reach 'senior' before us. But if he keeps the house, he will at least eventually have it as an asset regardless.

My mother is 79, living in a nice place (rented in a nice seniors apartment), it is not cheap, but it is easy on her budget. She brings in about the same as I do in a month.

Yah I'd like a home, a small shop, a backyard, no need to care who is above me, below me, or beside me when it comes to using a power tool in the place, or getting loud with the wife in bed. But, I don't mind having zero need to cut grass, shovel snow, or fix anything that breaks. When I turn 65, I won't be any richer, but I won't be any worse off than my mother. And frankly, I wouldn't have any problem with her place.


Gone
Premium
join:2011-01-24
Fort Erie, ON
kudos:4
reply to Robert
said by Robert:

We are aiming for that too. We have several friends "upgrading" into bigger homes. I can't justify going from being paid off in 7-10 years to 25 years plus and increasing the debt load. The thing is, the closer we get, the more we make additional payments. Can't wait!

That's the debate the wife and I are having right now. We have a small house right now, but we'd end up having it paid off in our 40s if we stay here. At the same time, we'd like to go to something a bit bigger to raise a family, but not outrageously bigger than what we have now.

While I was originally gung-ho about a larger house, I'm now starting to learn toward staying here and just renovating it to meet our needs. I can add a lot of space to this place if I just finish the basement.


J E F F
Whatta Ya Think About Dat?
Premium
join:2004-04-01
Kitchener, ON
kudos:1
Reviews:
·Rogers Portable ..
reply to Juggernaut
said by Juggernaut:

That's what Toronto said in '81, or so. The market thundered in at Mach 6. People walked away, and handed the keys to the bank.

Happened here in K-W too in 1981. It was bloodshed. Happened basically again in 1990, just not as bad.

House pricing is way to high, if interest rates go up by 2 or 3%, everyone who bought a house (or refinanced to close to 100%) recently will be walkin'.
--
If you can't explain it simply, you don't understand it well enough. - Albert Einstein


Juggernaut
Irreverent or irrelevant?
Premium
join:2006-09-05
Kelowna, BC
kudos:2
Yep, mortgage payments will virtually double.

I had barely left Hamilton when that happened.


Gone
Premium
join:2011-01-24
Fort Erie, ON
kudos:4
said by Juggernaut:

Yep, mortgage payments will virtually double.
I had barely left Hamilton when that happened.

Interest rates will probably remain low or at least manageable for the foreseeable future so the prospect of mortgage payments doubling probably won't happen. What will happen is that people who live in "hot" markets will most likely find themselves with a mortgage that is twice as much as their house is worth.


J E F F
Whatta Ya Think About Dat?
Premium
join:2004-04-01
Kitchener, ON
kudos:1
Reviews:
·Rogers Portable ..
reply to Juggernaut
said by Juggernaut:

Yep, mortgage payments will virtually double.

I had barely left Hamilton when that happened.

Exactly. I remember with the first mortgage I had, back in 2002, it was slightly over 8%, I asked the banker if I should be doing a 1 year term to see if it goes down, or do 5 years. She said 5 years since single digit interest rates aren't static at all and rates over 10% can come at any time. My ex wanted to go with the 5 year because her parents had lost a couple homes when interest went up too much on renewal. The last house her parents had, the payments went up $500 due to interest rate change.

You can imagine someone with a 30-year $400,000 mortgage 3.85% works out to about $1,800/month. At 8% (which is still pretty low) it goes up to $2,900. At 10% $3,500. And at 19%, $6,400 - that was the 1981 crisis!! Do the math, people will be walking.

BTW: Governments are coming to the conclusion that to get the economy running and get the debt under control, encourage inflation and then raise interest rates to much higher level.
--
If you can't explain it simply, you don't understand it well enough. - Albert Einstein


J E F F
Whatta Ya Think About Dat?
Premium
join:2004-04-01
Kitchener, ON
kudos:1
Reviews:
·Rogers Portable ..
reply to Gone
said by Gone:

said by Juggernaut:

Yep, mortgage payments will virtually double.
I had barely left Hamilton when that happened.

Interest rates will probably remain low or at least manageable for the foreseeable future so the prospect of mortgage payments doubling probably won't happen. What will happen is that people who live in "hot" markets will most likely find themselves with a mortgage that is twice as much as their house is worth.

Which only happens if the rates go up.

Many people who lost their homes in the US get shanked because the renewal rates rates went up far too much. There were people with poor credit and low paying jobs getting .9% interest rates for the first 2 years or whatever, only to find the rates skyrocketing to 6% upon renewal. On $200,000, that would be $635 per month going up to $1,200 a month.

Although Canada doesn't have that banking issue the US has. But if the US raises their rates to saves themselves, Canada will have to follow.
--
If you can't explain it simply, you don't understand it well enough. - Albert Einstein


Gone
Premium
join:2011-01-24
Fort Erie, ON
kudos:4
said by J E F F:

Which only happens if the rates go up.

Or when the ability to obtain credit is curtailed, which doesn't necessarily happen due to interest rates alone. If people can't obtain credit, the price of houses have no choice but to drop.

For what it's worth, mortgages in Canada operate far differently from in the US. Not only are they much harder to obtain - especially now, with the recent changes - but the whole interest rate trap is prohibited from existing like it did in the US.

said by J E F F:

Although Canada doesn't have that banking issue the US has. But if the US raises their rates to saves themselves, Canada will have to follow.

Depends. The Australians have managed to keep their rates relatively high compared to the rest of the entire world. While our rates would rise, they wouldn't necessarily have to keep pace directly with the US. One would also hope that the mistakes that lead to stagflation and super high interest rates back in the early 80s would not be repeated again.

Ultimately, rates will rise, but probably not to the extent that some people are predicting.


Mike2009

join:2009-01-13
Ottawa, ON
kudos:3
Reviews:
·TekSavvy DSL
I've been in my house 12 years. At that time my interest rate was 7% and we heard how rates would be going up. My next mortgage renewal was around 5% and my current one is 2.9%. While they will go up eventually it's not all doom and gloom like they're saying.


FaxCap

join:2002-05-25
Surrey, BC
reply to lugnut
What scares the hell out of me are the USA government printing
presses. 365/24/7 pumping out money backed by nothing but
a "trust us" promise.

FaxCap


Juggernaut
Irreverent or irrelevant?
Premium
join:2006-09-05
Kelowna, BC
kudos:2
reply to Gone
said by Gone:

Ultimately, rates will rise, but probably not to the extent that some people are predicting.

Hopefully, that is the case. With today's volatile markets, I'm not so sure.
--
Better to have it and not need it, then need it and not have it.


Gone
Premium
join:2011-01-24
Fort Erie, ON
kudos:4
said by Juggernaut:

Hopefully, that is the case. With today's volatile markets, I'm not so sure.

Well, you can't keep giving away money for free forever, but at the same time one would hope that lessons were learned 30 years ago when interest rates were in the 20-30% range.

But Mike2009 is very correct, while it would certainly throw a curve a modest interest rate increase will not be the end of the world for most people.


Juggernaut
Irreverent or irrelevant?
Premium
join:2006-09-05
Kelowna, BC
kudos:2
I'm not so confident. Many people live close to the bone these days.
--
Better to have it and not need it, then need it and not have it.


Mike2009

join:2009-01-13
Ottawa, ON
kudos:3

1 edit
Those who have overextended themselves financially to keep up with the Joneses are the ones who will suffer when the rates do go up. Those of us who live modestly and have financial options will continue to live the way we are living now.


Juggernaut
Irreverent or irrelevant?
Premium
join:2006-09-05
Kelowna, BC
kudos:2
Quite true. I owe a few hundred on my CC, and that's it. My debt will remain as low as I can keep it. I like zero, preferably.
--
Better to have it and not need it, then need it and not have it.

Sukunai
Premium
join:2008-05-07
kudos:1
Reviews:
·ELECTRONICBOX
reply to lugnut
The trick is to rent, and to live on the bottom rung of the ladder and learn to actually like the bottom rung.

Once you get skilled at making the bottom rung comfortable the only problem is sleeping with all the noise from people falling off the higher rungs hitting the ground and making loud splat sounds.

I might be on the next rung up, not sure. But I am certainly no where near my brother who is up so high I can't even see his rung.


yoyomhz

join:2003-02-15
Beverly Hills, CA
said by Sukunai:

The trick is to rent, and to live on the bottom rung of the ladder and learn to actually like the bottom rung.

Another trick is to be a small farmer, and have a garden, and learn to never eat out in restaurants, never to do ANYTHING. If you can take vacations every five years, you can subsidize the produce you grow (apples) so that you can still afford to stay in business, while selling your product at a loss.

Bob4
Account deleted

join:2012-07-22
New Jersey
Reviews:
·Optimum Online
reply to Gone
said by Gone:

For what it's worth, mortgages in Canada operate far differently from in the US. Not only are they much harder to obtain - especially now, with the recent changes - but the whole interest rate trap is prohibited from existing like it did in the US.

I'm curious what you mean by "interest rate trap". Fixed-rate mortgages in the US are just that - the rate is fixed for the entire life of the loan. For example, my bank has a 30 year fixed rate loan at 3.625%. And the rate will remain at 3.625% for the entire 30 year term. Plus, there's no pre-payment penalty.

Sure there were a lot of problems, but they were people who overextended themselves, or refinanced to get cash from their equity (almost always a bad idea).


Gone
Premium
join:2011-01-24
Fort Erie, ON
kudos:4
said by Bob4:

I'm curious what you mean by "interest rate trap". Fixed-rate mortgages in the US are just that - the rate is fixed for the entire life of the loan. For example, my bank has a 30 year fixed rate loan at 3.625%. And the rate will remain at 3.625% for the entire 30 year term. Plus, there's no pre-payment penalty.

Do you guys not have introductory rates, balloon payments and all sorts of things that are a foreign concept to a Canadian mortgage customer?

Bob4
Account deleted

join:2012-07-22
New Jersey
Reviews:
·Optimum Online
said by Gone:

Do you guys not have introductory rates, balloon payments and all sorts of things that are a foreign concept to a Canadian mortgage customer?

Yeah, but they're not mandatory or the only types of mortgages. They have specific purposes for certain types of purchases, and should only be used by sophisticated purchasers.

Most mortgages are fixed-rate for the length of the loan, with no pre-payment penalty. For example, I got a 30 year fixed-rate loan. After 12 years (18 years to go), I refinanced with a 15 year loan to get a lower rate and to knock 3 years off the term.

(Refinancing is like a whole new loan. The old loan is paid off without penalty and the new loan starts with its own terms.)

So I've always had fixed-rate loans, with no change in rates for the entire life of the loan.

Your mortgages can go up in interest rate every few years? That sounds pretty unfair ("We own over half your house and now you have to pay us more money! Pay or get out!" Sounds like extortion.) I don't think I'd want one of those.


elwoodblues
Elwood Blues
Premium
join:2006-08-30
Somewhere in
kudos:2
Reviews:
·VMedia
We used to have fixed rates my folks bought their house with a 25yr 6% mortgage, that didn't change either.

Now days, typical terms are 1-10yrs with the interest rate varying depending on the term.

But 30yr fixed rate mortgages in Canada? Not a chance in hell.
--
No, I didn't. Honest... I ran out of gas. I... I had a flat tire. I didn't have enough money for cab fare. My tux didn't come back from the cleaners. An old friend came in from out of town. Someone stole my car. There was an earthquake.......