Mortgage Rates - up and away

Source: http://americacanada.blogspot.com/2009/07/interest-rates-have-no-ways-to-go-but.html

We are living off an excessive amount of fiscal and monetary stimulus. But none of it is sustainable. In the next couple years, we will have to raise taxes, raise interest rates and cut government spending. Furthermore, the United States, with the international reserve currency will need to resell over $1 trillion in bonds purchased by the treasury. This last action will dramatically increase bond yields. UK who embarked on a more generous quantitative easing plan will need to make the same dump.

Other countries such as ours will need to defend their currency. If the Bank of Canada and Federal Reserve in America lifts interest rates from 0% to 4%, still a very low rate historically speaking, the bank's prime rate will go up to around 6%. As the rate rises, Canadian home prices will most likely plunge and the banks will begin charging a premium over prime (instead of under prime, which right now seems to be the norm). This premium will help compensate the banks for the added risk. As a result, a variable rate mortgage of 7 or 7.5% is quite optimistic. Historically it is a very competitive interest rate. It also assumes that nothing crazy happens with the currency markets (such as a US or UK dollar collapsing – which will happen if the US loses its reserve currency status).

But many Canadians justify that buying now makes sense because of exceptionally low interest rates. So in other words, there is a rush while rates are low. So we are all in agreement that rates will go up. So for all those squeezing into the largest home they can afford on a variable rate mortgage, what can they possibly expect? I thought I'd calculate it out to show the risks that they are taking.

MARRY AND BOB

Let's assume Marry and Bob earn $60,000 and $50,000 respectively. They are approved for $500,000 loan and choose a 35 year, variable rate mortgage. After-tax income is $75,000 or $6,250/mth.

$6,250 / month income
less:
Two Vehicles:
$500 car payment
$200 insurance
$125 car maintenance
$500 gas

Home:
$400 property taxes
$100 house insurance
$300 house maintenance
$200 utilities
$150 internet, cable, phone

Food
$800 groceries
$200 work lunches, snacks and coffee ($100 a piece)



Total deductions:
$3,475

Total left over for mortgage payment, entertainment, debt repayments on loans, CC's and HELOC's, household improvements, disposable consumption, savings and investments.
$2,775

So let's see what happens when the couple signs on for their $500,000 mortgage for 35 years and the associated mortgage payment:

2.5% - $1,787 - "cheap, anyone can afford that, we have about $1,000 left over for everything else.. let's put a new deck in while the reno tax credit is still in effect"

3% - $1,924 - "we can cut back on our lunches and we'll be fine"

4% - $2,213 - "$500 a month extra, where are we going to get that? - we are breaking even despite cutting back on entertainment and lunches"

5% - $2,523 - "we are going to have to max out the cards this month to pay for this"

6% - $2,850 - "home prices are plummeting and we're in negative equity"

7% - $3,194 - "It's been like since like the late 90's since rates were like this!

8% - $3,551 - "Our mortgage has doubled"

9% - $3,920 - we're broke

10% - $4,298 - mortgage payment is now 2.4 times larger than the initial loan.

The point is, whether you are calling for a subtle 1.5% rise in mortgage rates, or 6.5%, the change is quite dramatic. This does not bode well for home prices.

A good post from VCI.

We’re heading into a difficult time in terms of Provincial tax revenues. One of the other areas that is poised to torpedo the Provincial budget ( aside from the forestry, fishery, retail, property, mining and buisness failures on top of higher welfare, retraining, , unemployment , crime etc etc as general cost increase, never mind the Olympic budget bomb that has yet to be made public) is the off the cliff drop in natural gas revenues and land leases auctions which have literally ground to a halt in late 2008 and died in 2009 due to excess capacity.

If the government projects a rosy outlook from the gas field revenues in the upcoming budget you’ll know they are lieing big time. The truth is the the industry is on life support and the government can no longer count on the juicy revenues it enjoyed from 2004 through 2008. There will be a collapse in royalties and a nero zero response from land lease contractors in 2009.

In 2008 the government sold almost 1 billion dollars of natural gas land exploration leases. Since that time the gas buisness has near collapsed and every company has near ceased to explore. Drillers are virtually going out of buisnesss due to lack of contracts. Unemplyment in the once invincble gas patch has skyrocketed and is shedding jobs in the tens of thousands. many of these O&G workers were the mainstay of many condo projects in the Victoria and Okanogan areas for example, all on spec, all based on future earnings and continued appreciation of property prices. For many ( as everywhere,) it’s the perfect storm of job loss and property price collapse.

In 2007 the tax revenue from Natural gas royalties to the province was 238 million with nat gas fetching $6.50 per G. The price of gas has fallen to $4.61 per G and falling, consequently many well heads are being shut in, not producing.

With a Provincial budget coming up ahead of this very important election I expect that the real numbers will wrapped in so many layers of obfuscating toilet paper as can be found to try and hide the stink of reality looming for this boom and bust Province. Expect the local media to play along and do a lot more SPCA stories and whale birthing exposes’.

Consumer credit

A good comment posted on a blog I frequent:

A friend of mine is heavily involved in the consumer credit business here in Canada and he’s seeing early warning signs that the Canadian economy is grinding to a halt.

Consumer credit drives a surprisingly large amount of business here in Canada. For example, if you were to walk into the showroom of a mom & pop snowmobile dealer in Saskatoon and you bought a snowmobile on a “plan” it very well could be my friend who is financing your purchase plan (y’know, you pay 10% down and you agree to make a low low monthly payment for three years… that’s known as buying on plan).

You might be surprised by what you can buy on a purchase plan. In addition to the obvious ones, like furniture, cars, motorcycles, snowmobiles etc. you can actually have dental work financed, or you can have elective medical treatments financed (can you say “augmentation”).

Anyways, apparently in the past month in particular, buying on credit is suddenly freezing up solid. With the economic downturn you might think the banks (who are his competitors) would be lending like crazy at the outrageous rates that these “buying plans” charge. Well guess again. He tells me that all of the major players in the consumer credit game in Canada are getting out of the business.

And the list includes some massive entities… like GE Capital Canada, HSBC Bank, etc.

The reason even major financial entities like GE Capital are having to quit the leasing and consumer credit business is that they can no longer “securitize” any of their loan portfolios. Securitize is a five dollar finance word for sell. The industry has historically been driven by the ability to sell some of their loan portfolios.

Well it’s completely stalled. So GE Capital Canada and other majors have closed their doors to new business.

So what does this have to do with Vancouver real estate you ask?

It’s like this. My friends customers (the mom & pop snowmobile store, or the the dentist, or the plastic surgeon) are seeing huge declines in their sales levels because their businesses are now “cash only.” As a result, their businesses are hurting. The mom & pops will have to lay-off staff, and cut costs… and it all becomes a vicious cycle.

Canada is not going to be protected from the economic downturn.

Vancouver real estate prices are already inflated in relation to Vancouverites’ average salaries and rents. On a long term basis, real estate prices are driven by the economic circumstances that prevail in the local market. High rents = high prices… and low rents = low prices. Well incomes and rents will be under pressure as the Canadian economy fails… and real estate will fall with the economy.

The weight of gravity on the Vancouver real estate bubble is growing.

Real estate buying strategy

A post on a local real estate blog about getting the best price on a new home:

If I was a predator I would know that the ‘ blood trail’ is the place to look for an easy feed. The best deals are not going to be found in the ‘mom and pop’ market who will tend to pull thier listings off the market when they don’t ‘get thier price’.

I would go after the specuvestor multi unit holders and especially the small builders. As a real estate school grad mentioned correctly in an earlier string ‘the builders profit is tied up in the last 25% of the project’ although this number isn’t carved in stone it is on the right track. This isn’t just 25% it is actually ALL THIER CASH .

You want to find someone who “HAS” to sell not someone who’ll only sell ‘IF’. i would pay attention to large projects who may suddenly ‘ blow up’ into recievership.

Single family home builders are particularily vulnerable at this point in the cycle. They simply cannot afford to hold on, the COC loan gets pulled every thirty days after the construction phase is completed, this type of builder has the most to lose. This is where the knives are going cut the deepest. I don’t think we’re at that stage yet. I would look for a small project.

Bottomline, as a hunter you must be very patient, the game is still afoot. I would look at every project and start to inventory, without any offers tendered. Research is power.

Last time I bought an investment property I waited for everything to be in my favour. I walked away from dozens and dozens of ‘deals’. I waited to find a true forced sale which turned out to be a marital breakdown and the occupier being transferred suddenly out of Province and they needed to sell immediatly ( that week). I offered all cash, no subjects and quick ( same week ) completion. I got a HUGE discount. I paid far less than other offers because I could make it happen , no subjects.

I waited for that deal to come along for at least four months and that was in a good market. I made money the day I signed that deal, thats the way it should be. I would have waited six months I don’t care about time.

The low ball offer is not an art it is a tool. If you don’t get the deal so what, walk away and keep looking, theres a deal a minute in real estate.

Baron Rothschild said ” Only buy when theres blood in the streets”, we are not quite at that stage yet, but it’s like a big wave coming into view. For now, sit back on your cash and good credit and wait until desperate sellers are begging you to buy. Be predatory, stay alert and don’t fall for some of the slick spin the developers and governments are puking up. They are desperate , you are not.

Realty Plunge-o-Meter

A very informative site.

http://www.canadian-housing-price-charts.235.ca

Stock Market 101

Stock Market 101

Once upon a time in a place overrun with monkeys, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort.

The man then announced that he would now pay $20 for each one. This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching. The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one.

The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

While the man was away the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each.

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again and once again there were monkeys everywhere.