|Home sweet home: What to do about falling real estate values|
Harvey Enchin Vancouver Sun
I penned this editorial to calm fears that the real estate market in Vancouver was collapsing and I've added some brief comments at the end.
Living in Canada's most expensive housing market, residents of the Lower Mainland are obsessed with real estate prices and mortgage rates.
And no wonder. The benchmark price for detached homes in Metro Vancouver last month was $793,193. A down payment of 25 per cent would leave the buyer with a mortgage of $594,894, in which case a difference of just one percentage point in the interest rate can vary monthly payments by $500.
In comparison, the average price of a house in the Greater Toronto Area is $420,482. The standard down payment brings the mortgage to $315,316 and the interest rate impact to $260.
Given that a small hike in interest rates can mean the difference between cabbage and caviar, buyers, sellers and those facing mortgage renewal watch housing indicators as closely as equity investors follow stock market indexes.
News this week that home sales in Metro Vancouver plummeted by 45 per cent in July from a year earlier caught many real estate watchers by surprise. Some said the drop signalled a buyer's market, although a 33 per cent decline in the number of MLS listings last month from July 2009 suggests otherwise. Moreover, the decline in sales year over year is somewhat misleading in that July 2009 was a record for that month.
In the same vein, mortgage rate cuts by major Canadian financial institutions last week are being seen as competitive positioning in the face of a real estate slowdown. Most banks have lowered their five-year fixed rate by 10 to 20 basis points to 5.59 per cent.
But, unlike variable-rate mortgages, which reflect the banks' prime rates, fixed-rate mortgages are set in relation to yields in the bond market. Bond prices have recently been moving higher, pushing yields lower -- there is an inverse relationship between price and yield -- so the rate on fixed-rate mortgages has been reduced accordingly.
This all means that buyers have a window of opportunity to buy a residential property at a price below what they might have paid a few months ago and negotiate a mortgage at a slightly lower rate than what was offered a few weeks ago.
Similarly, those refinancing could get a better deal on rates, with several institutions also advertising that they'll pay the transfer fees if borrowers switch their mortgages to them.
Sellers, on other hand, may have to lower their expectations and either slash the asking price or be prepared to wait longer for an acceptable offer.
For the rest of us, the gyrations of real estate values and mortgage rates shouldn't keep us up at night. A house is not a stock, to be sold when earnings disappoint or a sector falls out of favour. Most people buy a home to live in it, to raise families, to seek refuge from the rat race, and -- as comedian George Carlin once explained -- to keep their stuff. Providing homeowners have purchased a property at a price they can carry within their means, and can ride out the ups and downs of interest rates without lifestyle disruptions, the changing market value of their home is largely irrelevant.
To anyone buying, selling or refinancing, good luck. To everyone else, relax, fire up the barbecue and enjoy the rest of the summer.
So there it is. If you can comfortably make the payments, I don't see anything to be gained by walking away from a mortgage that's underwater. If you do, you'll not only lose the money you have invested in the house to date, you'll damage your credit rating. That being said, it might be a few years, perhaps a decade, before real estate prices return to the heady levels of 2007. But there's a good chance they will. They long term appreciation of Vancouver homes is roughly eight per cent. That's better than the long-term return on stocks.
However that might be too long to wait for some folks who need to downsize, move to a new job or sell for whatever reason. Time then to talk to a financial adviser or lawyer about the available options.
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