Real Estate


Friday’s Financial Post featured an excellent article about a family in Alberta and the impact of falling real estate prices.  The family featured in the story “upgraded” from a condo to a house but kept the condo as an investment property.  The overall theme of the story is that falling property prices (in Alberta) is threatening to wipe out the family’s down payment.

This story highlights several problems that I presume to be very common amongst many Canadians in the wake of the real estate boom (or bubble as some would call it).

  • Failure to Evaluate Their Condominium as an Investment – The condo is currently generating $1,100 in rent but costs $1,800 to carry.  If the family looked at the cash flow, potential vacancy, CAP rates and rate of return on their “investment” they likely would not have kept the property.  It’s obvious that they were speculating on property prices continuing to increase.  Unfortunately, this family is probably not unique, I’ve had many conversations with individuals considering real estate investment who have no idea what “CAP rate” means nor have they put any thought into how much of their finances would be tied up in local real estate.  They are simply interested in real estate because they hear of so many other people making substantial sums of money.
  • Over Leveraging (Not Having Sufficient Down Payment) – The family purchased the $375,000 house with a $30,000 down payment.  At approximately 8% (equity) a small change in property prices has eroded their equity.
  • Belief That Real Estate Never Goes Down – The real estate boom of the past decade has created a generation of individuals who blindly buy into the “real estate never goes down” marketing.  I find it interesting that most of these same individuals would most likely agree with the rule “what goes up must come down”.  Logic dictates that only one of those two statements can be true.

It is encouraging to see that the family is willing to lower their asking price to sell the properties (the article indicates that they need to relocate for other reasons).  It seems that they have learned their lesson and will hopefully be able to start over without going into negative equity.  Others in the same position may be tempted to hold firm only to see the market drop even further.

Readers – what are your thoughts on this couple’s situation?  Is this a scenario that you hear all too often in the wake of this real estate bubble?

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.

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I live in Vancouver, land crazy real estate prices. I must admit that I’m hoping the two 25 basis-point rate increases over the past several months slow down the housing market so my family can eventually buy. However, will these rate increases change home-buyer behaviour? Let’s look a few examples of how the rate increases may impact home owners or potential home buyers:

Example A:  A young couple with an existing $500k mortgage (25 year amortization)

At 2% the monthly payment was $2,117.16.  After the 0.50% rate increase (two 25 basis-point increases) the monthly payment is now $2,239.83.  The monthly family budget will need to adjusted for an additional $122.67 per month! (Figures based on calculations using the online calculators at www.canadamortgage.com)

Example B:  Potential home buyer that can afford a monthly mortgage payment of $2100

At 2% the home buyers would be looking at a mortgage amount of about $495,925.  With the rate half a percent higher at 2.50%, the same $2100 monthly payment equates to a mortgage amount of $468,785 (both based on 25 year amortizations).

Assuming that the buyer’s down payment cannot be increased, their purchasing power has decreased by $27,140.

Looking at the numbers, I’m hopeful that the rate increases will slow down the Vancouver real estate market a bit.

What are your thoughts?  Will these small rate increases change purchasing behaviour in the short-term?  Or do you believe that buyers in Vancouver are paying all cash and don’t need significant mortgages?

Disclaimer:  This blog has no professional association with any organizations or companies mentioned in the article.  The contents of the article are the personal opinion of the author at the time the article was posted and may be subject to change.  The blog and author are not responsible, nor will be held liable for any content posted by others in the blog comments.  Readers should complete their own due diligence prior to making any personal decisions.