Wednesday, May 27, 2009

From the comments...

Hi, my name is May13 Anon (Fish wants me to pick a real name). And I brought a house last week.It was a very strange feeling after firmly believed this Vancouver Market will drop at least 50% for a long time.
There were a few things happened in my situation made me to change my mind. The numbers works out good in the purchase. Since it was a family deal, we were able to pick up a Town house in a pretty good area of East Vancouver (Killarney), plus the low interest rate. My mortgage for the next five years would be around 1200. And we also arrange the deal, so we don’t have to pay the darn CMHC 1 penny (that is very important for me).
Yes, the interest rate could be 15% five years down the road. But I could have hit by a truck as well. That's life.What hits me the most happened couple weeks ago. As I was riding my bike to home I saw groups of people gather outside. You know these people too. They are usually three in a group. One well dressed person accompanying an anxious couple standing on the sidewalk. Yes, realtor + would be home buyers.
Mind you, there is not just one group but 4!I was thinking: good god! When will these people go away! We saw BC poverty rate and EI claims soared this year. Who are these people? I have no idea, but I know there are plenty of these people out there.I well aware this decision effectively kills my dream owning a SFH. But oh well, I want to live in Point Grey too.Now the darn mortgage broker hasn’t returned our calls. Which means he is probably damn busy.My bear friends, what is your take? P.S 5 yr fixed is 3.55, should I go variable?

Hi May13. Firstly congratulations! No need to apologise. I will let you into a secret...all the bears who read this blog, myself included, hope to buy a home one day.

If not, why would anybody waste their time reading a housing blog.

You bought because the numbers worked for you and that's great. As I mentioned before, the cost of home ownership has come down nearly 40% from the peak due to the price drops so far and the drop in motgage rates. There are many other reasons to buy apart from financial and there are many reasons not to as well.

No one can advise you to go fixed or variable, without knowing your circumstances. A couple of hundred dollars spent talking to a good accountant would serve you better than all the free advice that you will get on the Internet.

here are a few points however:

3.55% is remarkably low. If you look here you will see that this is historically low. These are posted rates for commercial banks so you could take 1% +/- off, but even so, these rates are incredible.

No one knows where the rates will be in 5 years, but if I had to guess I would say higher.

Over the recent years it has always been beneficial to go variable rather than fixed, since fixed has always been a few % higher and because we have been in a twenty year span when Central Banks have been bringing rates down. As rates come down it benefits variable mortgages.

Of course there have been spikes up, but on the whole the trend has been down form the 20% of the late 70's to less than 1% now.

Over the life of a 15- 25 year mortgage you would have done better going short and variable than long and fixed.

However things maybe different now. For one, we cant go any lower, so by Murphy's law we can only go higher. If inflation shows up again (say in a year or three) then the Central banks will ramp up short rates. Long rates would probably be driven up by the market too. However if you went variable and could just make the payments, you may have to leave your home with little ceremony.

Fixed offers you 5 years of security. You know how much you have to pay. Variable leave you open to the whims of Central Bankers.

A well-known episode of this occurred in 2004. When Alan Greenspan famously told everybody to save money on their mortgages and go variable. Millions followed his advice.

He then raised fed rates 16X!! From 1.25% to 5.25%. People got skewered! Their payments often doubled or more. This was one of the contributing factors to the housing debacle in the US. I am amazed no one sued him, I would have.

So there you have it.

I like security, some like to pay less for now. Maybe you can get a spit mortgage with half in each if you are not sure. But definitely speak to an accountant who can show you the difference in payment if interest rates start to move up.

BTW bears...let me clear this up-I am not buying. I think we are in a window of calm before the financial storm sets about again. We have dramatically rising unemployment, debt, deficits and I don't see any of this turning around in the near future. It might not be the near collapse we had in fall, but it is not full speed ahead again IMVHO.

So based on that I cannot bring myself to take a bullish stance. However if a deal comes my way, that makes sense, I will look at it. Nothing has come near so far.


  1. Congrats to anyone who feels they have the job security to do this. I certainly don't.

  2. By knowing your local real estate investing market, you're able to keep your finger on the pulse of your local community and to stay abreast of changes in trends, sales prices and rental rates. Knowing immediately about these changes is critical to your investing future.

  3. "Family deals" always help.

  4. How far do you think housing market can realistically drop?

    Im a real estate newbie, but I dont think further declines of 20-30% are realistic. I am thinking it's more 5-10%?

    I am looking for a relatively new (10yr or newer) SFH in the Surrey/Langley area. I want something with a basement suite for under 450,000. I would be looking at a 375k mortgage, and was doing my affordability calculations based on 5% locked in at 10 years at 25 yr amort. If i am aggressive with my payments, and assuming straight 5% intrest i can be debt free in 13.5 years. The bank rakes in 123k in interest.

    Now however, lets assume I wait 1 year. In that years time, i can accumulate 50k more towards the downpayment, and suppose interest increases up to now 7% for 10 years @25 amort. Let's say the interest increase causes a drop of 5% off the house price. That means, I can shave off 50k + 20k towards the mortgage. So now I have a 305k mortgage @ 7% for 10 years at 25 amort. Putting in the same payment options I would have done for the 375 mortage, im am looking at 11.2 years before being debt free, and the bank earns $128k interest off of me.

    So, its looking like, do i overpay for the house, or give the bank more money? The numbers favor overpaying for the house.

    I had a look at the historical rates you've linked, and the 5% rates hoover around 5-6% for 5 years, so likely I am over estimating the interest rate? But I think given what people are saying about inflation etc, maybe its not unrealistic? Sorry, I frankly do not know too much about the banking/fiancial system or real estate so If i miss something importatnt in my calculations, please let me know!