No doubt that question may seem laughable to some. The thing is, depending upon one’s age, this question has seemed laughable to many for decades. Perhaps the question worth asking is not ‘what if insert negative thing here happens’, but ‘what if the trends of the past 30 years (increasing prices and lower interest rates) continue for another year, three years, five years, ten years?’
**This ‘what if’ question was originally posted in 2012, and again in 2014, and I have been asking it verbally for 25 years.
What if ‘good’ ensues?
Sitting on the sidelines gets pretty painful when things keep on going swimmingly and you are not a part of it.
I have worked with one client in particular… well, ‘conversed at length’ with a potential client… who has taken the wait-and-see approach since 2009. In 2009 he could have purchased his target detached home in Vancouver East for $650,000, and today that same property is cresting $1,500,000.00 (up 500K from my last post).
To date this client has not bought, resolving to rent for life. ‘Waiting and seeing’ has cost this client not only the significant capital gains and his preferred location, but also (thanks to record-setting low mortgage rates) the significant mortgage balance paydown. He has paid close to $180,000.00 in rent to live in a comparable home that would have cost him $90,000.00 in interest to have purchased. Today his mortgage balance would be $100,000.00+ lower as well, and as rates remain at record lows, he would be into a second five-year term at record low rates.
None of this was hard to see coming, at least not for those of us who cease paying attention to the hyperbole and Chicken Little stories that tend to permeate the water cooler talk.
If one looks at local history, two factors have caused price corrections or stagnation in the Vancouver market: economic crisis and (exceedingly) high interest rates.
Vancouver pricing corrections are historically short-lived and are rarely of tremendous significance to most of us. The statistical fact is that 99.73% of homeowners carry on making payments and pull through the tough times to the next round of appreciation.
Here’s a very interesting point with regard to the overwhelming majority of clients I work with: contrary to media suggestions that Vancouverites are all borrowing the maximum and buying at their outer limits, easily three out of four clients I work with borrow about 80% of the maximum they qualify for, and very few are carrying any significant levels of consumer debt. This continues to hold true in 2016.
One cannot easily enter into home ownership without being prudent. The reality is that ~$13,000.00 in consumer debt cancels out ~$100,000 of mortgage money one would otherwise qualify for. One cannot easily qualify for a mortgage of any significance while carrying any serious level of debt. And once people own a home, their mortgage payment becomes the priority (as arrears statistics clearly show) and significant consumer debt is rarely taken on by actual homeowners.
Think about this next time you hear about ‘debt to income’ ratios. What is the breakdown of consumer debt held by homeowners, vs. tenants? Think about your own personal situation.
We Canadians are equally prudent, yet we all fear our neighbor is being far less prudent that us, and they fear the same about us.