Funny we haven't heard from all the posters who were predicting the sky was falling. You know who you are, if you are still visiting this site. You know, the ones that predicted real estate values falling by 40-50%.
Gloomer, first class, reporting to post as requested. (LOL).
Interest rates are the story in real estate now... and they are the story in the foreseeable future.
The current mini-boom in real estate sales/values is the artificial creation of the Bank of Canada's stimulus efforts.
The lowest central bank rate in history has Canadians back on the home-buying binge re-creating rising prices and multiple offers from the bubble years. All despite the fact that we are in the middle of the greatest recession since the Great Depression.
But it is these very interest rates that are dooming many buyers who are making the worst financial decision of their entire lives by buying right now.
The Bank of Canada has lured them into a Capital Trap.
The first key concept here is that a house is only worth what someone can afford to pay for it. The second key concept is that very, very few people buy a house with cash.
The vast majority of real estate purchases are financed with mortgages-- with debt.
And that debt is lent to homebuyers at a rate of interest... a rate that is currently at historic lows. But those rates are about to change, dramatically.
We've all read about the $2 trillion US Federal deficit for this fiscal year. The US has an exploding national debt it must service. Combine that with every other government on the planet (yes, even the Chinese government) who are anxious to borrow huge sums of money to fund their exploding deficit spending and you have an emerging captital quandry.
And don't forget the corporations, local governments, agencies and real estate buyers who want to borrow money.
The point is: the demand for surplus capital far exceeds the supply of global surplus capital.
And as the voracious US government demand for debt servicing continues to grow, surplus money looking for a home is drying up even as the demand for surplus capital skyrockets.
The net result is that interest rates will have to rise - and soon.
While it is impossible to predict exact dates, simple laws of supply and demand dictate that rates will rrise and rise steeply as the shortfall between what governments want to borrow and what's available to borrow becomes visible (not to mention private demand for capital).
Most observers agree rates will double from the current market rate of about 4% to at least 8-9%.
In fact last week the govenor of the Bank of Canada (Mark Carney) warned that
"Ultra-low interest rates will not last forever and Canadians should be preparing for the day when their borrowing costs eventually return to more normal levels."
Canada's historic 'normal' is 8%. That represents more than a doubling of current rates.
While real estate prices can be set to whatever level the seller desires, the value of a house will eventually settle to the price the buyers can actually afford.
And since since very, very few people buy a house with cash, when interest rates double, house prices will drop in half, regardless of any other conditions.
Interest rates are driving the buying frenzy/mini-boom now. And shortly interest rates will drive the market collapse.
Charles Hugh Smith (
www.oftwominds.com) has produced these charts to demonstate the see-saw relationship between housing prices and interest rates.
In the graph above, a low interest rate (in this case 4.5%) will produce a monthly mortgage payment of $1,850 on a $500,000 mortgage.
But if the interest rates doubles, in this case to 9%, then...
... then a monthly payment of $1,850 will only allow a buyer to assume a $250,000 mortgage.
Which brings us back to the original issue: "The value of a house will eventually settle to the price that buyers can actually afford."
In the absence of a vibrant economy that generates more income for buyers to assume larger mortgages at higher rates, buyers are forced to reduce the size of a mortgage they can assume.
And a voracious demand for global capital is on the cusp of forcing interest rates back to historic norms (if not higher), it means a return to 'normal' interest rate levels.
And that will wipe out the market for average Vancouver homes that sell in the current bubble inflated $800,000 to $1.5 million range.
Buyers will only be able to afford mortgages at half the current amounts... a stalled economic recovery will guarantee this.
(lower, if rates spike to 11% or higher)
Canadians snapping up $600,000 plus mortgages today because they can 'finally' afford them with these historic low interest rates of 3% are making the worst financial decision of their entire lives.
Not only will 'normal' interest rates reduce other homes to half of what they paid for theirs... when these Canadians go to renew their mortgages after their 1-5 year term expires... they will be in a massive underwater position and they will default on their own mortgages.
This mini-boom is only guarenteeing a spectacular crash.
It is unavoidable.
