Interest Rate Reset Risk

[Greenhorn]

Grantness & Austin - Paying off the mortgage on my primary residence asap, no matter what rates are doing is what my plan is. With ultra low rates, I can pay off huge principal easily. Once that mortgage is gone, its gone.

Hi Greenhorn - You're welcome! I strongly recommend that book. Ferguson predicted the financial crisis quite accurately.

I am very optimistic about Vancouver's prospects and its because of what I see on the front lines.

Out of every 10 buyers you have dealt with, how many buyers get high ratio financing (5% down)? Less than 10% - Most put down at minimum 20% and are not highly leveraged.

How many buyers are first time? 20-30%

How many are rich foreigners? 20-25%

How many are poor foreigners (i.e. high ration financing)? Zero

How many need dual income? 40%

What are you seeing? 80% foreigners buying cash and using Vancouver as a vacation property? 15% of my business

How many properties are bought as rentals? 20%

The people I work with buy and hold because they see big potential for Vancouver. These are discretionary decisions based on Vancouver's quality of life and amenity.

What are your thoughts?

Excellent stats! Thanks!!! Downtown Vancouver will always fair better than the rest of the lower mainland, so your stats are not all that surprising. It makes me think that Vancouver is different and could be immunized to a certain extent.

Anecdotal evidence I have from a small sample in that rich money is buying downtown Vancouver and the West side. Iranians, Mainland Chinese, Koreans and few buyers from the Middle East. Pretty interesting.

You seeing any Americans coming up here with their stimulus dollars?

[vreaa]

Anecdotal evidence I have from a small sample in that rich money is buying downtown Vancouver and the West side. Iranians, Mainland Chinese, Koreans and few buyers from the Middle East. Pretty interesting.

“Rich [foreign] money is buying downtown Vancouver and the West side.”

Greenhorn - I took the liberty of archiving part of your post, I trust that is okay.

The role foreign buyers play is important in attempting to understand this market. Do you have any more info about these sales that you could possibly share with us?
How small a sample? (It has got to be at least 4 sales you're talking about!) How many properties does this involve? Any idea how the new owners intend to use the properties? (leave empty for own occasional use or rent out?).

[pianoexcellence]

Cross Dubai off the list of rich foriegners scooping up condos.

I guess the russians and turks and brazillians can take their place.

CRAP** I knew I shouldent have sold that squamish condo in May 2008. They are gonna double now and I'll be priced out fo-e-v-a.

[pianoexcellence]

Ha...btw I looked at some comparables in the squamish complex I sold in and a unit that is better than mine is asking a price that would net him 45k lower than I sold mine for....even after the carney cocaine injection...LOL.

I had some realtors here saying I was an idiot for selling my squamish condo before the olympics.

We'll see what happens to the housing market there once the interest rates rise

[bestplaceonmeth]

I had some realtors here saying I was an idiot for selling my squamish condo before the olympics.

Wow, some realtors are really stupid.

What would Squamish real estate have to gain from the Olympics?
People stopping in for gas and a Big Mac decide to buy a condo there?

[MikeStewartRealtor]

Hi Greenhorn,

I haven't had any American buyers recently, but they are around. Most of the buyers I am seeing are locals of varying ethnicity and people who maintain homes here and may have a Canadian passport, but spend a lot of time out of country.

Hi Austin,

Mike, I suggest you re-check that math regarding "with ultra low rates, I can pay off huge principal easily." before repeating it to your customers. Just some friendly advice.
This is only a good plan if you can't get superior returns on your money or you can't time the bond market, which is frequently true if investing isn't your forte so it's usually good advice. However, you suggested earlier to time the bond market depending on 'ultra low rates', so you're kind of contradicting yourself.

I can't think of a better investment than paying off the mortgage on a primary residence. Can you?

When did I talk about timing the bond market?

[pianoexcellence]

I can't think of a better investment than paying off the mortgage on a primary residence. Can you?

Of course there are better investments, but they are certainly not for everyone. For example I am glad I dumped money from my HELOC into the TSX in January 2009.

Having said that, for the average Canadian, the combination of GUARANTEED interest savings and the fact that you are not taxed on savings means that even in these low interest rate scenarios, it is the way to go...especially considering the fact that they will not stay low forever.

When you were previously criticized for suggesting that people pay off debt in a low interest rate environment. I understood where you were coming from...because you are paying it down so that later when interest rates rise there will be less total future liability. Financial management 101 text books talk about avoiding the payment of low interest debt...and that is true, but it is really more applicable with fixed rates.

As always...the textbook is a place to start...not finish.

[Austin]

I can't think of a better investment than paying off the mortgage on a primary residence. Can you?

Oh, absolutely, but certainly not for the average joe.

When you were previously criticized for suggesting that people pay off debt in a low interest rate environment. I understood where you were coming from...because you are paying it down so that later when interest rates rise there will be less total future liability. Financial management 101 text books talk about avoiding the payment of low interest debt...and that is true, but it is really more applicable with fixed rates.

You're assuming that you know interest rates are going to rise and when. If you happen to know this, there are much easier ways to profit than accelerating your mortgage payments.

What happens if interest rates go down? Really for the average joe, your best bet is simply to ignore the interest rate environment unless you are confident in your ability to time the market. The only reason that broadly applies that I'm aware of to pay down your mortgage is because you can not declare interest payments as an expense on your income taxes.


But, to be fair, if you are on a variable rate mortgage and you do know when rates are going to rise and can only accelerate your payments at certain intervals, then yes, Mike is correct. However, I still stand by original statement .. this is not advice I'd be handing out to my customers if I was a Realtor.

[pianoexcellence]

You're assuming that you know interest rates are going to rise and when. If you happen to know this, there are much easier ways to profit than accelerating your mortgage payments.

What happens if interest rates go down? Really for the average joe, your best bet is simply to ignore the interest rate environment unless you are confident in your ability to time the market. The only reason that broadly applies that I'm aware of to pay down your mortgage is because you can not declare interest payments as an expense on your income taxes.

Yes, there are a lot of better plays out there if you can time the bond market...but we are talking about average homeowners. I agree with your Avg. Joe not wanting to time the market.

What if rates go down? I guess maybe...

[Austin]

What if rates go down? I guess maybe...

Want to make a friendly wager that mortgage rates are cut in the coming week? This Dubai stuff is threatening a double dip.

[pianoexcellence]

I will make no short term wagers...you could be right.

Last wager I made was with Eyes...and I was dead wrong.
I think my main problem there was that I was thinking about the Abbotsford market, which is still WAY off peak and Eyes was thinking about East van, and was basing that opinion on first hand knowledge of buying a home and feeling the pressure.

[freako]

This Dubai stuff is threatening a double dip.

The Dubai stuff is just a symptom. The underlying disease is still out there. Stimulus is just a cold remedy, in that it seems to work pretty good ... until it wears off.

[Thompson]

Karl Case calls the bottom of housing market in US.
http://www.youtube.com/watch?v=XuBgANjHcGo and
http://www.youtube.com/watch?v=MJfL-bMhu-I&feature=fvsr

[freako]

Karl Case calls the bottom of housing market in US.

Who knows where the exact bottom is, but there is definitely value to be found in some areas of the U.S.

[Thompson]

I agree. Bottom or peak can be identified only after... and it is interesting to see that Professor Robert Shiller seems more negative about market than Case.