Real estate lost decade?

November 11, 2009

Any prudent home owner and investor should take note of a major report this week written  by TD Bank economists Grant Bishop and Derek Burleton.

“According to them, the country’s growth rate will crash to just 1.6% between 2010 and 2012, and just edge up to 2.1% all the way through to 2019. This will be the result of factors I’ve already mentioned, namely a rapidly aging population and a massive debt overhang for both families and governments”.

Why the housing market may be at it’s peak?

In high prices cities like Vancouver and other cities around metro Vancouver, home prices have climbed back to their previous heights as can be seen on the REBGV pricing chart for October, 2009. oct09-copy.jpg

Low interest rates will not last

It’s a matter of time that the current ultra-low interest rates will spike up, resulting in home prices less affordable to home buyers.

Home owners with high level of consumer debts and overly-leveraged are vulnerable to a down turn in home prices. A blog post by Jonathan Tonge high-lighted the danger of a housing correction in Canada.

High home prices not supported by fundamentals 

Whether it is a detached home, townhome or a condo, the rental return is not enough to cover mortgage payment, property tax and maintenance.  For example, the mortgage payment for a 2 bedroom condo in Richmond selling at $385,000 with 25% down payment, 35 years amortization will require $1,273 a month payment. Maintenance fee and property tax will add another $400 a month to the investment. When provision for repairs and vacancy is added, the investment will cost over $1,800 a month.

If rental return is just around $1,500 a month, the investment is losing over $300 a month. The exit cost will easily add another $16,000 or more to the investment. The investment with 25% down payment, and property transfer tax would cost around $100,000. The money may be better invested in other investments, rather than in today’s real estate. Smart investors will dump their real estate investments when their real estates fail to continue appreciating, or in danger of losing their values.

Should you sell now?

This may be the best time to sell when others are buying. If everyone is thinking of selling, it may be too late. Home prices can easily fall 15% to 20% when market sentiment turns, and home sellers are rushing to sell.

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