Spooky Things Are Happening...

Have you ever watched a "scary" movie - you reach the last minutes of the movie and the hero/heroine have survived only to discover that Freddy or Jason isn't really dead. Are we coming to something like that in Canadian real estate market?

For the past several years, I have been stating that I fully expect the Canadian housing market to go into a deep slide. How much remains to be seen, but a drop of between 10% and 30% would not be out of the question. With the real estate markets in the US already teetering on the brink, we are now seeing signs of what is to come in Canada.

When governments decrease lending rates to battle the "axis of evil" (thanks GDub), ultimately they will need to eventually raise them to combat inflation. For those who have never done a mortgage for over 8% interest rate, heed this warning - currently people in variable rate mortgages could be paying as low as 3%. What would you do if the rates went up to 8%?

On a mortgage of $300,000 (not an unusual amount in the GTA), your bi-weekly payments would go from roughly $650 to $1050. Think it couldn't happen - obviously no one can be certain, but we are in uncharted territory and we have seen rates that high in the past 15 years so why not now?

A recent Globe and Mail article highlights the similarities between the Canadian and US housing markets. Any further recessionary pressures will eventually lead to a decline in housing prices especially in locations that have seen rapid price increases (Alberta). Luckily, Canadians have to actually qualify for mortgages as opposed to the US which eventually led to the sub prime collapse. Yet we are already seeing trends emerge - no more 100% financing and dramatic changes to variable rate mortgages. Refinancing becomes more difficult as bank funds dry up; imagine how much equity you can borrow once you reach that wonderful point that 20% of US homes are at - negative equity (meaning they owe more than the value of their home). Recent blips in US housing markets should not be interpreted as meaning all is well in the world - Barrie McKenna believes that all is not well and may not return to normal for two more years.

What should you do? When clients ask this, I always use the same refrain - Upgrade in a down market and downgrade in an update market. If we go into a decline of 20%, then the more expensive home becomes "relatively cheaper". If you're a first time buyer, then when markets drop will represent a tremendous buying opportunity. The only question then becomes when will they hit the bottom. One last point to all the people out there who watch television shows that deal with buying 10 homes and renting them out - a client of mine purchased an investment property to supplement his retirement income. Five years later he sold the property. He said something that has stuck with me to this day;

The only people I was able to rent to were people I didn't want to rent to.