So I haven’t posted in over a week, and it’s been because i’ve had my head down working like a dog while reeling from the effects of the last week’s meltdown in the financial sector. Finally, after an up and down week, and Fed in the US approved the bailout. You would think that this is great news for the real estate industry, right?

I’m not so sure. What this plan effectively did is nationalize a private problem. There is a saying somewhere that when profits are made they are private, but when losses are taken, they’re public. I know that isn’t a direct quote, but it is close enough to get the gist of it. It is also very very true. So long as the market continued along unabated, with profits being made, private investors got to keep all their profits, spend it as they wished, and not have to pay anything other than taxes. When the problems set in, and the investors all stood to lose a lot of money, enter the Fed and a massive public bailout that effectively increases the national debt that took them over 100 years to build by 10% in a single blow. I don’t like the precedent that this sets, and hope that the bailout doesn’t totally bail out all the lenders and institutions that acted irresponsibly over the past 8 years. That said, I also don’t want the market to go into a tailspin and melt down.

A lot of the price appreciation we have seen in Vancouver Real Estate in the past few years is driven by the market being very desirable to live in, own in, and even rent in. As a result, prices have (and should have) risen. However, as someone on the front lines of mortgages and real estate, I DO think that prices have gotten ahead of value, and we are in for a correction.

Unlike the United States market, however, I do NOT think that prices will come crashing down around us. Our lenders up in Canada, (yes, even those based out of the US) were more conservative than there brethren in the US and required a borrower to have more than a pulse and sufficient body temperature to warrant getting approved for a mortgage.

Did we have true sub-prime lending in Canada? Yes, but only at a few lenders, and always at no more than 95% financing with most preferring to remain at less than 80% financing even on rock-solid properties. The US actually had lenders lending (in some rare cases) up to 125% of the purchase price with the hopes that property prices would continue to rise and put the clients back “into the black” in a few short years. While this strategy allowed clients to roll all their other debts into their mortgage as well, it only worked while prices continued their meteoric rise upwards. When they started to roll back, that was the end for those lenders (and insurers who insured the mortgages).

So where are we going from here? I met with a few other brokers over the weekend and we chatted about where the market is as well as some of the large pull backs in prices we have seen recently. Most of us agree that prices are likely still going to continue downwards for a while, and the fact that money is still getting tighter and tighter and guidelines more and more restricted will only compound this issue in the near future. CMHC is slated to release some new guidelines any time soon, and I suspect that their “Self Employed Simplified” program will disappear or reappear in a far more conservative form. This could make it far more difficult for self employed borrowers who show no income to get qualified. Given the very high percentage of self employed borrowers in BC, this will have a disastrous effect on real estate prices if we are correct. I hope that we aren’t.

So, if prices continue to decline, should you still buy?

The answer depends on your plans:

1. If you intend to buy and hold it for 5 years or more, then yes you should still consider purchasing rather than renting.

2. If you are buying an investment property, I would likely shy away from the Vancouver market in the next year.

3. If you are intending to flip the property, DO NOT get into this market. I have many, many buy-and-flip investors who have purchased properties, poured $100K into them, and cannot sell them for their original purchase price at this point. Buy and flip is not shrewd in this market unless you are buying at a substantial discount and putting essentially no capital into it.

The bottom line is that if you are buying a home, long term, you should always get into the market, buy as much house as you can afford, and let history, scarcity, and payments do the rest for you. You will always come out ahead, and I defy anyone to prove a 10 year period in Canadian history where if you purchased you would have been better off to have rented. That period doesn’t exist, and for that reason, buying property in Vancouver is still a good LONG TERM investment.

Happy hunting!

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This entry was posted on Monday, October 6th, 2008 at 5:29 am and is filed under Home Buyer Info, Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.