Kelowna real estate will be severely affected by recession

[eyepop]

.. he has the potential to go from "riches to rags" virtually overnight....

he was never 'rich'.


______________
that's rich

[Merry]

.. he has the potential to go from "riches to rags" virtually overnight....

he was never 'rich'.


______________
that's rich

I agree, but in his mind he was. However the point is that not only could he wind up losing all his condo's, he could also potentially lose his principle residence as well. On top of which he could still be on the hook for the difference between what he owes and what the bank can get for his properties. In short he could potentially go from feeling like a "millionaire" to being penniless! And I'm sure there are many others just like him.

[Rjamer]

I have a friend who lives in the Mission and used a HELOC as a downpayment to buy several condos. He has to subsidize his condos because the rent doesn't cover the mortgage. He did this because he was relying on the annual price increase to guarantee a good return on his investment when he decided to sell. Now he can't sell because the condo's are worth less than what he owes, and if the value of his own home continues to drop he could wind up owing more on his HELOC than his home is worth. So he has the potential to go from "riches to rags" virtually overnight. Obviously he made some very foolish decisions and is the author of his own misfortune. I'm not defending his behaviour. But when people ask how a massive drop in prices could affect some, my friend is a good example. Because I'm willing to bet there are hundreds more just like him out there.

There will probably be a lot more like your friend that will end up in serious DOO DOO.. When I talked to my friendly banker in Mar. 2008,,he was concerned about home equity loans at that time that were being used to buy investment properties.. Things have gotten much worse since then,,well actually things are about the same,, but it is just that most people have finally clued in thanks to the Media..It`s the same old Boom Bust cycle aka .the transfer of wealth that just repeats itself every few years..What really surprizes me is that there was another bubble so quickly as we just got out of the Tech. bubble and bust.. I learned my lesson in the tech. bust so it was pretty easy to see this real estate pump and dump. It was just watching an old movie that you have seen a half dozen times..Oh well,,live and learn as they say..

[SCL]

I have a friend who lives in the Mission and used a HELOC as a downpayment to buy several condos. He has to subsidize his condos because the rent doesn't cover the mortgage. He did this because he was relying on the annual price increase to guarantee a good return on his investment when he decided to sell. Now he can't sell because the condo's are worth less than what he owes, and if the value of his own home continues to drop he could wind up owing more on his HELOC than his home is worth. So he has the potential to go from "riches to rags" virtually overnight. Obviously he made some very foolish decisions and is the author of his own misfortune. I'm not defending his behaviour. But when people ask how a massive drop in prices could affect some, my friend is a good example. Because I'm willing to bet there are hundreds more just like him out there.

There will probably be a lot more like your friend that will end up in serious DOO DOO.. When I talked to my friendly banker in Mar. 2008,,he was concerned about home equity loans at that time that were being used to buy investment properties.. Things have gotten much worse since then,,well actually things are about the same,, but it is just that most people have finally clued in thanks to the Media..It`s the same old Boom Bust cycle aka .the transfer of wealth that just repeats itself every few years..What really surprizes me is that there was another bubble so quickly as we just got out of the Tech. bubble and bust.. I learned my lesson in the tech. bust so it was pretty easy to see this real estate pump and dump. It was just watching an old movie that you have seen a half dozen times..Oh well,,live and learn as they say..

Real estate bubbles tend to occur after all stock market bubbles as central banks push down interest rates (pushes up the price of homes) for damage control.

[Devil's Advocate]

Real estate bubbles tend to occur after all stock market bubbles as central banks push down interest rates (pushes up the price of homes) for damage control.

What are you talking about? The stock market does not affect interest rates. The stock market is a speculative market. Real estate is anything but speculative but for the occassional bubble here and there. As you yourself have pointed out an investment in a house is not likely to be so lucrative as that of stocks. On the other hand it is not likely to loose one as much as investment in stocks might.

Are you maybe confusing stocks with the bond market which most certainly does affect interest rates?

And what about this most recent stock market meltdown which did not precede but followed that of the speculative real estate bubble?

How will interest rates rise even though government is reluctant to do so and might resist raising the bank rate? The answer is through the bond market.

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

As government continues trying to fix the situation by feeding the economy the euphoric drugs offered by fiscal policy ultimately, as is the case with any habitual user of cocaine, it becomes worse and worse with eminent death the outcome. So were governments to continue down this path the buyers of the bonds, or not, would ultimately take control and force right upon them. The bond market is the police force of the economy so to speak, which ultimately controls the value of stocks, homes and all other asset classes as dictated by the influence of interest in the economic calculations done by the individual in their purchase decisions.

So will interest rates rise? I think based on the preceding clearly there is no way around it. It's just a matter of time... less time than you think.

As written by Niall Feguson in his book The ascent of Money "As in so many financial relationships there is a feedback loop. The higher interest rates make the deficit even larger. The bond market rises it's eyebrows even higher. The bonds sell off again. The interest rates go up again. And so on. Sooner or later government faces three stark alternatives. Does it default on part of it's debt, fulfilling the bond markets worst fears? Or, to reassure the bond market, does it cut expenditures in some other area, upsetting voters or vested interests? Or does it try reduce the deficit by raising taxes? The bond market began by facilitating government borrowing. In a crisis however, it can end up dictating government policy". Hence, bonds are the police force of monetary policy.

[SCL]

Real estate bubbles tend to occur after all stock market bubbles as central banks push down interest rates (pushes up the price of homes) for damage control.

What are you talking about? The stock market does not affect interest rates. The stock market is a speculative market. Real estate is anything but speculative but for the occassional bubble here and there. As you yourself have pointed out an investment in a house is not likely to be so lucrative as that of stocks. On the other hand it is not likely to loose one as much as investment in stocks might.

Are you maybe confusing stocks with the bond market which most certainly does affect interest rates?

And what about this most recent stock market meltdown which did not precede but followed that of the speculative real estate bubble?

How will interest rates rise even though government is reluctant to do so and might resist raising the bank rate? The answer is through the bond market.

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

As government continues trying to fix the situation by feeding the economy the euphoric drugs offered by fiscal policy ultimately, as is the case with any habitual user of cocaine, it becomes worse and worse with eminent death the outcome. So were governments to continue down this path the buyers of the bonds, or not, would ultimately take control and force right upon them. The bond market is the police force of the economy so to speak, which ultimately controls the value of stocks, homes and all other asset classes as dictated by the influence of interest in the economic calculations done by the individual in their purchase decisions.

So will interest rates rise? I think based on the preceding clearly there is no way around it. It's just a matter of time... less time than you think.

As written by Niall Feguson in his book The ascent of Money "As in so many financial relationships there is a feedback loop. The higher interest rates make the deficit even larger. The bond market rises it's eyebrows even higher. The bonds sell off again. The interest rates go up again. And so on. Sooner or later government faces three stark alternatives. Does it default on part of it's debt, fulfilling the bond markets worst fears? Or, to reassure the bond market, does it cut expenditures in some other area, upsetting voters or vested interests? Or does it try reduce the deficit by raising taxes? The bond market began by facilitating government borrowing. In a crisis however, it can end up dictating government policy". Hence, bonds are the police force of monetary policy.

You need to learn to comprehend and then study history because housing bubbles/bull markets have occured after nearly every stock market correction in the past 100 years. WHy are you trying to explain the bond market to me?

[SCL]

As you yourself have pointed out an investment in a house is not likely to be so lucrative as that of stocks. On the other hand it is not likely to loose one as much as investment in stocks might.

How much money is lost if you bought a home in the last 2 years with a 10% DP compared to that of the stock market? Numbers do not lie.

Are you maybe confusing stocks with the bond market which most certainly does affect interest rates?

I think you are a little confused, interest rates are set in the bond market.

And what about this most recent stock market meltdown which did not precede but followed that of the speculative real estate bubble?

The tech bubble occured before the housing bubble is what my initial comment stated.

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

Are you trying to sound smart? I bet I could nail you for plagarism!

So will interest rates rise? I think based on the preceding clearly there is no way around it. It's just a matter of time... less time than you think.

I did make that statement far before you did. :bump:

[Devil's Advocate]

You need to learn to comprehend and then study history because housing bubbles/bull markets have occured after nearly every stock market correction in the past 100 years. WHy are you trying to explain the bond market to me?

Maybe because you don't seem to understand it? Just as you don't seem to realize that the US housing correction which followed a period of easy credit policy that led to exuberant speculation resulted in what was then-after called the "credit crisis" which preceded the sudden reversal of the stock markets such that 10 years of gains was wiped out. Let me put that in order for you

1. Dot Com meltdown
2. Investors flock to "bricks and mortar" (real estate) as a safe haven
3. #2 demand pushes up housing prices
4. Clinton brings in initiatives to make housing more attainable to those who otherwise could not afford it
5. People who otherwise couldn't now can buy a home resulting in higher demand
6. #5 pushes real estate values even higher
7. Speculators enter the rising market (irrational exuberance) additional demand
8. #7 causes yet further price increases (supply and demand)
9. At some point the bubble is about to burst. Banks realize this and they tighten credit
10. The "credit crunch" hits full steam as banks start to fail and those who remain don't lend
11. Companies start to fail
12. Investors panic and the stock markets tumble

Now I could take some time and edit this list with more detail, references and dates but I am sure you and any other reader would have to agree with the sequence of events in this most recent economic situation which really does mirror that of the Great Depression quite closely. Again I could do something of a timeline presentation to prove that.

My point is the stock market reversal which recently wiped out all those gains of the last 10 years started long after the real estate bubble began to loose much of it's air.

[Devil's Advocate]

SCL: "How much money is lost if you bought a home in the last 2 years with a 10% DP compared to that of the stock market? Numbers do not lie."

I did not myself, nor did I advise any first time buyers to, buy a home in the last two years.

And how much did you lose on your initial bank stock investments which now pay you dividends on half what you paid for them?

[SCL]

You need to learn to comprehend and then study history because housing bubbles/bull markets have occured after nearly every stock market correction in the past 100 years. WHy are you trying to explain the bond market to me?

Maybe because you don't seem to understand it? Just as you don't seem to realize that the US housing correction which followed a period of easy credit policy that led to exuberant speculation resulted in what was then-after called the "credit crisis" which preceded the sudden reversal of the stock markets such that 10 years of gains was wiped out. Let me put that in order for you

1. Dot Com meltdown
2. Investors flock to "bricks and mortar" (real estate) as a safe haven
3. #2 demand pushes up housing prices
4. Clinton brings in initiatives to make housing more attainable to those who otherwise could not afford it
5. People who otherwise couldn't now can buy a home resulting in higher demand
6. #5 pushes real estate values even higher
7. Speculators enter the rising market (irrational exuberance) additional demand
8. #7 causes yet further price increases (supply and demand)
9. At some point the bubble is about to burst. Banks realize this and they tighten credit
10. The "credit crunch" hits full steam as banks start to fail and those who remain don't lend
11. Companies start to fail
12. Investors panic and the stock markets tumble

Now I could take some time and edit this list with more detail, references and dates but I am sure you and any other reader would have to agree with the sequence of events in this most recent economic situation which really does mirror that of the Great Depression quite closely. Again I could do something of a timeline presentation to prove that.

My point is the stock market reversal which recently wiped out all those gains of the last 10 years started long after the real estate bubble began to loose much of it's air.

You are silly DA. WHy did investore flock to brick and mortar? Of course histirically low interest rates needed to cushion the blow of the stock market had nothing to do with it.

[Devil's Advocate]

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

Are you trying to sound smart? I bet I could nail you for plagarism!

Niall Feguson... do you dispute it?

If not, as you shouldn't, would you not agree that interest rates are a measure of confidence? Check the origins of the word "credit" ... "I believe". If you believe the ecomomy is sound you need not demand such a high return for the risk as there is little. If on the other hand you believe the economy is in shambles you will demand a higher return. That is where the bond market is a leading indicator of the economy.

[SCL]

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

Are you trying to sound smart? I bet I could nail you for plagarism!

Niall Feguson... do you dispute it?

NO i do not dispute it. It is basic math. You need a historian/author to break that down for you? Stick to the RE commentary.

[SCL]

SCL: "How much money is lost if you bought a home in the last 2 years with a 10% DP compared to that of the stock market? Numbers do not lie."

I did not myself, nor did I advise any first time buyers to, buy a home in the last two years.

And how much did you lose on your initial bank stock investments which now pay you dividends on half what you paid for them?

Less than what I would of lost if I bought a home. :coffeecanuck: What is your point? First itme buyers who purchased in the last 2 years have lost far more than if they had invested in a similar blue-chip investment via the stock market.

[SCL]

As a country becomes a bad credit risk it's government bonds are sold off by worried investors at discount rates. The bond pays a fixed rate or coupon of 1.5% per year say, $1,500 per year in the case of a $100,000 bond. but the market interest rate or current yield is calculated by dividing the coupon by the market price. If the current market price of that bond is $102,333: $1,500 / $102,333 = 1.47 per cent. Now imagine a scenario in which the bond market took fright at the huge size of government debt. Suppose investors worried that the government be unable to meet the annual payments to which it had committed itself, or the countries currency in which the countries interest on those bonds is paid. Buyers would only be found at a price low enough to compensate for the increased risk. Imagine that bond fell to $8,000 then the yield would be $1,500 / $80,000 = 1.88 per cent.Home buyers would find they have to pay at least (1.88% - 1.47% =) .41% more in interest on their new or renewed mortgage.

Are you trying to sound smart? I bet I could nail you for plagarism!

Niall Feguson... do you dispute it?

If not, as you shouldn't, would you not agree that interest rates are a measure of confidence? Check the origins of the word "credit" ... "I believe". If you believe the ecomomy is sound you need not demand such a high return for the risk as there is little. If on the other hand you believe the economy is in shambles you will demand a higher return. That is where the bond market is a leading indicator of the economy.

iF THAT IS HOW IT WORKS IN DA-LAND THEN LET IT BE.

[Devil's Advocate]

SCL: "How much money is lost if you bought a home in the last 2 years with a 10% DP compared to that of the stock market? Numbers do not lie."

I did not myself, nor did I advise any first time buyers to, buy a home in the last two years.

And how much did you lose on your initial bank stock investments which now pay you dividends on half what you paid for them?

Less than what I would of lost if I bought a home. :coffeecanuck: What is your point? First itme buyers who purchased in the last 2 years have lost far more than if they had invested in a similar blue-chip investment via the stock market.

I disagree. The Dow was 14,000 before and now is trying to stay above 8,000. On the other hand a Central Okanagan single family dwelling was a median $511,000 at the peak in April 2008 and is now $415,000. Sounds like a 43% drop in the DOW vs. 19% drop in real estate. Sound like real estate fell less than half that of stocks on average.

Before you get into the blue chip deal, there are equivalent "blue chip" properties to choose from as well which have held their value better than others.