We are entering an era in which we may see a lot of personal bankruptcies because people owe more for their homes than they could sell them for.
Someone that bought a house in Victoria in mid 2007 for $575 000 with 20% down and a 25 year mortgage will now owe about $450 000 on this house. Let us say you sell that house for $500 000, a reasonable amount in the current market. The cost of selling the house will take about $30 000 out of your pocket leaving you with $470 000 to pay off the $450 000 mortgage.
Anyone that bought a house or condo in the last three years with much less than 25% down is now realistically looking at a house that is less than their mortgage. This means a large number of people.
Let us say you bought the same house above but only had 10%, you would still be owing about $520 000 on a house you could only net $470 000 on. If you have to sell, you will be left owing $50 000 to the bank. Realistically you will be forced into bankruptcy.
If you got into a condo in the summer of 2006 for $250 000 with 5% as a first time buyer, you are really screwed. Odds are your unit will now only sell for $220 000 netting you about $205 000. You will still owe about $27 000. Many condo buyers had low equity mortgages because they were first time buyers.
The market is going to see houses coming onto the market that are bankruptcy sales. These sales will dampen the rest of the market if they become commonplace. Condo bankruptcies will be the biggest tranche.
4 comments:
Bernard,
There is already a 2009 foreclosure:
Court ordered forclosure (Shelbourne/Cabana).
The house has a BC assessment value of $452k (2007) and was sold in April/08 for $517,750. Asking price is now $475k.
http://www.realtor.ca/propertyDetails.aspx?propertyId=7820389
I agree completely with your take on the situation. House prices are trending down, and people that purchased in the last year or two with very little money down, will have negative equity. This is what happened in the U.S. Unfortunately, the downward trend in prices is self-reinforcing. Foreclosure sales will reduce average prices and assessment values, and drive more homeowners into negative equity.
hp
All this was predicted years ago by those with common sense and no connections with the real estae industry. A crash in Victoria prices back down to 1998 levels, adjusted for 3 percent annual inflation since then, is inevitable, as well as the best thing that could happen to this smug and arrogant city. I'v elived here all my 47 years and have never seen such self-congratulatory conceit as a general attiude here as has been the case for the past five years.
I have been saying the market has been too high and was going to see a serious correction locally in 2009. I was saying this back in 2005 already. In 2007 I suggested people sell their houses, rent something for a few years and by back in 2010.
There are those of us out there that could see this was coming, but we were a tiny minority. Even now a lot people are not really willing accept where the market is headed
Bernard,
I suspect many folks feel that they are mortgage poor, have negative equity and now that house prices are declining they want out.
But they probably don't have any cash in reserve so unless the bank will give them an unsecured line of credit loan they can't sell. In the US some banks are letting the sale go ahead and eating the loss as a short sale.
Even if they did sell they would end up renting because they would not have the downpayment for another house.
I feel sorry for these folks. Many bought thinking they would stay for a couple of years and then move up the property ladder. Some are now stuck in a small condo or a suited house with tenants and no way out. They just sit there hoping they can continue to make the monthly payments and watching the market value of their home keep dropping.
I think once the spring market proves to be a fizzle we will see prices drop rather quickly. By then the recession will be biting hard and bankruptcy & foreclosure properties will become commonplace on the RE market
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