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Loans cost more. The interest rate on my first mortgage (in the 90's) was 7%.

refurb 9y ago
Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.
- smnrchrds 9y ago
  > as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
  - encoderer 9y ago
    These are not fixed rate loans?
    - winthrowe 9y ago
      You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
    - kylemuir 9y ago
      When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
      - encoderer 9y ago
        In USA it’s common for loans to be fixed rate for life of loan.
- Retric 9y ago
  It also made the idea of a starter home more meaningful. Your monthly payments quickly became meaningless especially if you got any kind of a promotion. At 5% inflation if you pay 1000$/month in year 0 it feels like 614$ / month in year 10 and 377$ / month in year 20. At 1-2% inflation the loss of the interest tax deduction over time as you pay more principle and less interest means home lone feels about as expensive in year 0 and year 20.
  - shostack 9y ago
    Right, but isn't the distinction that you are paying principle, which in essence buying equity? It isn't free cash flow, but there's a big difference between putting money towards principle and paying a bank interest.
    - Retric 9y ago
      I am not saying it's reasonable or unreasonable for home interest to be tax free. Just that the difference impacts your disposable income.
- toasterlovin 9y ago
  > It basically reduces buying power for real estate. But real estate is unlike a lot of other goods in that it's value is significantly driven by what other people are willing to pay, rather than what it intrinsically costs to produce. Thus, as your buying power goes down, so does everybody else's.

Back in the 1970's a 12% interest rate on your mortgage was considered pretty good! It basically reduces buying power for real estate. Using the google mortgage calculator and assuming a $1500 max monthly payment. At a 3.92% (today) rate you can borrow ~$320K At an 8% rate you can borrow ~$200K A 38% decrease in buying power. It's already happening in Canada as the gov't is trying to slow down the real estate market by making buyer qualify at a rate 2% higher than what it is today.

smnrchrds 9y ago
> as the gov't is trying to slow down the real estate market This is not the reason for mortgage stress test, just one of its effects. The main reason for the regulation is to avoid a tsunami of bankruptcies when interest rates eventually increase.
- encoderer 9y ago
  These are not fixed rate loans?
  - winthrowe 9y ago
    You can't really get a rate fixed over the entire amortization period in Canada, our 'fixed rate' mortgages are a 5 year lockin typically.
  - kylemuir 9y ago
    When those fixed rates end and they have to refix a ton of overleveraged people will force mortgagee sales. In Auckland there's been talk of that for at least 5-6 years. For example, people I personally know only earn $80-90k/yr and yet own a $500k house (absolute entry level livable house in Auckland). They also got in under our old rules which meant they only needed 5% deposit instead of the 20% required now. They're only being propped up by their record low interest rates. If those interest rates went up 2-3% they'd be in serious trouble. EDIT: for more context the average fixed period for any home loan in NZ is roughly 2-3 yrs. The term is a 30 year term typically.
    - encoderer 9y ago
      In USA it’s common for loans to be fixed rate for life of loan.
Retric 9y ago
It also made the idea of a starter home more meaningful. Your monthly payments quickly became meaningless especially if you got any kind of a promotion. At 5% inflation if you pay 1000$/month in year 0 it feels like 614$ / month in year 10 and 377$ / month in year 20. At 1-2% inflation the loss of the interest tax deduction over time as you pay more principle and less interest means home lone feels about as expensive in year 0 and year 20.
- shostack 9y ago
  Right, but isn't the distinction that you are paying principle, which in essence buying equity? It isn't free cash flow, but there's a big difference between putting money towards principle and paying a bank interest.
  - Retric 9y ago
    I am not saying it's reasonable or unreasonable for home interest to be tax free. Just that the difference impacts your disposable income.
toasterlovin 9y ago
> It basically reduces buying power for real estate. But real estate is unlike a lot of other goods in that it's value is significantly driven by what other people are willing to pay, rather than what it intrinsically costs to produce. Thus, as your buying power goes down, so does everybody else's.