5 ms·

> Ultimately your payment is determined in step 3 and has nothing to do with interest rates. This presumes a single purchase. You've got to go 'macro economic'

by mabbo 8y ago

> Ultimately your payment is determined in step 3 and has nothing to do with interest rates. This presumes a single purchase. You've got to go 'macro economic' to see where this breaks down. When prices start rising because of increased max loan amounts, you get things like bidding wars. Toronto has been terrible for those in the last 5 years. Both the bank and the seller win when people start paying (and borrowing) twice as much as they would have for the same house 5 years ago. Belief that home values are higher and will rise causes them to do so (bubbles, yay). Example, personal: I bought my condo for under $600k 3.5 years ago. The neighbour is selling their nearly identical one today for just shy of $1m. (CAD$, but still insane). Interest rates are higher today than they were when I bought. My new neighbours will pay higher amounts to both the bank and the seller. There's more to prices than just interest rates.

zippy5 8y ago
However, the problem is that loans are an extrapolation of 30 years of income. So in a boom portion of the cycle, we over project an unsustainable income but in the bust portion, we under project. There is an inherit recency bias in the loan approval process. When coupled with an interest rates that are far below the historical median, there is an implication that a buyer can take out more debt than in any other economic conditions. This is a great resource to understand macroeconomic debt cycles: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0 However in a place like Toronto, I imagine there could be a lots of regional factor that would be more significant than interest rates: - Gentrification - Zoning Restrictions - Increase in Population - Geographic constraints (like bridges, freeways, school districts) Personally, I suspect you'll do quite well in Toronto but every housing market faces headwinds at some point.
- 01100011 8y ago
  And on the flip side, you can assume some level of inflation which makes that 30 year bet on your income less crazy. Sure, I don't expect to make 200k+ in inflation adjusted dollars for 30 years, but I might make that much after inflation devalues the dollar.
brailsafe 8y ago
I'm guessing you're in Toronto or Downtown Vancouver, mind breaking down approximately where/what your condo is out of curiosity? I'll never hope to own something here, but I'm always curious how far out these insane prices are getting and what you would get for 1m.
- mabbo 8y ago
  Toronto. We're double engineer income with no kids, and spent years saving up. We were also fortunate in finding this place, the unicorn of condos: 1400 sqft, near a subway station, well-built building, responsibly managed condo board. Is it worth $1m? Oh heck no. I don't think it's worth what we paid even, once the market readjusts to reality.
  - brailsafe 8y ago
    Damn. That certainly is a unicorn. Congrats on finding it.
charlesdm 8y ago
Until the music stops. See how much those condo's sell for during the next downturn, if you can even sell them.
- mikekchar 8y ago
  If interest rates go up causing people not to be able to afford their payments, those condos will sell -- after the mortgages have been foreclosed. Was in London in 1992, just before the pound was removed from the European exchange rate mechanism. Very instructive. Now is a particularly dangerous time to overextend yourself on a mortgage. For any realistic scenario, interest rates will never be lower than they are now. People ridiculously short terms on their mortgages (like 5 years or less). On top of that they are encouraged to take floating rates to shave a little bit off. If you end up with $1 million in debt and the interest rate jumps up to 5% (or 10%... or like London at the time I was there -- 18%!) what will you do? Of course you will have no choice but to default on your loan. House goes into a fire sale, but nobody can afford it with the higher rates, so it's sold for 10% or 20% or even 30% less than the original mortgage... And now, that's the price of houses -- Virtually everybody is more than $100K underwater at that point meaning that if you miss a payment, personal bankruptcy is probably your only hope. Of course, it may not happen in our life times. That's the tricky bit.
  - RhodesianHunter 8y ago
    Does anyone get floating rate mortgages any more? I thought (could be very wrong) that these had mostly gone the way of the dodo due to exactly what you're describing.
    - mabbo 8y ago
      In Canada, most mortgages have to have their rate renegotiated every few years. For example, mine was amortized over 30 years, but on a five year rate. When five years are up, I have to renegotiate an interest rate. "Renewing" the mortgage. This has interesting properties economically. It's a bit like a floating rate in that it will change, but like a fixed rate in that you don't have to worry about next month having an unexpected high bill. The banks give better rates because they only have to estimate the near-future and not the next 30 years. Big question: what happens when all the people who could barely afford their mortgage five years ago come to renew with rates higher?

by mabbo 8y ago

zippy5 8y ago

However, the problem is that loans are an extrapolation of 30 years of income. So in a boom portion of the cycle, we over project an unsustainable income but in the bust portion, we under project. There is an inherit recency bias in the loan approval process. When coupled with an interest rates that are far below the historical median, there is an implication that a buyer can take out more debt than in any other economic conditions. This is a great resource to understand macroeconomic debt cycles: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0 However in a place like Toronto, I imagine there could be a lots of regional factor that would be more significant than interest rates: - Gentrification - Zoning Restrictions - Increase in Population - Geographic constraints (like bridges, freeways, school districts) Personally, I suspect you'll do quite well in Toronto but every housing market faces headwinds at some point.

01100011 8y ago
And on the flip side, you can assume some level of inflation which makes that 30 year bet on your income less crazy. Sure, I don't expect to make 200k+ in inflation adjusted dollars for 30 years, but I might make that much after inflation devalues the dollar.

brailsafe 8y ago

I'm guessing you're in Toronto or Downtown Vancouver, mind breaking down approximately where/what your condo is out of curiosity? I'll never hope to own something here, but I'm always curious how far out these insane prices are getting and what you would get for 1m.

mabbo 8y ago
Toronto. We're double engineer income with no kids, and spent years saving up. We were also fortunate in finding this place, the unicorn of condos: 1400 sqft, near a subway station, well-built building, responsibly managed condo board. Is it worth $1m? Oh heck no. I don't think it's worth what we paid even, once the market readjusts to reality.
- brailsafe 8y ago
  Damn. That certainly is a unicorn. Congrats on finding it.

charlesdm 8y ago

Until the music stops. See how much those condo's sell for during the next downturn, if you can even sell them.

mikekchar 8y ago
If interest rates go up causing people not to be able to afford their payments, those condos will sell -- after the mortgages have been foreclosed. Was in London in 1992, just before the pound was removed from the European exchange rate mechanism. Very instructive. Now is a particularly dangerous time to overextend yourself on a mortgage. For any realistic scenario, interest rates will never be lower than they are now. People ridiculously short terms on their mortgages (like 5 years or less). On top of that they are encouraged to take floating rates to shave a little bit off. If you end up with $1 million in debt and the interest rate jumps up to 5% (or 10%... or like London at the time I was there -- 18%!) what will you do? Of course you will have no choice but to default on your loan. House goes into a fire sale, but nobody can afford it with the higher rates, so it's sold for 10% or 20% or even 30% less than the original mortgage... And now, that's the price of houses -- Virtually everybody is more than $100K underwater at that point meaning that if you miss a payment, personal bankruptcy is probably your only hope. Of course, it may not happen in our life times. That's the tricky bit.
- RhodesianHunter 8y ago
  Does anyone get floating rate mortgages any more? I thought (could be very wrong) that these had mostly gone the way of the dodo due to exactly what you're describing.
  - mabbo 8y ago
    In Canada, most mortgages have to have their rate renegotiated every few years. For example, mine was amortized over 30 years, but on a five year rate. When five years are up, I have to renegotiate an interest rate. "Renewing" the mortgage. This has interesting properties economically. It's a bit like a floating rate in that it will change, but like a fixed rate in that you don't have to worry about next month having an unexpected high bill. The banks give better rates because they only have to estimate the near-future and not the next 30 years. Big question: what happens when all the people who could barely afford their mortgage five years ago come to renew with rates higher?