快樂牛郎

From the tone of 牛郎, 佢等待左呢日好耐BiscottiGelato 發表於 2010/10/1 11:32

Actually, I don't mind if it comes later than earlier.  The later it comes, the more capital I will have.

sheep

In the US, if you walk away from your home, the banks cannot do anything but decreasing your credi ...
快樂牛郎 發表於 2010-10-1 13:20

    but the RE still worth 85%

sheep

Also you might have a 15 to 20 % down before, right?
I'm not talking about the sub prime mortage.

BiscottiGelato

but the RE still worth 85%
sheep 發表於 2010-10-1 13:24

If you have 20%/30% paid off on the house...
- A 20/30% drop on the home would've wiped the equity in your home out. Aka, if you sell your home, whether it be forced to sell or sell voluntarily, u'd be penniless.
- If there's a greater than 20/30% drop on the home, you'd be under water. I don't know if the bank would make you make up the difference or foreclose your property. Regardless, you'd be in a negative equity position, if not outright bankruptcy...

Say someone put 20% down on a home with a 30 years mortgage. Keeping in mind that in the initial stint, most of the payment probably won't be contributed into the equity of the home (aka only towards interest). For convinience, lets say for the first 5 years, all the payments are on interest reduction. That means, the equity portion in the home would continue to be 20% if the market price stayed flat. If the market price tanked by 20% or more in the next 5 years, one would have 0 equity, or negative equity in the property... If one's in an unfortunate position that they need a big chunk of emergency cash, and thought they can count on selling the home to get some equity, etc.... there'd be no equity to tap into. obviously savings have all gone in as Mortgage payment already (esp with some of the calculations fibbi was doing where all spare cash went into mortgage payment). it's essentially over for this individual...

Bet he/she wish that he/she just paid rent and kept the money.....

That's why I said, if one can bear (pun intended )a mean reversion to the long term trend line, or even an overshot below the long term trend line, buy a home, live in it, and be happy you are not paying someone else's mortgage. If a mean reversion (35% drop or so?) means you'd be in the red, then you definately should not buy a place, whether you think you can afford the mortgage payment or not. As happy cow said, you are doing a 500% leverage, imagine doing that on stocks. The risk is the same thing if you are buying real estate at all time high at multi-fold leverage levels.

fibbi

回復 259# Look4chrisng

If you like to continue discussion plz go here:
    http://www.loyaukee.com/forum/vi ... &extra=page%3D1

Btw, my mom does not give me spare change for breakfast. I always have breakfast at home.

快樂牛郎

I don't know if the bank would make you make up the difference or foreclose your property. Regardless, you'd be in a negative equity position, if not outright bankruptcy...fibbi 發表於 2010/10/1 14:16

In Canada all your equities are used as guarantees.  So unless you are absolutely broke, you need to pay them back somehow.

大C姐

If you have 20%/30% paid off on the house...
- A 20/30% drop on the home would've wiped the equity ...
BiscottiGelato 發表於 2010-10-1 13:48

    You're 100% right. I think every home owner understands the risks involved.

BUT, if the real estate market drops by 20-30% (that is not unusual in HK but it's indeed quite dramatic for Vancouver), who's in the position to buy then? To have such an extreme drop in market, one can reasonably assume that the overall economy would suffer. Mortgager lenders will tighten their policy and demand higher % downpayment; your job may not be as secured... will you be in good position to buy a property then? to "buy cheap"?

Let's assume you have the downpayment at that point. If you hold your cash in your saving account it may be okay, but if you're holding investments, you can only hop they will not go down with the RE market at that point. And besides, the interest rate is still unknown! Just because RE market is down doesn't necessarily mean the interest rate is low, if interest rate is 10%, is it clever to buy then? After all these finanical consideration, there is still no guarentee that you'll find a property you love.......

It's always ideal to aim for that "perfect time" to buy low and sell high, but there are so many different variables, sometimes it's easier to just look at your wallet and buy what you can afford now (as i previously mentioned).

快樂牛郎

BUT, if the real estate market drops by 20-30% (that is not unusual in HK but it's indeed quite dramatic for Vancouver), who's in the position to buy then?

Those who have been really savvy with their money will step in.

but if you're holding investments, you can only hop they will not go down with the RE market at that point.

By now people should know how to PROFIT from a downturn, rather than just buy and hold.

if interest rate is 10%, is it clever to buy then?

If interest rate is at 10%, all other alternative investments (stocks, gold, oil) will also soar through the roof.

sheep

回復 274# BiscottiGelato


    Yes, that's the risk and yet you won't be go after by the bankers and you are not in -ve equity.

BiscottiGelato

You're 100% right. I think every home owner understands the risks involved.

BUT, if the real ...
大C姐 發表於 2010-10-1 15:31

Again, do you agree that there's more of a downside risk (a possible drop) than an upside risk (price running away from this point)? If not there's almost no point in talking about this because essentially the conception is that housing will go up forever, even at the current peak point.

Now, if you do think downside risk is considerable that it justisfies further thinking into the matter, then we must look at how big a drop we'd expect if the risk materializes. We are at a minimum 35% over the historic long term trend (30-50 years trend). We must factor in this risk when we determine whether one can afford  a place.

So yes, if the downside risk is reasonably quantified and factored into the affordability equation, and one can still afford to buy, then I agree with you in the recommendation that people should buy what they can afford now. My suspicion is that with a 35% downside risk factored in, most should conclude that this is not the time to buy, even if it means renting for now and having to put up with the overhead of moving later.

My personal investment thesis for majority of my portfolio is to beat inflation and counter downside risk (capital preservation). A massive deflation would bold well for my position. I am not very concerned about certain trends emerges and take off on me. Greed is good but I try to keep it reasonably in check. Moreover, historically, housing prices tend to be more affected by the local economy than the global one. If the local economy under performs the global economy, a well diversed portfolio will most probably out perform the local housing value, especially at current valuations. So will many non-service oriented jobs survive if it's just the local economy going into the drain.