Are we entering another recession?

[piperdriver]

Falling house prices might not necessarily be a bad thing in over heated markets like the GTA and Vancouver.

[7ECA]

Falling house prices might not necessarily be a bad thing in over heated markets like the GTA and Vancouver.

Not for the folks who've bought in and are mortgaged to the teeth, they're f'd.

For the people who've had a home for years and are either nearly paid off or mortgage free, a decline in value to what they paid is good as it decreases the property taxes. Also helps tell developers to piss off, rather than continue to harass homeowners to sell and then go die in an condo...

[mmm..bacon]

Falling house prices might not necessarily be a bad thing in over heated markets like the GTA and Vancouver.

Can't speak for Toronto, but for those of us with an 'average' income in the Lower Mainland, prices will have to drop ~40% to bring them back to 'affordable' - and that's a huge kick to the net worth of a lot of people.

[digits_]

Falling house prices might not necessarily be a bad thing in over heated markets like the GTA and Vancouver.

Not for the folks who've bought in and are mortgaged to the teeth, they're f'd.

See, I've never really understood that. What does it matter that the value of your house goes up or down 50%? You are living in there. Your mortgage payments are not affected by the changing value of your house. So how does it affect your lifestyle?

It may feel sucky and sour to pay off a 500k mortgate if your house is only worth 250k, but it shouldn't affect the ability to put food on the table or drag you into poverty because you can't pay your mortgage anymore.

What am I missing?

[rookiepilot]

Falling house prices might not necessarily be a bad thing in over heated markets like the GTA and Vancouver.

Not for the folks who've bought in and are mortgaged to the teeth, they're f'd.

See, I've never really understood that. What does it matter that the value of your house goes up or down 50%? You are living in there. Your mortgage payments are not affected by the changing value of your house. So how does it affect your lifestyle?

It may feel sucky and sour to pay off a 500k mortgate if your house is only worth 250k, but it shouldn't affect the ability to put food on the table or drag you into poverty because you can't pay your mortgage anymore.

What am I missing?

Which bank is going to lend you 500k on a 250K property? Let me know I'm interested

[digits_]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

[fish4life]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

The catch is when the time comes to renew your mortgage after the X year term of the mortgage. I believe the bank you currently hold your mortgage with is pretty much stuck to renew you but you will never be able to switch lenders so you are going to get an awful interest rate.

[rookiepilot]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

The catch is when the time comes to renew your mortgage after the X year term of the mortgage. I believe the bank you currently hold your mortgage with is pretty much stuck to renew you but you will never be able to switch lenders so you are going to get an awful interest rate.

Huh? No bank is ever obligated to renew you. They can demand repayment in full after the term is up, if they don't like the loan.

[7ECA]

See, I've never really understood that. What does it matter that the value of your house goes up or down 50%? You are living in there. Your mortgage payments are not affected by the changing value of your house. So how does it affect your lifestyle?

It may feel sucky and sour to pay off a 500k mortgate if your house is only worth 250k, but it shouldn't affect the ability to put food on the table or drag you into poverty because you can't pay your mortgage anymore.

What am I missing?

I'd suggest that the issue would be the decrease in equity, while the debt load remains the same. The other issue is that people have gotten into the overinflated housing market with some hope that while they bought high, they could sell even higher... Instead, you bought high then the market corrects and you're stuck with a large mortgage on a home/land that is worth a lot less.

Mind you, the buy high sell higher thing has worked fine for the "foreign" buyers looking to launder their cash. Hell, they don't even bother to move into the homes - just buy them, sit for a while and cash in. Case in point is the Whitby Estates area of West Van. https://thebreaker.news/news/west-van-empty-mansions/

[fish4life]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

The catch is when the time comes to renew your mortgage after the X year term of the mortgage. I believe the bank you currently hold your mortgage with is pretty much stuck to renew you but you will never be able to switch lenders so you are going to get an awful interest rate.

Huh? No bank is ever obligated to renew you. They can demand repayment in full after the term is up, if they don't like the loan.

they aren't obligated to renew you but if they have a 500K loan on a house worth 250K and don't renew you, followed by you defaulting and then they are stuck with a 500k liability on a 250k asset. A bank would rather renew the loan and have you continue paying the 500K loan.

[digits_]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

The catch is when the time comes to renew your mortgage after the X year term of the mortgage.

Good point. If that would result in a refusal and a forced sale, you would indeed be royally screwed.

I'd suggest that the issue would be the decrease in equity, while the debt load remains the same.

I agree, but how would that screw someones life (with the exception of the above example)? You wouldn't be able to get loans for fancy toys like new atvs and boats, but in the long term that wouldn't hurt you, on the contrary. Less payments to make, so more cash in your bank account.

[ekg]

Seems somewhat moot to argue about equity. Ideally real estate should not be investment. Seems like a terrible way to plan for retirement. People will get screwed is if they lose their jobs during a recession. For example rising rates would make debt more expensive for corporations leading to mass layoffs.

[Eric Janson]

It may feel sucky and sour to pay off a 500k mortgate if your house is only worth 250k, but it shouldn't affect the ability to put food on the table or drag you into poverty because you can't pay your mortgage anymore.

What am I missing?

When you've paid 500k you will only get 250k back when the house is eventually sold. You've lost 250K of equity.

The idea behind owning a home is that it becomes worth more over time - increasing your equity.

If you lose your job due to circumstances beyond your control ( happened to me 3 times so far in my career ) you may end up being unable to meet your monthly payments and selling the house leaves you with a large debt that you can't pay.

One of the first things I did when I was able to was to pay off my mortgage.

[LennyLeonard]

But how is that relevant? The moment your mortgage gets approved, the bank uses the current 500k value of your house. One year later, the house is only worth 250k. How does that @#$! up your life? The bank already approved the mortgage, and your income and payments didn't change. What's the catch?

Why continue to pay $500K for something now worth $250K? People walked away from their mortgages in the states which added to the fire during the subprime crisis.

[fish4life]

Because in the US you can walk away from a mortgage whereas here you need to fully declare bankruptcy and deal with garnished wages.

[shimmydampner]

Seems somewhat moot to argue about equity. Ideally real estate should not be investment. Seems like a terrible way to plan for retirement.

I have a friend who always makes that comment about real estate not being an investment. Swears by it. He also plays the stock market with no formal education therein and has yet to do better than break even over the last decade. I sold an income property recently that was cash flow positive and made $40k on the sale. Seems like a perfectly legit way to plan for retirement if you're smart about it.
And why is equity a moot point? It directly affects your net worth.

[C-GGGQ]

I think the point is "property as equity/ investment" is the reason the housing market is as inflated as it is. Which is probably the single largest complaint we hear today how the major cities are unaffordable. So if we got away from "buy houses to make money" and back to "buy a house to live in a house" things might look better than they do now.

[digits_]

The idea behind owning a home is that it becomes worth more over time - increasing your equity.

That's the thing that I don't get. Why it is important to increase your equity by increasing the value of the house you live in. You still need a place to live. If the house market goes up or down, you can always sell that house and you'd pay the same to get a similar house.

Not sure how it is in the rest of the world, but I find that to be an interesting difference between North America and Europe: in Europe, the house that you live in, is not considered part of your investment portfolio, in North America it is considered to be the biggest asset in your investment portfolio. Huge difference in mentality. Note that this doesn't mean you couldn't buy other houses to be part of your investment portfolio to flip or rent them, that's perfectly fine, but treating your own house as an investment sounds a bit dodgy to me.

If you lose your job due to circumstances beyond your control ( happened to me 3 times so far in my career ) you may end up being unable to meet your monthly payments and selling the house leaves you with a large debt that you can't pay.

That would indeed be bad yes.

[shimmydampner]

There's a big difference been considering your house to be an investment and (rightfully) considering it to be an asset affecting your net worth.

[digits_]

There's a big difference been considering your house to be an investment and (rightfully) considering it to be an asset affecting your net worth.

Ok. I'm not arguing that it affects your net worth, but why is it so important that your net worth is high?

If you are using it for your pension scenario, then you are using it as an investment. You could buy a 250k house to live in, and a 250k house to rent out. That one 250k investment property could then be your retirment nest egg.
The retirment scenario mentioned in earlier posts, would have you buy the 500k house, hope/assume it becomes worth more, and then what? At the retirment age you sell it for 600k, and buy a 300k house to retire in? I wouldn't be too comfortable to be forced to sell the house I've lived in all my life to to pay for my daily expenses. I'd find scenario 1 safer and more desirable. But it's everyone's personal choice of course.

Another reason why your net worth could be important, is to qualify for more loans and/or extra mortgages. For the investor/self employed/business owner kind of person, I can see that this would indeed be beneficial. Risk the house to get more money for your business. A risky decision but a noble goal. This group of people would be severly affected by the housing market crash.

What I think most people would do however, would be to use their house as collateral for unnecessary loans: bigger trucks, bigger boats, and just increase pull of the noose of debt around their neck. Even though your net worth allows you to do this, they often don't realize they still have to pay the money back.... A one time bigger loan will restrict the money available for more "wise" investments. This group will also be affected by a house market crash, but this group, would actually benefit from it in the long term. If they can't get these frivolous loans, then they would actually save money in the long run, even if they are paying off a house that is worth less than what their mortgage is.