Wealth Effect
Thursday, January 4, 2007
This week's property tax assessments may have you worried about having to pay higher property taxes. But there's another potential affect of higher assessments -- a psychological one.
Thursday, January 4, 2007
This week's property tax assessments may have you worried about having to pay higher property taxes. But there's another potential affect of higher assessments -- a psychological one.
When house assessments go up -- it creates something called *the wealth effect*. People feel richer and are willing to spend more. If you're thinking about borrowing money against the value of your home -- think twice. Home equity loan companies or banks are happy to loan you money but there are risks. The biggest risk is the value of your house dropping.
RBC has something they call the affordability index. In Calgary -- for example -- the average house price is four hundred and five thousand. Its affordability index is forty-two and a half. The higher the number -- the less affordable a house is.
Toronto has an average house price of four hundred and forty six thousand. And an affordability index of fifty point four. So houses there are less affordable than Calgary.
So how does Vancouver compare? In Vancouver the average house price is almost five hundred and seventy five thousand and the affordability index is seventy-five. So compared with the rest of the country our house prices are way out of whack.
The less affordable houses are -- the harder they are to sell. That puts more pressure on housing prices to fall. RBC predicts the Vancouver housing market is near a turning point -- where prices will begin to fall. The signs are all there. The number of sales is down. The number of houses on the market is up. So that's the reverse of what we've been used to. Now there are more sellers than buyers. So RBC is saying that house prices are going to drop. By how much is the big unknown. Nobody knows. Hypothetically, let’s say they fell by a third, that would only bring prices down to where they were two or three years ago. We'd still have the most unaffordable houses in the country. Which brings us back to the original point. Given all these indications that house prices could fall - it's dangerous to borrow against the value of your house when that value is expected to drop by an unknown amount. Remember -- you'll still have to pay back whatever you borrowed. LINK
4 comments:
This week's property tax assessments may have you worried about having to pay higher property taxes.
This is a common misconception. Property taxes are function of local government spending. I can assure you that in the early 80's and late 90's when assessments were going down taxes kept going up.
Assessments are just used to compute how much taxes you pay compared to the next guy. If everyone's assessment goes up 20%, for example, that won't change.
BTW a 575K average for Vancouver must include condos, SFH has got to be higher.
Unfortunately RE prices do go down. Prices in RE go up and down all the time.
In the long run, due to inflation, you will always get more for your house than what you paid for it. But in the short run you can get burned by buying high and having to sell low.
There are only so many "Rich" foreign investors out there. Trust me they won't be looking for a SFH in the Burbs. Or a 500sqft Condo on Hastings.
So if you own a nice property in West Vancouver, Down Town, etc. there will be some insulation there.
They were saying that there would be no down turn in the US. Look at what is going on there. It's correcting, getting back to the fundamentals. Those who don't have to sell are just fine and will be in the long run. Those who are selling now due to job transfers, divorce, job loss, health, etc. are in serious trouble if they don't have a lot of equity.
Agreed. RE goes up, and it goes down. Ironically, the stock market usually recovers faster than real estate does, yet people feel the stock market is riskier than real estate. The reality... RE is less liquid and forces people to wait. If you wait long enough, of course it will go up. question is... how long can you maintain those mortgage payments? Assuming *life* doesn't happen and force you to sell?
Do we really know how many short term investors/flippers are out there?? There maybe more than you think.
If they feel pressure then it will bring on some competitive selling. Condos are probably more prone to this than SFH.
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