Cooling market could sink recent buyers
Perfect storm of factors could push down home values, leave those who purchased property in 2017 vulnerable
Buying a first home together is a milestone for many young couples.
But for Ines Min and her husband, achieving this life landmark felt more like a feat of herculean financial effort.
Like so many other buyers looking to purchase property in the Lower Mainland, they faced the challenge of buying a home in a red-hot market in which prices for even a modest apartment-style condominium exceed $680,000.
Despite the cost, the couple were undaunted, figuring it was now or never.
After all, prices were unlikely to get cheaper, they inferred.
“The condo market was on fire last year when we bought, but we were reassured by the fact that our investment was only going to appreciate over time,” says Min, 30, who works in public relations.
The dual-income couple with no kids purchased a condominium apartment in downtown New Westminster last July, thinking all they needed to do now was keep paying the bills, and watch the value of the property grow. Well, not so fast.
Recent measures aimed at cooling the housing market announced by the provincial government in the 2018 budget may do more than slow down rising prices.
As finance minister Carole James indicated after the budget was unveiled, the new taxes on speculation, foreign buyers and high-priced homes may even cause homes prices to fall.
While that would be good news for would-be buyers, it’s the opposite for recent buyers who could see the value of their home worth less than what they owe, putting their mortgage under water.
Lana Gilbertson, a licensed insolvency trustee with MNP, says this would seem like a stunning reversal of fortune for young homeowners. Yet the scenario is by no means novel for Greater Vancouver area.
“I was around during the recession of 2008 and 2009 when afterwards many homeowners who bought a year or so earlier saw the value of their home worth less than their mortgage,” she says.
Though unsettling, the situation wasn’t all that dire for most homeowners.
“Prices go up and down, and as long as people met their mortgage and other debt obligations, they were largely OK.”
Homeowners just had to wait it out until home values started moving upward again, albeit it took about five years for prices to recover fully, says Cameron Muir, chief economist with the British Columbia Real Estate Association.
Still, some homeowners—even if they could keep making payments—felt the pain more than others.
“The common complaint around 2013 and 2014 was many households looking to move up in the marketplace couldn’t because their home was worth less than it was when they had paid for it in 2007 or 2008.”
While prices did recover, the last downturn revealed it didn’t take a U.S.-style meltdown--where home values fell to a small fraction of their peak--to sow tremendous economic upheaval.
“What happened here paled in comparison to what you have seen in the United States at that time.”
But the downturn did have a negative impact for many homeowners in the Lower Mainland, Muir says.
Still, he adds that some of the new measures--including raising education property taxes on homes worth $3 million or more and hiking the surtax on purchases by foreign buyers from 15 to 20 per cent--are unlikely to cause prices to fall significantly, if at all.
But the new speculation tax— potentially an additional tax on vacation homes—may be a different story, Muir notes.
“We’re still looking for more details from the government in terms of who will be affected,” but if it does affect second-homes— like vacation condos—prices could sink across the board, Muir says.
Equally concerning is these regulations come at the wrong time in the market cycle—the peak—and fail to address the biggest driver behind soaring prices: supply.
Muir says the industry has been working to address this problem, building tens of thousands of new units in metro Vancouver alone.
But now this new supply could hit the market just as these dampening measures take effect, Muir says. Along with a peaking stock market and growing uncertainty regarding trade with the U.S, existing homeowners could experience a perfect storm of negative factors on the housing market, pushing values below what they owe.
“It’ll mean we probably bought at the worst possible time,” Min says.
Yet homeowners can take steps today, so they can keep their heads above water financially even if their mortgages end up under water, Gilbertson says.
“More than ever it’s a good time to get your financial house in order.”
The small pains incurred now-cutting costs and paying down debt aggressively--could help avoid larger ones in the future. After all, even though homeowners may be able to keep up payments on an under-water mortgage, fiscal management becomes much more challenging if you’re making payments on multiple sources of debt.
Gilbertson points to experiences of indebted homeowners during the last recession. “One thing we saw was they could no longer access any further equity in their home because it had dissipated, so if they were unable to meet their consumer debt obligations, they were looking at bankruptcy or a consumer proposal.”
Moreover many lost their jobs, “and couldn’t make their mortgage payments,” facing foreclosure on their homes, she adds.
That’s not a major worry at this stage for Min, who says she is confident the couple can manage what may come because they practise good financial habits.
“The most challenging aspect of managing expenses as a new homeowner is learning to account for unexpected maintenance costs and special levies, but once you have built in a contingency budget, the rest isn’t so bad.”