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Wednesday, December 23, 2009

Jeff Rubin: Housing in for shock... prices to drop 25% or more?

Jeff Rubin was the chief economist at CIBC World Markets for 20 years. He was one of the first economists to accurately predict soaring oil prices back in 2000 and is now a popular commentator on oil depletion and its economic repercussions.

He argued that it wasn't sub-prime mortgages, but record oil prices that drove the world economy into its deepest post-war recession.

Speaking of mortgages, he has some advice for Canadians currently holding a mortgage.

Look at your current situation and ask yourself a long, hard question: just how big a mortgage can you carry?

  • "When money is free, it’s hard not to borrow it, even if the lender keeps warning you to be vigilant against debt. That’s exactly what Bank of Canada Governor Mark Carney has been telling Canadians while at the same time keeping their cost of borrowing as low as it’s ever been.

    Today’s inflation rate is no more sustainable than today’s interest rates... And this time the inflationary fallout won’t just be in the energy component of the Consumer Price Index. The impact will be much broader...

    Stress test your floating-rate mortgage three or four percentage points from today’s level and take a good, long look at the resulting increase in your monthly mortgage payment. For some homeowners, that could be as much as another $1000 per month.

    Twenty years ago a similar shock to borrowing rates caused Canadian housing prices to fall by an unprecedented 25 per cent. I know because I called it.

    That call was as much about where interest rates were going as it was about where housing prices were heading. Based on current borrowing rates, today’s homeowners will be facing almost as large an increase as they did back then.

    So heed Governor Carney’s caution when you decide how big a mortgage you can really afford to carry. Because once the Bank of Canada starts raising your mortgage rate, it will be a very long time before they stop."

You all know I completely agree with Rubin on this, it's exactly what I, and the other members of the Rainforest Roundtable, have been saying all year long.

When it comes, however, the drop in real estate prices in Vancouver will be much steeper than it was 20 years ago.

I stand by my prediction of at least a 40% drop in single family home prices and a 50% drop in condo prices.

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