Underwater

On Tuesday we brought you Richmond realtor James Wong's musings that "sales are expected to continue to languish due to the lack of buying interest."

Fellow Richmond realtor Alphabet Arnie Shuchat follows that bleak news up with the following market analysis:

Primarily in Richmond, most people who bought in the last 3 years are technically under water. What I mean is that they are for sure going to be unable to sell their property for more than they purchased it; they are definitely likely to have a selling price net of commissions yield proceeds of disposition less than the amount owing on their mortgage.

I say this because in our previously expensive real estate market, buyers were throwing everything they could at the down payment and they would be lucky for a house purchase to be able to do so with a conventional mortgage at 20% down. The market being down some 25-30% depending upon neighbourhood, means that they are 40% through their 5 year fixed mortgages and in the event they were at term today, the discussion at the bank would most likely revolve around them coming up with sufficient equity in the form of a new 20% equity payment to finance a conventional loan, or CMHC insurance for a non-conventional one. Both scenarios are grim and place yet another purchase of the next house phase in jeopardy.

So we have all niches of home ownership who got in over the last 3 years looking at negative equity and all of the chilling effects on spending, renovating, moving up etc... that go with that. It is the inverse of the wealth effect that happens when asset prices move up and people feel good.

Shuchat's analysis is a shocking bit of news for anyone who believed the bunk that the real estate always goes up.

This is the very scenario that started the dominos falling in the United States, a condition the real estate industry here has always insisted simply cannot happen in Canada.

Say it isn't so.

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