It’s a question worth considering as we approach month 7 of the buyer/seller standoff. The new mortgage rules will certainly limit the ability of a number of would-be home owners to acquire the financing needed to keep house prices bid at their current levels.
Home owners might believe that they set market prices and if no willing buyer can be found at their price point, they can simply pull the listing until prices firm. No doubt this is a motivating factor behind the massive decline in inventory nation wide over the last 6 months. But how rational is this move?
Certainly it worked back in 2009 when the seller strike combined with cratering interest rates, stimulus programs aimed at household spending, and massive mortgage purchases by the Bank of Canada to keep credit flowing all combined to spur a deluge of new buyers. Inventory was sparse. Money was cheap and abundant. Bidding wars erupted.
With this ingrained into the psyche of the average Canadian home owner, they no doubt have visions of a strong Spring market accompanied by willing buyers and flowing credit. There’s one problem….and it’s a big one. Since 2006, the mortgage market in Canada has been characterized by a fairly continuous loosening of credit conditions and rapidly falling interest rates. Sure we had the 0/40s for a while and they were corrected, but the trend is obvious.
Loosening mortgage standards and falling interest rates have one major effect: They pull demand forward. People who would have been forced to sit on the sidelines for a couple years until they could save up the necessary down payment or afford the mortgage payments on a shorter amortization suddenly found themselves able to enter the market…..and enter they did.
But if they were GOING to be buying in a couple of years and instead bought then, what does that imply? Simply that without a continuous loosening of lending standards, a demand gap would eventually hit when the bulk of the demand had been satiated.
That was our future even if mortgage rules had remained where they were. Now the feds have moved to kill demand at a time when the market was already facing a demand gap evidenced by the extremely weak demand in most markets for the latter half of 2010. What does it mean? It means that 2011 will be the year of the ultimate buyer strike. What does it mean for prices? I’ll cue up an insightful comment courtesy of ‘HowdyThere’:
“From a micro (individual) perspective, you have to make your financing match the price. As an individual, if the price is $300K, you better find out how to borrow that much.
From a macro (collective) perspective, prices will match the overall ability of people to borrow. In other word, if lending is reduced, prices will fall. Most people don’t understand this, as they are focussed on the para above.
People who don’t understand that the buyer set the price (as per para 2) will rush to buy before the new rules apply. They assume prices are determined by factors beyond their control and that they need to maximize their borrowing potential to meet market prices. They are micro in their understanding of economics. They are greater fools.
For those who understand that aggregate prices are set by the buyer (macro), they will anticipate lower prices from the new rules. By limiting the ability of people to spend their future income by 5 years, prices will fall.
Add in that investors will flee markets that don’t provide a positive return, we can expect significant drops in prices. I predict that sales and possibly prices will increase before the new rules. This is only because people don’t understand that availability of debt and willingness to use it sets prices; they deserve the title of greater fool.
Only when the general public understands the dynamic nature of markets (macro outlook) will we see rational markets. aggregate willingness to mortgage your future pushes prices up; aggregate conservative fiscal policy gets a better price and a better future.”
This comment is bang on! Those who are in the market and considering buying would be wise to sit on the sidelines as their purchasing power will not erode with the onset of the new mortgage rules. House prices will be set by those who have to sell. They become the new comparables. As total available credit declines, house prices will, by necessity, decline to reflect this new reality. Your purchasing power is intact……and you get the same house for less. Sweet deal. Pity those poor fools who will rush to purchase their home in the next 60 days. Lemmings……meet cliff.
For more on this discussion, check out ‘Why a ‘rush to buy’ is completely irrational’.