I’m feeling a bit doom and gloomy about the economy. One possible bright side is that the people who live and work here in Vancouver, who make it a city and not a ghost town, may yet afford a place here. So take heart, Krystal.
It all has to do with this Asset Backed Commercial Paper problem. Don’t run away from me. It won’t be boring, I promise. And remember, I’m a money coach, I’m not an economist, so what follows may be way off base. But here’s the future as I see it:
Joe wants to buy Sally’s $300K condo. He doesn’t have $300K available just then (he’s not John Chow).
So Joe goes to Friendly Credit Union or Big Bank to borrow the money.
Now here’s the thing. Do you think Friendly Credit Union has the $300K sitting around? No! They don’t either! (seriously. they don’t.) So how do they get the money to pay Sally out? Two ways:
1. For every $1 dollar banks do have sitting around (in term deposits, gic’s, savings etc) they can essentially use their own credit to give Sally approximately $20 or a little less. (Think of it a bit like writing yourself a cheque on your line of credit.) So let’s say they have $10K in savings. They can pay out Sally $210 and owe themselves $200 which of course they’ll get from Joe over the years. But where’s the remaining $90K they still need to pay Sally?
2. Friendly Credit Union or Big Bank would go to outside sources, and “sell” that part of the mortgage to a third party. With the proceeds of the sale, Friendly Credit Union would then pay out Sally. Often, these third parties were american companies. And often these companies also provided mortgages for less than stellar people … who increasingly defaulted their payments in 2007. So now these companies are extremely jittery about lending out their money anymore – if they even have any to lend.
What that means is this. In the coming months, Friendly Credit Unions and Big Banks will have to be a lot more cautious about who they lend to. Why? Because they can only go to those third parties if Joe is a super-secure kinda guy. If he’s not, the third party companies won’t touch him, and the FCU or BB won’t be able to pull together the cash to pay out Sally.
It also means the FCUs and BBs are going to do all they can to get some cash coming in (see point #1 above if you don’t understand why) so expect pretty good rates on term deposits and high interest savings.
Here’s the doom and gloom part. Say Joe wasn’t a good risk. He’s more likely to get turned down than ever before. So Sally doesn’t get to sell her place. But there’s worse news. Sally isn’t the greatest risk in the world herself, and her mortgage has is up for renewal. She actually rents her place out (she doesn’t live in it) and doesn’t get as much in rent as her monthly mortgage payments. So Friendly Credit Union or Big Bank may end up not renewing her mortgage. So Sally goes from Bank to Bank and finally finds one who will lend to her – but at an interest rate so high that her cash flow would mean no lattes or ski trips for the year.
What would you do if you were Sally? You may start to feel pretty anxious. You may decide it’s not worth it, and dump the property. You may drop the price of your place to get someone – anyone – to take it off your hands.
And that’s where Krystal and all the other average joe/ette Vancouverites may find a gleam of hope.
I don’t know if I should laugh or cry. Or if I should take my own future-telling seriously.
Readers: what do you think? Will the other factors undergirding the Vancouver economy keep housing prices up? Or will the ‘credit crunch’ lead to falling prices and a fair bit of panic? Is the cold and rain of Vancouver just getting to me and skewing my perspective?
Photo credit: Azrainman (who apparently shares my sense of gloom)