The willful idiot

BIKER modified

“My partner and I,” says Jeremy, “are looking into buying a new home.  I’m really glad I stumbled on your site now. I read a few of your posts and things started to become quite clear (that I have no clue what I am doing and have been a willful idiot for most of my adult life).”

Jeremy’s in Vancouver, where the average property now costs about $830,000. Even in Toronto realtors are telling virgins they need at least $700,000 for an ‘entry-level’ house – and that won’t even get you a detached in most of 416. Van’s worse.

“Basically I’m writing because I want to take control of my life and what I’ve got,” he continues.” My savings are in a TFSA/mutual fund around the 30k mark and I have no clue what to do with it.  I’m in the Architecture profession so my disposable income is laughable so I’d like to make good use of what I’ve got.  I’ve just had a coffee — it is midnight and I’m on a mission to read your entire blog.”

I have no idea if he consumed all 1,900 posts overnight. If so, he’s likely dead. My advice will be irrelevant. But on the chance he survived, Jeremy deserves to be spanked for even thinking about buying a house with net worth of just $30,000. Sadly, however, our rapacious bankers make such things possible.

For example, you need only 5% down to get conventional bank financing, which would be about $40,000 in Vancouver. And while Jeremy and his squeeze don’t have enough, they can borrow the rest – on a personal line of credit, with a loan, or putting it on their plastic. They can find a lender who offers a cash-back mortgage, in which case they get free money but a slightly elevated interest rate. They can withdraw from the Bank of Mom.

The necessary mortgage insurance can be added to the mortgage principal, so no cash is required. Land transfer taxes are reduced or waived for first-timers. There are even federal and provincial tax credits and grants just for virgins.

The point is, the system has made it ridiculously easy for people to walk into the massive debt required to buy. So even a self-avowed willful idiot like J can end up with a house, despite lacking enough to cash-buy a decent car.

No wonder banks are rich. RBC, for example, made $9 billion in profits this year – up about 8% from 2013. Half of all that came from personal and commercial banking, and much of that was from a massive mortgage portfolio. But as I pointed out yesterday, change is in the wind.

This week even the nation’s largest bank admitted housing is overdone and 2015 may be the year everyone feels it.

CEO David McKay now says prices could fall by 15% as interest rates start their inevitable ascent. “There could be some price correction, particularly in a rising rate environment,” he said Thursday. “I don’t see it to the extent that the Bank of Canada does, but I do think you could have a 10 to 15 percent price correction.”

McKay was referring to the central bank’s musing that big-city house valuations are too high by up to 30% – roughly the drop that caused the US middle class to collapse under its own debt load. He’s also acknowledging there’s no way rate hikes in 2015 will be avoided, or that they’ll be temporary. Those who think otherwise are simply not paying attention to the US economy’s fundamental strength, or the fact Canada cannot resist raising rates for long after the Americans pull the trigger. If it did, the loonie would be done like dinner.

Moreover, the RBC guy says all of this – higher rates and cheaper houses – is healthy for the economy. “A slowing market is absolutely a healthy thing right now, so we’re not concerned.”

He’s right. Rates will go up. Property values will come down. It’ll be good for the long-term viability of Canadian society. But it will also kick the crap out of many people who (like Jeremy almost did) borrowed excessively, bought more than they can afford, and have virtually no equity. Even a 15% correction would put them seriously under water, destroy their personal net worth and saddle them with a giant, expensive and illiquid asset. About the last thing a young person needs.

As for the wrinklies so many angry kids on this blog love to disparage, this also sucks. Maybe worse. Most of them don’t have corporate pensions nor are they public servants. Most have surprisingly little saved or invested. Most have plowed their net worth into a single asset. And half believe they’ll have no choice but to sell or downsize in order to generate a living income. So, what happens if prices fall and markets slow just when they need to bail?

Years ago I wrote about the two groups who would eventually be most at risk when the inevitable occurred. Years later, I’m still at it. Maybe I should just get a life.

Going negative

In case you missed it, Wall Street exploded higher on Thursday (421 points), but oil resumed its slide ($54.11) and the layoff notices are flowing in Calgary. This is the kind of world this pathetic blog told you to be on the lookout for. And prepare for. It’s a world in which you want to own financials, not stuff. More US and less Canada.

In the ‘stuff’ category is houses. And it’s started.

Home sales in the first two weeks of December didn’t really move from last year. Says local perma-bull realtor/pumper Mike Fotiou, in awe: “Sales could fall below year ago levels.  Falling sales is a precursor to falling prices.” And listings are bloating while sales stutter, showing lots of cowboys have decided to absence is the better part of valour. New listings have spiked 35% and active listings are up by a third compared to last year.

Says Mike, now on a Prozac-and-JD diet, “If sales drop off in 2015 as many expect, inventory will continue to grow and result in depressed prices.”

Ex-realtor and housing consultant Ross Kay, who has the same relation with CREA that Sony does with Kim Jong-un, says he saw this coming. “Calgary went negative on December 15th,” he tells me, “and Toronto went negative on December 16th, a week earlier than we predicted.”

That means, according to his numbers (which weed out the usual realtor number-massaging) that Calgary sales are down about 1% from last year, while Toronto’s are flat. “As of December 17th sales volumes in both Calgary and Toronto are now in the negative, comparing apples to apples.”

Of course, most people haven’t heard this, because they get their news from the MSM, which gets it from the real estate boards. According to the Toronto cartel, sales increased by 1.9% in the last two weeks (over the same time last year), and “Greater Toronto Area households remain upbeat about buying a home, as evidenced by the increase in sales compared to last year.” The board also says the average price is 8.6% higher than a year ago, but fails to mention it’s $24,259 lower (a decline of 4.1%) than in April.

Meanwhile, more and more souls are starting to discover this dichotomy between financials and bricks. The Bank of Canada now warns houses are inflated, joining the IMF, World Bank, The Economist, Morningstar, most US ratings agencies, Robert Shiller and Demographia (among others). I gave you a hunk of a column by CBC editor Don Pittis the other day saying similar. Now pesky little Rob Carrick at the Globe is back on board.

“The ugly stuff going on in the stock market lately could happen in housing,” he warned the other day. “So follow the same 10-year rule as a home buyer that you should as an investor. If you can’t wait a decade or more for your transaction to make financial sense, don’t do it.”

Did he clear that with the advertising department, I wonder? Or the dinglenuts on the city desk who use words like ‘hot’, ‘torrid’ and ‘steamy’ to describe every realtor release? (Now I’m a little aroused.)

Apparently not. “It’s time to start getting real about housing – the longer it keeps rising, the sharper the ensuing adjustment will be. We live in a jittery, news-saturated financial world today that can take shifts in sentiment about assets such as oil or stocks and amplify them into wipeout trends. Houses don’t have immunity. They are financial assets, just like stocks, gold bars and gallons of oil, which is to say prices move both up and down.”

Absolutely. But the trouble is, with 49% of all real estate buys now being done by virgins, many of them weren’t even little wrigglers when the last housing wipeout occurred in the early 1990s. They have no idea that 10% or 20% of their equity can be blown off in a few months, or that interest rates weren’t always 3% (and soon won’t be, again).

Worse – as the wise people now flooding realtors’ offices with listings in Cowtown know – real estate can get colder than you spouse when you buy her a Dyson Cyclone Upright for Christmas. Houses become illiquid astonishingly quick. The slower sales get, the more listings accumulate and the more reticent buyers become. Only meaningful price hacks can entice the brave to buck the trend and buy. Wait. You’ll see this is so.

Meanwhile, why did investors storm Wall Street this week? Because cheap oil, that’s hurting Calgary (where houses cost twice what they do in Houston), will accelerate growth by increasing the disposable income of millions who now spend less on gas and home heating. Ditto in Europe, Japan and China. All the leading indicators are green, and 2015 looks to be one promising mother of a year for financials.

No surprise here, though. How many times have people been told that with epic debt and a single, swollen asset, all we needed was one economic shock to change everything?

Looks like it landed.