Mayhem

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We’re heading into the final five or six weeks of the spring real estate rutting season. This one, as you know, is memorable for having the lowest five-year fixed mortgage rates ever. Money is available for as low as 2.49%, if you don’t mind dealing with lenders you’ve never heard about before. But even with the big guys, 2.6% is totally doable. The result in the GTA and YVR is predictable. Mayhem. It’s a debt orgy.

Last week I told you the regulator in Ontario is about to crack down on the way bidding wars are being run, which is beyond overdue. These blind auctions totally disadvantage potential buyers, ensure the ‘winner’ pays too much and are open to realtor abuse. Bidders never actually know what the competing offers contained, or if they even existed. It’s the last way normal people would ever buy anything – and yet thousands get sucked into this when it comes to the biggest purchase of their lives. Go figure.

What can you do? Simple. Walk away from any property with panting buyers, a scuzzy realtor who holds back offers, or where the listed price seems below market value. You can also (at least in Ontario) make a Form 109 request to ensure other bidders actually existed, and the agent wasn’t just making them up.

Not so in BC, says realtor Greg Dent. He also admits to reading this pathetic drivel.

“I don’t have a lot of time to debate the pros/cons of most of your blog and while I disagree with some of it, you clearly have some valid points too (and while I know some of my colleagues are scum, there are a large number who are honest, hard-working professionals).  Regardless, I wanted to drop you a line around the RECO/Form 109 portion.  You’ll be interested to know (likely terrified to know) that there exists no such form/process either through the licensing body in BC (which as I’m sure you know is the Real Estate Council of BC) or the Real Estate Board (the board has very specific rules).  In BC, the only ways to confirm the presence of another offer is to either be presenting in person (which is what any good realtor should probably be doing for their client anyway) or ask to see the top half of Page 4 of the other offer (which contains no personal information other than the other buyer’s realtors’ name).”

Well, there you go. Another reason to move to Lillooet. No bidding wars there. Except for the bus to leave.

Speaking of Vancouver house prices, there may be another group to blame if you’re tired of mindlessly bashing people from China. And these folks are easier because they’re slower!

Yup, wrinklies. Specifically, millionaire home owning wrinklies who don’t feel like paying their property taxes any more. They’ve started to cost taxpayers a bundle, thanks to a weirdo program BC has to capriciously punish the young at the expense of the old. It’s called the BC Property Tax Deferment Program, and it more or less legalizes tax evasion on the local level.

Here’s the deal: if you’re 55 or older, you can stop paying the taxes on your Vancouver house, even though it’s worth a million or two and you’ve benefited from a windfall gain in property values, spiraling your net worth. You have the right to waive the tax bill and instead pay just 1% annual interest on what you owe. YVR’s property tax rate is $3.68 per thousand bucks of assessed value, which equals about $4,000 on the average house. But if you’re a crafty wrinklie who expects a full range of services you don’t want to pay for, and you feel like hoarding your cash, just say so. Now you only shell out $40 a year. The province has to make up the $3,960 and pay it to the city.

Only when the property is sold does the tax bill come due, but the outstanding amount does not attract compounding interest. It’s a gift to the greedy – since there’s no means test involved. Those with the ability to pay don’t have to, once they hit the double nickel. Ageism at its finest.

As you might imagine, this is spreading. Last year almost 39,000 people in BC didn’t pay their taxes – up 35% in the past four years. It’s costing about $17 million a year in Vancouver, and an equal amount in the burbs. That might not be a massive amount in a delusional market like this, but it should sure stick in the craw of all those moist millennials and lusty virgins who already feel shut out.

And it’s another fine example of the way politics feeds real estate, thanks to do-gooder elected nimrods who end up subverting the market. Like in Hamilton, where a renter making $70,000 can apply for a down payment loan that’s payment-free and interest-free for 20 years, so long as she buys a house in a specific hood. Hamilton house prices, by the way, have jumped 10% in a year and sales increased 13.9% last month, as the refugees from Toronto stream down the QEW.

And remember the federal RRSP Home Buyer’s Plan, allowing first-timer couples to raid their retirement funds for $50,000 in house-buying money? The number of kids who have abandoned paying anything back has risen to about 60%, which means the money is added back to their incomes over 15 years and taxed. It also means most of them have been borrowing to the max, buying so much house that they can’t find the cash flow to repay an average of $1,200 a year. Sad.

Meanwhile the plan has pumped an extra two billion into housing, making it more expensive for everyone, creating bidding wars, inflating household debt levels, leading to subsidy programs for former renters and grossly padding the equity of millionaire geezers who then legally refuse to pay their taxes.

You can’t make this stuff up.

Hard landing

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Just a few days after it seemed another rate cut in Canada was a dumb idea, it’s back on the table. The reason is simple. Imagine a ‘hard landing’ at the Halifax airport – engines mashed, wings crumpled, gear torn off and nose squished. Canada is the Airbus. The runway’s reality.

The head banker termed our nation’s growth ‘atrocious’ this week. In fact the current quarter could end up being negative. One more and it’s called a recession. You certainly know why. Oil and commodity prices have plunged, household debt has swollen badly, imports are racing ahead in price and we’ve created a condo economy in which 61,572 people work in the oil and gas sector, and 108,000 people are realtors. Our dollarette is falling and 80% of our real estate markets are stagnant. Energy exports have tumbled recently and we haven’t created this few new jobs in 40 years.

This is why, two years ago, I strongly suggested you have more of your portfolio weighted to US and international assets than to Canadian ones. Right now it should be two-to-one, because Canuckistan is faltering, and another rate cut two weeks from Wednesday will sure be an admission.

Here’s the fascinating part. Most people think they’re doing great – party time in the A320 as it screams towards the power lines at YHZ.

Those irony-loving accountants at CPA Canada just released the results of a poll done a few weeks ago as the economy unravelled asking people (a) if they felt satisfied about things and (b) how they rated themselves in terms of financial discipline.

“It may be a matter of perception,” said head accounting dude Kevin Dancey. “Factors such as lower interest rates, cheaper gas and a strengthening U.S. economy may have some people thinking things are just fine. However, no matter what happens with the economy over the coming months, the lingering issue of high debt levels cannot be ignored.”

No kidding. Most people said their financial lives are great and gave themselves high marks for discipline. And this is what the survey found:

  • More than half (53%) of working households in Canada are saving nothing. Zip. The same people assessed their level of discipline when it comes to money as ‘somewhat or very strong.’
  • Over half (51%) have no money put aside if something goes wrong. But it won’t, of course. This is Canada. We’re special. Mom said so.
  • With the economy now deflating and Alberta imploding, only 16% of Canadians said they expected to be negatively affected.

Meanwhile, says Capital Economics, Canada is ‘falling off a cliff.’ “The reported declines in retail, wholesale, manufacturing and export volumes… were very disconcerting. It’s typically never a good sign when all these key indicators fall together.” The company says it is “almost unbelievable” how quickly oil and gas drilling “cratered” and that all this is reminiscent of 2009.

Here’s a snapshot of economic activity, by the way. Put your helmet on.

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And here’s how Stevie Poloz, head poodle at the central bank just framed it:

“The first quarter of 2015 will look atrocious, because the oil shock is a big deal for us. In theory lower oil prices mean [putting] more money in consumers’ pockets, but … if an oil company cancels a project, laying off a worker, that guy will not have the money to buy a new pickup truck. That spreads pretty quickly.”

You bet. Try selling a house in Calgary, Fort Mac or Edmonton. And these are the early days of the commodity crunch – with the ripples just now spreading outward from the oil patch. No country can see its key export ripped or its currency whacked without some consequences. And yet in Canada, where 53% of families are saving nothing and carry epic levels of debt, people are cool. What’s to worry? That’s the pilot’s job. Here, have some peanuts.

The other day I said we are sleepwalking into financial torpor and failure. Some people get it, and know what to do to preserve their wealth. Others will simply blow up. Sometimes we find them both in the same family!

This guy just wrote me. He needs serious help. What’s your advice?

Hello Garth

“My Name is John and both my wife and I are in early fifties. We have a complex and emotional situation going on with our decision making. My wife wants to buy and max out on the show home mentality and I desperately want to live without a mortgage. We are both professionals and our combined income now is about 140k.

“We sold our house in Toronto 1.5 years ago and have $1,000,000 in the savings account earning 2% and we are renting (2800$/month). This was a choice as we wanted to move further north and either build new or buy ready on a larger land property. Kids are finishing high school (1 is off to university in the fall and the other has 2 years left). The kids RESPs are about $130k and earning about 5%. Our combined RRSP and TSFA are about 400K.

“The tension between us is huge. My wife is trying to convince me that rent is a waste and she is searching for the perfect home and that means about $400 to $500K mortgage, plus the $1 million down. Personally I would love to have the house to show off but I am in complete alignment with your concepts. I sense a complete economic collapse into a recession unfolding in Canada and the only way I see it for me is to sit back and watch. My wife wants to pull the trigger and buy.

“My question to you is regarding some information to convince my wife otherwise. I reference your blog on the regular basis but the tidal wave of emotions are blinding. Help.”