Ma folie

Let’s forget Trump, China, the markets and rates for one day. Deal?

Three winters ago I told you about losing my mind and buying a 127-year-old brick structure with bad wiring, no insulation, leaky roof, crumbly bricks, tilted floors and attitude. For eight years it had sat fallow after the last owner failed at the intersection of Old Main Street and Forks of the Credit Road, 45 minutes north of the CN Tower.

I was about to prove that old adage: if you have too much money, buy an old building. Problem solved.

The Belfountain General Store opened in 1888 when the area buzzed with quarry workers, tree-cutters, mill employees and farmers enjoying the fruits of the post-Confederation wheat boom. Everyone needed a place to get the mail, buy supplies, booze up and sit around the stove bragging.

Over decades the pile of bricks ebbed and flowed with the economy and society. When horses went and cars came, it sank. Big box stores a few miles away almost killed it. The economics of scale were definitely against a country store that tried to compete selling milk, batteries, nails and frozen pizzas. Successive owners lacked the cash flow to care for this tarnished historic and architectural gem. So the porch rotted. Bricks fell out. The stone basement became a no-go zone. The water cistern silted in. Commuters drove on by.

“You did what?”, Dorothy said, upon hearing the news. But I was smitten. Alas, even I am not immune to the tingles of real estate ownership – actually, the potential of it. And here was so much.

The gut reno took four months and the store opened two Aprils ago. This time its focus was not on groceries, but experiences. A vintage ice cream parlour with 26 flavours, gourmet hand-made dog biscuits, a full-service deli café plus racks and tables full of local foods, crafts and arts. This time the customer base was not the locals (who are now in love with Home Depot and the Loblaws Superstore), but day-trippers, hikers, tourists and anyone who wants to escape the Big Smoke for a few hours to go rural and walk back into a 19th-Century quirky, crooked, aromatic anachronism.

 During the first season Lorna emerged from among the cadre of employees as the natural leader. A foodie with a background as a professional buyer, she also had the patience and understanding to deal with a squad of teenagers and college students that scared me. So I made her boss. Good move. In the first year the General Store generated enough cash to finance itself – pay for all the stuff, the staff and the taxes. Pay me back? Not a chance.

The second year Lorna’s squad expanded to 19 employees and her menu blossomed. The ice cream parlour rocked, the outside patios were full, entertainers were brought in for long weekends and the product lines grew wildly. So did sales. They more than doubled. Suddenly we had enough money to replace the geriatric air conditioner ($9,000) and reroof the main building and the storage structure ($17,000). And don’t even ask about the HST. It got handled. But pay me back? Forget it.

So now Season 3 begins in a week. After being shut for a couple of winter months, the Belfountain General Store opens Good Friday, bunnies or no bunnies. The challenges this year are a little less on one hand – enhanced customer base and reputation, good suppliers and cool employees – but greater on another – a big jump in Ontario minimum wages, fatter electric bills, more employee-centric labour laws.

Running a small business is not the utopia of big cash flow and deep write-offs that many Canadians think. It is pure risk, tinged with anxiety under a constant overhang of failure. Worrying about customers is sometimes secondary to fighting city hall, the roads department, the CRA, the health inspector, the conservation authority, regional government or the bylaw enforcement officer.

Despite that, there are still tingles when I drive to this property, hang around outside with people and their dogs, scoop ice cream for kids or watch the young employees shimmy their way through shifts. Because Lorna is the boss, my most responsible job now is sweeping the patio. I’m good with that.

But I want fifteen bucks an hour.

The bully

It’s just an ugly half-century-old bung on 55 feet of uninspired dirt in the worky East End. But when it went up for sale eleven months ago, realtor Dan was surprised.

“So I sold the place with a bully offer,” he says. (That’s when a purchaser disregards the seller’s desire to accept offers on a certain date and ponies up an extreme bid to bully everyone else out of the way.) “In this case the seller was wanting to wait until the listing came out. That didn’t happen. The house had no improvements for 20 years, and even had just 60-amp service. So I sold it to him. It was all I could do to make him see the light.”

Thus did the place on Applefield, Toronto, change hands. It had been listed for $849,900, and sold for $890,000. With double land transfer tax the bully bidder shelled out almost $920,000. Yes, peak house.

Two weeks later the Ontario government lowered the boom with a go-home tax, universal rent controls and more. Then interest rates started to snake higher. News of the B20 mortgage stress test spread. And suddenly the bubble was gone. No more 30% year/year increases. Instead, the beginning of the great unwind.

Well, an identical house across the street is for sale, and realtor Dan is shaking his head. The ask is $748,800. If it sells for full coin, the net after commission will be $711,360 for a real-world, one-year loss of equity on this street of 22.6%. Ouch.

Ignore the real estate board stats, because this is what’s actually happening to detached homes in most hoods, in most markets, most of the time. The buyers are gone. Sellers who waited to list are freaking. Prices are tumbling. And it may have just started.

As you know, the US Fed jacked rates again Wednesday. That it would, was a slam-dunk certainty. The cost of money has now jumped five times in little more than a year. As a result bond yields went up, the stock market swallowed it and the US dollar declined. All as expected.

The big question – given a shiny new boss at the American central bank (Jerome Powell) – was what comes next? How aggressive will the bankers be in piling on more interest, based on their view of the Trump economy? Now we know. Very.

Here’s the forecast just received: three increases in 2018. Three more in 2019. At least two additional in 2020. The federal funds rate which sat at zero during the dark, desperate, credit-crisis Obama days will hit almost 3.5% by the time Trump squares off against Oprah. This is happening because the Fed believes modest economic growth will be sustained, almost everybody who wants a job will have one and the Republican tax cuts will fuel it all. As a result, lots of consumer spending and business investment will occur – and higher rates will result, to ensure no wage-price spiral or romping inflation.

Fine. No more doubt. Seven more American rate hikes coming, bringing the total to 13 in this tightening cycle. That’s not far off the historic average, but it must scare the poop out of moisters and real estate bulls who thought (and said so here) that mortgage rates could never rise above 3% without causing the market to crash. “Because everyone is so in debt and has no money,” they whined, “the government wouldn’t dare do it.”

Well, kids, the government isn’t running this show. The CBers are. Get used to it. In this country the mandate of the Bank of Canada is not to worry about your mortgage or even economic growth, but rather to protect the value of the dollar, keep inflation under control and maintain monetary stability. As such, you can be sure rates here will also rise – as they have in the past when 92% of the time the BoC aped the Fed. It may take a few months, but it’s coming.

This is what makes politicians so dangerous. They diddle with housing when natural forces are the best tonic to issues like unaffordability. The risk now is that the universal mortgage stress test overreaches. Or that Toronto will err with a vacant homes tax. Or BC’s provincial politburo will tax a declining market into a dying one. Household debt is extreme, residential real estate is leveraged up the wazoo, the cost of money is plodding higher and now governments – who allowed the bubble to inflate – have chosen the worst moment possible to prove they can push everyone around.

The outcome will be far worse as a result. More proof bullies never win.

(Note: An earlier version of this post incorrectly identified the exact home for sale. That reference has been removed.)