Good advice

GIRAFFE modified

In case you missed it, our American friends grew their economy at a 3.9% rate in the third quarter of the year. That came after a 4.3% jump in the previous three months. This was the best six-month spurt since way back in 2003, when Stephen Harper still liked me.

The Yanks have been churning out 200,000 jobs a month and corporate profits are just fine. The central bank has completely turned off the stimulus spending tap and none of the chaos America-haters and bullion-lickers predicted has come to pass. So, stock markets keep on hitting new highs and the greenback appreciates, since the rest of the world (including Canada) is in varying degrees of swampiness. In short, the US recovery is seriously on track.

So what?

Barring a terrorist attack, more Taylor Swift vids or a natural disaster, the Fed will starting raising interest rates in 2015. The only question is when – spring or fall. That will initiate a long process and also mark this moment as perhaps the lowest point for the cost of money in a generation. A few of them, actually.

Will Canadian rates follow?

Of course. Once the Fed goes, the bond market will pretty much guarantee that long-term, fixed mortgage rates will follow. And now we have another credible prediction that the Bank of Canada will follow suit, starting in May. That’s six months away. And if this happens, the cost of variable-rate loans, lines of credit and business borrowings will go up the same day.

But don’t blame me for this. Dis the OECD. The international agency was a thorn in the paw of CMHC this week, just one day after the feds termed the Van and 416 real estate markets “low risk.” The call is for the first rate hike this spring, and then more of them, “steadily thereafter”. The OECD is also stating the obvious – it’ll ruin the financial plans of Canadians who have gambled it all on a house.

The biggest risk the country faces, the economists say, is a “disorderly housing market correction.” BTW, these dudes also point out that the current house price-to-income ratio is at 132% of its historic long-term average. There is only one other country in the world that’s worse, but who cares about Norway?

Now, let’s talk about Adam Mayers, the poor personal finance editor of the Toronto Star.

He wrote about housing this week, urging young people to buy in a city where average prices have increased at four times the inflation rate in the past year. You’d think that would tell a financial guy something about over-valuation and hormonal urges, but apparently not.

Calgary, of course, is cooked, Adam says, especially since oil just tanked below $75 a barrel. But Toronto is the holy land. Suck it up, virgins, and buy.

“Should we be worried, too? I don’t think so. Price increases will moderate as interest rates slowly rise, but that’s no cause for panic. Home ownership is about a place to live, so the horizon should be long. While the big gains for condo investors may be over, for those who plan to live and work in Canada’s largest and most desirable city, waiting probably won’t help. If they’re forming households or just tired of paying rent, they might as well pay themselves first. That’s the prime law of personal finance.”

Wow. Somehow it makes more sense to Adam for a kid to pay interest to RBC, and carry $400,000 in debt at rates destined to rise, rather than pay less rent to Larry and owe nothing. In fact, there hasn’t been a rent-or-own scenario on this pathetic blog where the math has proven that buying beats leasing over any five-year period. And don’t tell me 26-year-olds are buying a detached property to be their Forever House. That’s simply a myth.

Pushing your finances to the wall to get a half-million-dollar condo or $800,000 slanty semi is not the only path to ‘paying yourself first.’ Remember that just $100 a week stuck into a TFSA and invested in a balanced portfolio for the same length of time as a mortgage – 25 years – will end up being worth almost four hundred thousand, and for that you assume no debt and little risk. No condo fees. No property taxes. No burst pipes. No new roofs.

Plus, Adamonics assumes what has happened will continue to take place. It’s classic. This is the sentiment that screws more people than unsupervised radio hosts. By every measure, real estate values in Toronto and Vancouver are excessive, frothy, volatile and unsupported by incomes or economic activity. So when the Fed moves, and if the OECD is correct about Canadian rates, you should expect that disorderly correction.

And so much for Mr. Mayer’s advice: “If you’re at the age and stage when it’s time to buy and you can be patient in any downturn, there’s not much to be gained from waiting.”

By the way, the Star asked readers if this is a good time to buy a Toronto house. Yes: 30.54%. No: 53.56%.

I hear there’s an opening in Sports.

The lottery

LOTTO

194 Euclid Avenue is, of course, butt ugly. But to the old Portuguese couple who have lived there for years, it’s a bela casa. No wonder. Listed for $849,000, it just sold for $1,080,000.

The sawed-off bung in Toronto’s lower west side has 1,700 square feet, a basement suite, garage and two bedrooms. It was for sale for a week and got eight young couples excited enough to start a bidding war. But here’s the thing. A new semi not far away just went for $1.2 million, and a townhouse in the hood changed hands for one Kia less than $1 million. So because this sad, tired, little pile of bricks is detached, it jumped into the seven-figure range.

Here’s a picture, courtesy of Toronto Life mag, which makes this comment, “the home proves that $1 million doesn’t buy what it used to.”

No kidding.

toronto-sale-of-the-week-194-euclid-avenue-intro

About the time I was reflecting on the stupidity of man, a CBC reporter wrote me asking for a comment on the latest report card on Canadian real estate, as seen through the eyes of the federal agency known as CMHC. In case you missed this piece of trickery, let me summarize.

But before I do so, be reminded that CMHC is massively invested in the national property market. In fact without it, houses prices would be a fraction of what they are today. By allowing banks to lend to people who basically have no money, without taking risk, this agency has made cheap mortgage rates available to everyone. No matter if a kid wants 95% financing, or a 60-year-old wants just 20%, they get the same rate. Unlike, say insurance – where a smoker pays more because he’s likely to kick sooner – a penniless virgin borrows at the lowest rate because if she defaults, the government will pay the bank back.

Hence, with almost $600 billion invested in residential real estate it helped to inflate, and enabling most of the high-ratio, high-risk mortgages in the nation, CMHC’s hardly an independent or impartial player.

Having said that, I believed the analysts working there had a modicum of pride. I was wrong.

It’s called the House Price Analysis and Assessment framework, which is the agency’s Big Look at the entire Canadian housing market. Yes, it’s the same market which this pathetic blog has been reporting on almost daily with shocking tedium. You will remember the published numbers – sales reductions in more than 60% of the largest cities, price declines erupting in many, and yet three regions (Toronto, Vancouver and Calgary) where people are on drugs.

Most of the world agrees. The International Monetary Fund thinks we’ve flipped. US housing guru/economist Robert Shiller says we are on the same path that ate the American middle class. Even the big Canadian banks are on record as stating we’ve overvalued houses by about 15%.

Evidence abounds that conditions are unstable. Regional markets that popped wildly a few years ago, like Regina, are in tough shape. The second-biggest market in Canada, Montreal, has seen monthly sales declines. There’s a two-year supply of houses for sale in Halifax. Single-family home sales in Edmonton just fell 12%. All of this is happening even while five-year mortgage rates sink to the lowest point ever, down close to 2.5%.

The reason is clear. Incomes are not rising, and consumers have historic levels of debt, which keep bloating. As I showed last week, we’re adding a net new $10 billion a month in mortgage borrowing, and now a stunning 49% of all sales are going to first-time buyers – CMHC’s cannon fodder. (In the US only 29% of sales are to virgins, down from an historic average of 40%.)

Well, the feds say this: “Housing markets in Canada remain broadly consistent with underlying demographic and economic factors such as employment and interest rates. Nevertheless, a modest amount of overvaluation is observed, meaning that house prices are slightly higher than what the underlying factors would suggest.”

On Vancouver: “Low Risk — The level of home prices in Vancouver is supported by local growth in personal disposable income and long-term population growth.”

On Calgary: “Low Risk — Overvaluation in Calgary reflects the combination of strong growth in house prices and modest gains in personal disposable income.”

On Toronto: “Moderate Risk — Overvaluation in Toronto is due to steady price growth that has not quite been matched by growth in personal disposable income.”

There isn’t much doubt this will further stoke the fire, as it is intended to do. The report will be used by realtors to ‘prove’ that if the markets have any risk, it’s ‘slight’ or ‘modest.’ CHMC, which facilitated the creation of real estate values so extreme they suck off the majority of family cash flow, is now officially sanctioning them.

Meanwhile, at 194 Euclid, the wrinklies won the lotto. At least somebody gets the joke.