Time to be heard!

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– Vancouver Courier

Old people have money. Young people have time. It’s a broad statement, I know. But in general it is true. The older we get, the more we’d trade wealth for extra years. The younger we are, the more we demand both. We are so arrogant.

And this brings us to the worn stone steps of the Vancouver Art Gallery today, Sunday, where the youth of YVR are revolting. They’re angry, too. Not gonna take it.

“It’s time to be heard! There is no end in sight to the stratospheric home prices in Vancouver and its impact is being felt across our communities.

“Families and professionals are leaving in frustration, homes sit vacant while too many need shelter, rent is sky-high, businesses can’t retain talent in this city, and the next generation of Vancouverites are forever priced out. The affordability crisis is affecting everyone in the income-spectrum and problems are all interconnected. But what’s to be done?”

So, a big rally against real estate prices in a city where the average detached hovers around $1.4 million. The kids, led by Twitter warrior Eveline Xia (I spoke with here a few days ago, as you know), have turned this into a Millennial-vs-Boomer, local-against-Chinese, all-vs-politicians movement. It started with her #DontHave1Million campaign, spread to the conflict-loving MSM, spawned a tax-foreigners petition with 25,000 names and now has gripped the pliant mayor, Gregor Robertson.

Friday night, after years of silence, and as it became apparent the winds were shifting against him, he issued this statement:

“We definitely need taxation tools that discourage speculation on real estate. It’s clear that rampant speculation on real estate is driving up prices in Vancouver. Vancouver needs the BC Government to take action on creating a speculation tax and recognize that we need a fair and level playing field to make housing more affordable for residents in Vancouver, and throughout the province. Their complete absence in supporting low and middle income housing is making it extremely difficult for people, especially young people, to live and work in Vancouver.”

Next in line was the local condo king, Bob Rennie – one of those West Coast, anything-goes marketing guys as responsible as anyone for blowing on the embers of housing lust. We need a speculation tax, he told a big conflab of business people last week. “It’s speculation we should be concerned about. The conversations aren’t about foreign investment, the conversation is about China. That’s the elephant in the room.”

Rennie (and his political horse, Robertson) is calling for a sliding-scale tax linked to the length of time someone owns a property – in addition to capital gains tax, and the CRA’s treatment of quick gains as 100%-taxed income. Where should the money go? “Let’s repatriate some of that money back to first time buyers,” he said graciously, hoping everyone in the room would forget he makes his living selling boxes in the sky to horny kids.

Well, it’s clear those same kids are feeling victimized – persecuted by a system they say is broken and unfair. In 1976, they argue, the Boomers needed to save for only five years to amass a down payment. Now it’s fifteen. Average wages, they add, are pitiful. Besides, everyone has to go and get a degree or two, incurring debt. They feel the world has failed them when they cannot turn into their parents and within a short time of leaving university have a marriage, a kid, a detached urban house, a retriever and a picket fence.

And so they Tweet. They petition. They op-ed. They blog. And they march. Here is how it looked on Sunday:

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Time will tell if others, like the mayor, bend and sway with the wind. With a federal election on the horizon, and the moist generation leaning left, it would not surprise. But I would obviously be a mistake. It’s always sexier and more fun to blame the system than yourself, your peers or your family.

The truth is a spec tax won’t make a SFD in Vancouver more affordable. Nor will beating up on Chinese immigrants or investors. Only by addressing the root causes of this stupid-price situation will any sanity return to the real estate marketplace.

We know what they are. I just devoted eight years to telling you. At the top of the list are the lowest interest rates ever which have encouraged excessive debt, overspending, and inflated house prices. Once rates start to normalize, the thud will be deafening. Then there’s financial illiteracy. You know, the kind that leads BC residents to spend (on average) 108% of their incomes, adopt a high-risk, one-asset strategy and turn their houses into a futures market. Add in irresponsible lenders, like Vancity with their laneway and free-down payment mortgages, plus CMHC, which strips away banker risk and gives cheapo loans to people without money. Low rates, easy credit and market-bending policies have bred greed and entitlement. It’s classic bubble thinking.

But there’s an even greater cause. It’s Mom.

Seriously. If the market were left to its own devices, house prices would have started to wither several years ago. Today 42% of all first-time buyers rely on the Bank of Mom for the down payment – a reliance that is swelling along with house prices. BMO also found that an equal number of move-up buyers are being financed by parents, most of whom are tapping their own windfall equity to keep the party going.

As you might expect this has bred the very kind of irresponsible, anti-social behaviour the moist Millennials are accusing everyone else of exhibiting. Almost half (48%) of Mom-financed first-timers are willing to jump into a bidding war, as are 36% of the upsizers. And here’s the most telling fact (that you will not hear on the steps of the VAG today): without the Bank of Mom 40% of first-timers and a whopping 50% of the move-up crowd would not be buying.

If that were the case, if this torrent of money from the hated Boomers and local families was not gushing into the real estate market to support the entitlement of the virgins, prices would descend rapidly. But, it’s so much easier to blame the Chinese. The premier. The oldsters. The system.

Of all the things wrong in the world to vex about – climate change, over-population, ISIS, Canada at war, public debts and deficits, punishing taxes, animal depopulation, homelessness, a sliding economy – the young protest over real estate.

We are so arrogant.

Don’t do it

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For the past four years, says Jon, he’s been waiting for houses to cheapen. “Renting, saving and investing,” he tells me, “with bated breath.”

Finally it was all too much. “As we stand on the precipice of historic housing highs,” he says with a flourish, “alas, the idea was hatched that we moved back in with Mom – after putting on an addition and renovating the place.” Late thirties, two screamers – it seemed like a good idea. After all, the old gal lives in a good hood, and it “would show the kids that family sticks together.”

But, adds Jon, there was “a nagging feeling prompting us to assess our sanity. Hence talking to you.”

That is probably a mistake, but let’s push on. Turns out Mom has $300,000 left owing on a place worth five hundred, and Jon would personally foot the $150,000 addition. “But what happens when Mom’s pension runs dry in ten years, or when she croaks and the other three siblings want their cut,” he asks?  “Any equity we put in until then gets split?  What provisions could be made in advance to avoid squabbles down the road regarding the inheritance?  Or do we hold the course, forget the whole thing, and ship a case of depends and Purina anonymously? Can this end well?”

Jon needs to remember one of the GreaterFool cardinal rules: never invest in real estate with anyone you’re not sleeping with. That includes mothers. Your own, I mean.

The potential problems are legion. If Jon’s going to spend serious money renovating the house, he needs to be on title in order to protect that investment. But with Mom on a pension and a substantial mortgage outstanding, it looks like the house equity constitutes the bulk of her net worth. So, will the other three children come looking for their slice when she passes?

You bet they will, presuming Mom’s will divides her estate equally between the kids. So, Jon would not only inherit a $300,000 mortgage if he assumes title with her (and she lacks insurance), but he’d have to remortgage the place to suck out two-thirds of the remaining equity (including the addition he financed) in order to pay them off. Disaster.

How to avoid this? Don’t do it. In fact, Mom-with-the-$300,000-mortgage should sell and rent, since it would lower her overall living costs and give some cash to invest for an income stream she obviously needs. Hopefully she’ll live long enough to consume it all. However, if Jon truly loses his mind and goes into this unwise situation, he needs to ensure Mom’s will is rewritten to deal with the new reality. He should also pay the premiums on an insurance policy (on her life) large enough to handle the inheritances.

But the best strategy is to keep the baited breath, save, invest and rent. Because with every day that passes, we move closer to the event he has been waiting for. Most people don’t believe this, (which is why I have no friends) and a big report on debt in the last few days reinforced the popular meme.

Maybe you saw it. The Fraser Institute said there is no borrowing crisis. “Little evidence that Canadian households are being irresponsible in taking on new debt,” it said.

Really? With $1.3 trillion in mortgages and households owing more than at any point in history, with the IMF and the World Bank, all major ratings agencies and virtually every major economist – even the prime minister- warning about piggy borrowing habits, how can this be?

The think tankers make this argument: assets (mostly real estate) have risen 31% in the last five years, while debt (mostly mortgages) has increased “by just” 21%. So, whazza problem? Besides, the Fraser Institute says compared to other countries, like Norway, Switzerland and South Korea (seriously, I’m not making this up) our debt-to-income ratio don’t look so bad. (But compared to the country most like us, the US, it blows.)

Conclusion: “Canada doesn’t have that problem. Our banks have tighter lending standards and Canadians are clearly managing their debt levels responsibly with no evident strain to their incomes or balance sheets.”

Well, remember those people sitting in lawnchairs yesterday outside a sales centre in a GTA suburban field waiting to spend $2 million on a monster particle board house that increased in price $150,000 overnight? Those are the faces of debt. It is the intersection of greed and stupid. This is what risk is made of.

As Capital Economics points out, the think tankers took only mortgage interest into consideration (not debt repayment) when doing their report. They didn’t acknowledge the potential of a real estate correction, as is now gripping Alberta. And they reinforced the delusional belief interest rates can never rise.

The scariest part of this is believing that houses are more valuable because they cost more. In fact, real estate costs more because money costs less.

There is no intrinsic increase in shelter itself, just that cheap rates have allowed people to pile on epic debt and carry it for the same monthly fee. Say the economists: “While total net worth has risen by 141%, real estate has grown by 211%, contributing 55% to the overall gain in net worth. But with house prices now at record high levels relative to incomes, there’s obviously a greater than normal risk of a correction which, in turn, would hit net worth hard and, indirectly, negatively impact household spending. Since household spending represents more than half of the entire economy, these household balance sheet risks should be taken seriously.”

Jon should rent. His mom, too. Let the greater fools borrow. Just watch.