No tomorrow

DOG DISH modified

Well, so much the Greeks. Yawn. There was no olive-inspired collapse on global markets Monday because (as I told you): (a) Greece is old and markets are tired of it, (b) banks have slashed their exposure to the country over the past four years, (c) the Athens stock market already choked, down 50% even before he vote and (d) things in euroland are actually getting better, thanks to massive central bank stimulus. If the Greeks don’t wanna play, good luck to them.

Now, we have better things to worry about. Like us.

Here’s Elaine to set the scene. “I’m an accountant,” she says, “so I see a lot.”

She sure does. In Elaine’s job she gets to peel away the financial underwear and stare at the goods. Scary.

“People with $50,000 in annual net income with $900,000 mortgages. People with net worth of $2.5 million and unable to secure commercial financing (no CMHC there!) I’ve been expecting a lot of my clients to go bankrupt for years. But yet, they carry on. Or, they go bankrupt they’re able to turn to shady online lenders and secure new loans of $100k. I honestly can’t believe it. It almost seems like the banks are too scared to do anything (ie foreclose) because maybe there are just too many insolvent people in Canada? It just doesn’t make sense to me how so many of my clients can carry on with such massive debt, and no consequences. They have little or no equity in their homes, and yet the banks continue to fork money over like there’s no tomorrow.”

Now, here’s Josh. He read the piece here a few days about dreamy Nancy, the perfect woman with a fat lawyerly salary who refuses to be suckered into the real estate morass.

“I was born and raised in Toronto but now work in Houston, Texas as an investment banker. Prior to leaving, I spent a number of years as a CA and then as an equity research associate. If people like Nancy and myself cannot afford houses on much larger than average incomes it just boggles my mind how people do it without their parents help. I don’t see how deleveraging can go smoothly in Toronto when rates rise. I am really hoping that when U.S. rates begin to inch higher that the Canadian dollar goes below $0.77 USD and that housing corrects.”

Finally, a note I received from Landon. “My wife wants a bigger, nicer house now that we have a kid.” he admits. “You know what they say about a happy wife.”

Amen. But Landon writes to share a little tale. He and his squeeze offered on a mid-town Toronto semi in March (in Riverdale) for $1.317 million on a listing price of $1.189 million. They lost. It sold for $1.325 million.

“Lo and behold the same house was back on the market a few weeks ago.  According to the listing agents the buyers were selling due to a “change” in job situation.  They painted it up and it actually showed better than the first time around.  We decided against making an offer.  After a couple of weeks on the market, which is an eternity in Riverdale in that price range, it sold for $1.275M – a drop of $50K or about 4%.  With transaction costs, the family who bought it would have taken a $150K hit.

“My agent claims this dip in price is just part of the normal summer slowdown before things go crazy again in the fall.  However, I’m thinking this could be a harbinger of where the market is going as this is a direct apples to apples comparison of the market over a 3 and a half month span.  Rarely does the same house hit the market in such a short span, at least without it having been renovated. This is obviously just one house but it could also provide a good glimpse on a very micro level of a subtle shift in the market.”

Well, let’s now turn to the news. Oil prices collapsed on Monday – more than 7% – to just $52 a barrel. This is not because of Greece, the wild gyrations on the Chinese stock market (which impact very few of us), or even Jane Fonda and her sexy new hat. There’s just too damn much of the stuff, and we’re adding half a million more barrels a day.

Alberta is not only smoky and politically confused, it’s in serious economic trouble if crude settles at fifty bucks and stays there a year or two. Meanwhile the Canadian economy (as we discussed last week) has shrunk like a dude in a cold stream over the last four months, the dollar is barely above 79 cents, incomes are comatose and consumer credit is romping higher. This is unsustainable. As Elaine put it to me in the subject line of her email, we are “The Walking Dead.” She’s right. Mortgage borrowing is increasing 5.5%. Wages are going up 0%.

This brings us to next Wednesday. That’s the date of the next Bank of Canada rate announcement, and all of this weakness – especially with the latest oil dump – is convincing more people we’re in for another rate drop. As you recall, the last one (January) took the bank prime down to 2.85%, ignited a mortgage war (five-year fixed now 2.4%)) and propelled the SFH price in 416 to $1.4 million and in urban YVR to $2.2 million.

Just look what it did to borrowing…

CONSUMER CREDIT

In other words, the central bank move did not stimulate economic growth or prevent us from sliding towards recession. It whacked the dollar and fueled inflation. As far as I know, there were no new factories opened or jobs launched. Mr. Poloz (the BoC boss) can say all he wants about it rescuing Canada from heart failure, but it seems the negatives (bigger debt, houses we can’t afford, more expensive Harleys) outweigh the positives (ah, um, meh… ).

One bank egghead, Scotia’s Derek Holt, is finding the voice to speak out against those wanting still-cheaper money. You’d have to be an idiot he says to think we can sustain economic growth “off of all-time record highs in the home ownership rate, real per-capita consumer spending, house prices by every measure, household leverage, and renovation spending.”

A rate cut now, or in the autumn, or anytime soon, he adds, would “risk inflaming housing imbalances.” Just ask Landan, who couldn’t buy half a house in Toronto for $1.317 million in the wake of the last rate chop. When money’s so cheap, it devalues. Debt loses its bite. People borrow because there seems to be no consequence. So with every drop in the cost of a loan, prices increase. It’s a death spiral.

But let’s focus on Greece. How could the poor souvlakis not have seen it coming?

So glad it’s different here.

OXI

GREEKS modified modified

First, angry Albertans punted Tories and installed Dippers in the legislature. Then delusional Vancouverites voted down a tax funding the future. Now the Greeks have embraced economic suicide instead of financial servitude.

Come senators, congressmen
Please heed the call
Don’t stand in the doorway
Don’t block up the hall

At least, as I scribble this out on a Sunday afternoon, that looks to be the Hellenic epiphany. Exit polls and early results were all but decisive, giving more than a 60% mandate to the No forces, led by socialist PM (and now temporary hero) Alexis Tsipras. The margin of defeat for the pro-euro forces is relatively vast – at late as Saturday night it was still being touted as too close to call. But a 60-40 split? That’s massive, baby.

For he that gets hurt
Will be he who has stalled

We’re now entering the unknown, in a big way. Greek banks are still closed. The stock market, too. People have been wounded in less than a week, with cash rationing leading to starving stores. By voting against a package of reforms (higher taxes, fewer benefits, more austerity) the country is opting to gamble it can get a better deal from the great powers of Europe. And, if not, how much worse can it be than having 50% of your young people out of work?

Europe may cave and offer emergency bailout loans to keep the lights on and prevent the Greeks from taking an even more radical turn (Hello, Mr. Putin?), or it might decide this small country is just too irritating to bother with. After all, five months of high-stakes talks with Tsipras & Co led only to a pouty exit from the bargaining table, and this surprise referendum, peppered as it was with massive demonstrations.

There’s a battle outside
And it is ragin’

So Greece could be kicked out of the EU, lose use of the euro, default on almost all of its debt obligations, and within a month be forced to print its own currency. That, experts surmise, could lead to a 30% or 40% drop in average net worth, and a far worse outcome for the people. But Tsipras says no. He claims it was never a vote on staying or leaving Europe, but one of dignity. Now, he adds, he has the mandate to go back to the bargaining table and kick serious butt.

For other countries, central bankers, monetary agencies and markets it means turmoil. Maybe compromise. Perhaps not. After all, the establishment forced countries like Ireland and Spain to put up with similar belt-tightening and collaring in order to stay in the club. Now the Greeks have refused to come to heel, and still expect a seat at the table. Such. Hubris.

It’ll soon shake your windows
And rattle your walls

So last week Greece became the first developed country ever to miss a debt payment to the august International Monetary Fund. This week its citizens told the IMF to piss off. Some will argue average voters did not understand the complex 68-word ballot question, nor comprehend the implications of a No decision. They’ll say people misinterpreted this as simply a way of bolstering their government’s bargaining power, instead of choosing proud over practical.

But that’s the democratic flaw. When you ask people something, giving them the power to make it so, you must live with the consequences, as illogical as they may at first appear.

Tomorrow the banks in Athens will edge closer to having empty vaults. Those investors who bet wrong will be punished. The leaders of wealthy, powerful nations will shake their heads in disbelief and dismay. Average Greeks will face a crisis, and smile.

For the times they are a-changin’.