Faux times

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Some days I just don’t know where to start this pathetic blog. So let’s do it in Mississauga, where we ‘re suddenly up to our skivvies in unsaleable luxury homes, providing a fitting backdrop for the main event.

Remember Saxony Manor? Sure you do. It’s the 18,000-square-foot faux French monument to bad taste nobody wanted to buy during the winter, so it went up for auction. The owner wanted nine large for it, but the hammer price came in at $6.2 million. But even that was too much.

The deal’s now falling apart since the buyer (it wasn’t me) couldn’t get financing, so a new auction is set for August 27 – which means the fruitcake who decided to recreate Versailles among the suburban schleps and endless minivans – will just have to keep making payments on his $5.2 million mortgage. By the way, at today’s rates that’s a monthly of $25,797, plus property tax and three grand a week for the cleaning lady.

Meanwhile a second monstrosity not far away – also unsold after eight months on the market – will also soon go up for auction April 27th. Make sure you have $39,000 extra every year for the taxes.

Now, why aren’t unique, expensive homes selling if we’re at the apex of a boom market with all-time high prices and wall-to-wall social horniness? Simple, because we’re not.

The housing market in Canada peaked months ago, and is showing material signs of weakness which are lost in the oh-wow-look-at-the-latest-prices coverage in the mainstream media. Overall volume is down. Fewer SFHs are selling Toronto than did in 2010, 2011 or 2012. Homes well over seven-figures – now a major market segment, especially in Vancouver – are unloved. And as prices jump, inventory shrinks since homeowners are afraid of buying again – which makes prices swell more.

This is all the more significant because you can get a mortgage for the dirt-cheap rate of 2.99% and (as I showed in recent days) you don’t actually need any money to own real estate. So why wouldn’t the hipsters be going ape over saggy semis held together with bug spit and love?

Anyway, lots of people think we’re all nuts.

Derek Thompson wrote about weird Canadians in the Atlantic a few days ago, for example, wondering how we got a wealthier middle class than America (as judged by something called the Luxembourg Income Study Database). The answer, he says, is simple. It’s housing. And this is a eureka moment. We are house-rich the same way Americans were before real estate blew up and destroyed them.

“The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened).”

And just to scare the crap out of anyone with a $5.2 million mortgage, Thompson treats us to two graphs. The first comes courtesy of Maclean’s which uses data from US housing guru Robert Shiller to show that real estate prices are almost double their mean average of the half-century between 1950 and 2000.

CHART 1

And here is the same index of US home prices, using the same data. As Thompson notes, reassuringly, “the US collapsed just before reaching 200, the red line that Canada is approaching.” Oops.

CHART 2

While we’re chunking charts guaranteed to work as fast-acting laxatives in Calgary and Vancouver, here’s one from the Globe and Mail, which has just discovered Canuckistan houses cost 66% more than similar US properties. It’s a record gap, astonishing given the fact US house prices have been in major recovery mode for the past year.

CHART 3

Now, what are we to make of this? Canadian housing economist Will Dunning says the market has peaked, and is turning. Sales crested last autumn and the sales-to-listings ratio is eroding. As inventory drops, prices increase – entirely consistent with the late stage of a market now poised for correction.

As for the Yanks, they just watch us with bemusement as we blow the world’s biggest housing bubble. Canada’s middle class is house rich, and saturated in debt as a result.

“But if you’re seeking a proximate reason why Canada has passed the U.S. as the world’s richest middle class this year of all years,” says the Atlantic author, “it seems to me you have to consider the opposite trajectories of our real estate fortunes and household wealth. Canadians are standing on their rooftops screaming for more debt while too many Americans are buried under their houses.”

Write this down: come August 27th, Saxony Manor will fetch less than its mortgage. Let’s crowdfund the sucker. Greater Fool world HQ.

MANSION

Obsession

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Snapped by Norman, in Toronto. (Hey, this could be a regular feature)

If you’re shopping for real estate in Nova Scotia, you have an advantage few other people do – complete and unfettered access to the detailed sales records of most properties. The local real estate board makes it available to the website/broker Viewpoint, which makes it free to you.

Sadly, elsewhere, this critical info is hidden from buyers, along with the number of days a property’s been on the market, whether or not any deals have fallen through, what the current owner paid and how many times it’s been relisted. Buyers in Mississauga or Kelowna are forced to ask a real estate agent for what little of this data is available, and then only for specific properties they identify.

Of course, you can always go to the land registry office (or pay your lawyer to do so), in order to get a complete record of what a house sold for in the past, and what kind of financing was placed against it. At least for now.

There seems to be a movement afoot to strip even this critical information from the public record. That, of course, would go hand-in-glove with the real estate industry’s current push to remove transparency from the system, as I described yesterday. Once average or median sale prices are obliterated by local boards, replaced by meaningless Frankenumber indices, most consumers will have no true picture of market conditions.

“Looks like even a public record for the price paid for a home is also going the way of the Dodo,” says an inside source in Ontario. “So much for transparency.”

Here’s what one lawyer is revealing to his realtor clients:

HIDING PURCHASE PRICE AND LAND TRANSFER TAX ON ALL CLOSING DOCUMENTS

The government has established a procedure in which land transfer taxes may be paid in advance of the closing date and in doing so, allow the solicitor on closing to register the deed as “zero consideration” and the land transfer tax payable would show as zero. In this way, the public is unable to determine the purchase price paid by the purchaser nor the land transfer tax which was payable for the transaction. I have recently had two separate occasions in which it was necessary to invoke this procedure as my investor client did not wish to have his acquisition cost a matter of public record given the plans of renovation and resale.

Call it the Flipper Strategy. If you buy a piece of junk, throw some money at it and double the price when you sell it six months later in a bidding war to an unsuspecting virgin, your lawyer can forever cover the deed.

And speaking of bidding wars, the media obsession continues. “Toronto’s real estate bidding wars are reaching a fever pitch,” reported the CBC yesterday. In fact the public broadcaster’s Toronto TV station now has a daily feature called “The Real Deal” dedicated to pumping the notion that house prices will rise forever, without end, amen.

Actually, in places like Toronto and Calgary, they will. Until they stop.

My political sources (incredibly, I still have some who are not dead) tell me the Big Owe received a stiff memo from Finance Department economists the other day when the price of a detached SFH in two of Canada’s major cities passed the $1 million mark. “That sure caught their attention,” I’m told. “Most of these guys (MPs and the Cabinet) believed Flaherty’s four mortgage rule changes were enough to let this thing cool off on its own. But now they understand the true nature of the problem.”

And what’s that?

As I detailed yesterday, it’s the banks, now increasingly aggressive to scoop up what business they can in a market where mortgage volumes have been sliding. That explains the 2.99% five-year specials. It explains the cash-back loans, the interest-only payments, the skip-a-payment plans and the “Honey, I’m pregnant” emotional blackmail YouTubes.

Naturally the real culprit here is federal mortgage insurance and CMHC, which continues to tolerate these systemic abuses. But it’s easier to blame the banks, especially if you are in the government and read stories about multiple bidders pushing the price of trashy semis into the $900,000 range.

So will Owe stop being a wuss and a caretaker Minister of Finance, and pull a F-like nasty on the lenders? All I can tell you is that he is being urged to do so. The feds don’t want a housing dump, but neither do they want to go into the next election with seven-figure homes and a population more indebted than Greece.

There are two reasons houses cost too much. Money’s too cheap and people have no discipline.

Guess which one they think they can fix?