Spring fever

LOVE modified

As Toronto motorists joyously celebrated the advent of Easter by jamming highways and playfully gesturing to each other with their fingers, the local real estate cartel was publishing some astonishing numbers.

Sales in the first two weeks of April, “started off on a strong note,” said the board, “with a 10.8% year-over-year sales increase.”

Wow. Maybe I was wrong. Said Reatress princess Dianne Usher: “The robust increase in sales speaks to the fact that home ownership remains affordable in the GTA.  The majority of home buyers purchase a home using a mortgage.  A household earning the average income in the GTA can comfortably afford a mortgage on an average priced home.”

Hmm. Let’s parse this a little.

First, it’s impossible to know the truth. TREB has secretly fudged its numbers yet again. Sales this month are actually only 6.6% higher than those reported one year ago. But last April’s sales were 6.5% lower than the previous year – which means no growth in two years, while the population has increased dramatically. Not good. In fact, with the exception of last year this was the worst April (so far) for GTA detached house sales since the financial crisis back in 2009.

See how much fun numbers are? Of course, besides quietly revising its stats the real estate board never supplies context for its reports, because… it’s always a great time to buy!

Now, how about the average family affording the average home, currently $583,697? Well, the average GTA family earns $96,040, which means houses cost six times income. According to Demographia, that falls into the ‘severely unaffordable’ category. It also means to buy the average home a family would need at least $45,000 for a downpayment and double land transfer tax and a mortgage (including CMHC premium) of $570,000. The monthly (with property tax and insurance) would be $3,400, or 42.5% of gross (before-tax) income.

Now let’s refer to CMHC’s rule:

Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.

See what I mean? Fail.

But the average resale price in the GTA also includes a lot of one-bedroom and loft condos which clearly do not attract families, and aren’t suitable for them. So maybe we should look at detached houses only. But when that happens, a whole new level of risk emerges.

Here is the scorecard for detached houses in 416. Sales of 628 for the last two weeks came in 11% higher than last April, which was 10.8% lower than in 2012, which was 3.9% less than in 2011. So, this April fewer detached homes were sold than in 2010, 2011 or 2012.

Of course this year we have 2.99% five-year fixed mortgages, which means you can’t blame higher interest rates for poor sales. But you can blame a lack of listings, and exceptionally unhealthy public attitudes, for a massive and dangerous escalation in prices.

The average detached 416 house is now changing hands for $1,012,172 – an increase of 19.2% over last Spring. Yikes. This surpassed the 14.2% price pop in 2011 when sales crested and F freaked at the prospect of a bloated gasbag that could rupture at any time, blowing up the economy. He tightened mortgage rules – which brought year/year increases down to 3.2% (2012) and 6.22% (2013).

Quick summary: sales are back below 2010 levels for detached 416 homes, and prices have risen since then by 50.1%. Nice news if you own one (but only if you sell and crystallize the capital gain), but it all boils down to a single word: risk.

Feel free to ignore me, of course. Most people are.

But not Carmen and Ricky. Yesterday I ripped the immigrant couple a bit for wanting to buy an inflated house at the wrong time, with no money, so they could get a washer and dryer.

Says she: “We saw what you posted. Thank you so much. It made us clear of how to proceed and my husband was celebrating that he listened to you. Thanks for that washer idea as well…lol..

“Your advice made us think what is important and we are considering saving more and putting up in some investments, although that’s our next research of where to put the money and using some of our monthly dollars to invest for my sons sports or some extra music classes.

“Thanks again for your time and will be holding on the idea of buying home until we see your GO on your blog.”

My Easter just improved.

What could go wrong?

WRONG modified

Five years ago Ricky and Carmen came to Canada for a better life. That led to graduate studies, two so-so jobs, two kids, a new SUV and a two-bedroom apartment in Burlington. But it’s not enough. This is the land of entitlement, after all.

“So we are today renting a 30 yr old apartment, with no washer, dryer or dish washer,” Carmen writes me. “Paying $1300 per month. Our annual income together is $115000, but take home is $6k per month for both of us. We have a car loan for $8000 and no other debts. We have 20k in RRSP and 5K in TFSA and contribute $300 for our 2 sons (5 years, 8 months) towards RESP.”

Not a bad start on the new life, with debt under control and almost twenty grand in liquid assets. But Carmen’s house-horny.

“So now I am having hard time staying in apartment with 2 kids, and no washer/dryer means 3 hrs of  weekend time for using downstairs laundry. We thought of moving for rent as my husband is following your advise of not buying home now. But when we started searching rental homes anywhere in GTA, house rent for 3 BR townhouse or condo is no less than 1700, plus utilities..which all together will come for $2000 per month.

“So my question: would it not be ok to buy a semi home around 420K with 5% down so that our monthly mortgage will come around $2300 or so. Is it better to rent for 2000 or buy anything with monthly mortgage as $2300?”

Well, Carmen, do the math. A $420,000 house will take every last cent of your liquid assets to buy, and you still won’t have enough for the CMHC premium ($10,972) or the land transfer tax ($2,875, after the first-timer rebate). And even if you do manage to close the deal and add the insurance bill to the mortgage, your monthly (loan plus property tax and insurance) will be more than $2,500 – plus those utilities. In other words, almost a thousand-dollar premium over renting.

Is it affordable? Technically, yes. You qualify, because there’s nobody in the system – not the realtor, or the banker or the broker – tasked with looking out for your interests. We have lost our way, Carmen, when a young family with more equity in their vehicle than money in the bank can move into a $420,000 house, with a $410,000 mortgage. The moral compass around here is broken.

By the way, a portable, washer-dryer all-in-one appliance which is ventless and requires only a kitchen faucet to operate can be purchased for $900. There. I just saved you $432,937.

Of course Carmen is nuts to roll the dice and risk everything on a crummy suburban semi for larger reasons, too. Despite the assertions of the house-humpers, Re/Max, the real estate cartel and everyone in Calgary, the Canadian real estate market is not in good shape. Yesterday’s pathetic post showed even in mighty Toronto, home of hormonal hipsters and media-pleasing bidding wars, more houses are selling for below ask than above. Sales volumes have decreased steadily since 2012 and big segments of the market (like properties over a million) are languishing.

There are also places, like Halifax, where a two-year supply of houses is piling up weekly, with sales off 35% and prices starting to tank. A nation away, Victoria house sales are running way below the five-year average and prices are flatlining. In the middle, Ottawa’s condo market is in serious shape while overall sales and prices have hit a wall. Nationally, Teranet reports that March was the first such month in 15 years that housing values stalled.

Now, there’s Adrienne Warren.

The Scotiabank economist shared a stage with me a couple of years ago in a Toronto hotel as we debated the housing market. She said the fundamentals were good. I said we were headed down the wrong road. Today it sure sounds like she agrees with me.

The bank’s latest real estate report, released Wednesday, pulls few punches.

“Canada’s long housing cycle is turning,” says Adrienne. “Residential investment stalled last year as affordability constraints tempered home sales, and builders scaled back the number of new developments… The impact of a softening housing market will be felt broadly. The likelihood of smaller household wealth gains as house price growth slows — or adjusts lower — will reinforce a more cautious trend in consumer spending.”

The key points are simple. The housing boom’s ending and as it does, we all take a hit. For the last dozen years the real estate sector has expanded at twice the rate of the economy (I’ve shown you graphs comparing the FIRE sector here to that in the US). There are now almost 500,000 people employed in building, flogging or financing homes. Hell, there are 40,000 agents in the GTA alone, almost three-quarters of whom didn’t make a sale last month.

Adrienne says you can blame a combination of things, like inevitably rising mortgage rates, stricter mortgage regs and (above all) prices which have mushroomed past the ability of people to pay – and still have a life. Folks like Carmen and Ricardo. Just imagine if they threw everything they had into buying a place that cost them far more than rent, only to have it decline in value and wipe that meagre wealth away. What a personal tragedy.

With listings tight and money cheap, there are many who come here to celebrate rising prices, claiming everything’s cool. But a market with thinning volumes and ever-rising mortgages which sucks in the naïve and the vulnerable provides a classic definition of risk.

How is that not obvious?