Entries from April 2009 ↓

The doctor is IN.

Our first patient of the day is Paul, a 40-something divorced guy with a fancy new house, no wife and a honking big mortgage. In Kelowna, to boot. He’s been following this blog (hence the divorce), and now worries about the local housing market and what to do about his debt and his future.

“I am considering 2 options; (1) Selling my home for about 500K and buying an older home for 100-125k less, thereby eliminating mortgage debt, or (2) Selling and then renting for 12-18 months to see where the market goes. Buy back in once we hit bottom????

Either way, I am uncomfortable now with such a high mortgage. I originally intended to build the house, live in it for 2 years and sell it for a profit. 2 years has now come and my house has devalued approximately 100k in the last 18 months since building it here in Kelowna and I am worried it will continue to decline. While realtors will tell you , everything is fine…..we have reached the bottom…..things are starting to move…blah…blah…blah. I don’t believe it for a second.

I was just curious to hear your opinions on the real estate market and economy in the central Okanagan for the coming months and years. People say we will be fine hear in Kelowna, because it; a destination area, people will always want to live and invest here, so we won’t be affected as much as the rest of Canada. Again…I don’t believe this….Vancouver too, is a destination place and look what is happening there. Anyways, if you could give me some REAL insight….I would greatly appreciate it. I want to do the right thing based on sound information. Thanks for your time.”

Well, Paul, experience is a great teacher. In your case it should teach you that the era of the big McMansion on Lake Okanagan is kaput. The fact you have lost $100,000 in the last two years is telling. So is the average of 97 days that it now takes to find a buyer, or the 30% bump up in active listings. Or the 50% drop in sales YOY. Or prices now falling by about 1% a month, while it takes 75% longer to flog a house than it did last Spring.

This is why realtors have little credibility left – pumping the market when everyone can see reality splayed before them. Kelowna may be a great place to live (with some of the hottest waitresses in the nation), but its local economy can hardly sustain the housing bubble created there. Overvalued. Over-inflated. Hyped and obese. This market is destined to lose more altitude, and there are no more convoys of cash-soaked Boomer refugees from Mississauga in RVs, bombing down Highway 97.

So, Paul, bail. And why trade one devaluing piece of property for another, unless you plan to stay there until this blows over and prices recover, which could be a decade. Or maybe never. Hell, you can rent a 3-bedroom house in Kelowna these days for $1,500 a month. Do so, and in a year you’ll feel like a genius.

This is the time to sell, now that the Bank of Canada has abandoned its responsibility for the money supply and is pimping for new loans. With mortgages sinking close to the 2% range, I hear there are still a few greater fools knocking around Kelowna who think this is the time to buy. And guess who they’ve been listening to?

Equity fugit, pal.

Speaking of Kelowna…

Friday May 1, 7 pm, Ramada Inn. I will be presenting a financial seminar which is open to the public. But you must call to reserve a seat: (250) 860-6494.

Saturday, May 2, 8:15 am, Coast Capri Hotel. I’ll be speaking at the HoweStreet.com Money Expo on what comes next with this economic mess. Attendance is free, but you have to register to get in. You will then hopefully be frisked by waitresses.

The lead story on the supperhour news in Calgary TV land Tuesday was (and I quote), “Condo market collapses in Alberta.”

Meanwhile in Toronto economists were clucking over the latest new housing stats. Disaster city. The pace of construction in the first three months of the year plunged by over 60%, while condos crashed almost 80%.

About this time, in Ottawa, came a stunning admission the feds are losing control. The talking was done by the Bank of Canada which tripled its estimate of how bad the economy will be in coming months, while slashing its interest rate in half. It’s now a quarter of one per cent, considered to be virtually zero, and at the lowest point in history.

Obviously cheap money’s intended to goose borrowing and spending. The effects of this were detailed here in the previous blog, with young, hormone-drenched buyers flocking to grab homes they think are bargains but which are likely to blow up. The sad fact is that tricking people into more debt seems to be the best policy Canada has right now. Of course, we’ll regret this. Big time. The seeds are being sown for a second leg down for housing.

Money from Ottawa’s stimulus program – announced in January – started flowing just 20 days ago. In the meantime close to 200,000 jobs have been lost. Despite the rhetoric, there have been no direct rebates to families, no middle-class tax cuts, no more cash for the unemployed and no assistance to struggling small business guys. So, it’s been left  to the central bank to save us with 3% mortgages, 2.25% lines of credit and its bold plan to throw the kids under the debt bus.

But it won’t work.

Debt started the dominoes falling, and piling on more is insanely dangerous. Already the average household debt load in Canada equals 127% of income, virtually equal to the US. Mortgage and credit card debt are at record levels, while the savings rate is zero and more than half the population has put away absolutely nothing for retirement.

We already know the government has gone from a $12 billion annual surplus three years ago to a $30 billion deficit now. And we know the consequences – higher taxes, higher inflation and higher interest rates. There’s absolutely no question that the cost of money will be going up, since it can’t go lower. We know people borrowing today will be renewing at far higher loan costs in five years. And we know what that will do to disposable income.

Meanwhile in the States, Obama is radically increasing the size of government, without paying for it. Trillion-dollar deficits as far as the eye can see also spell higher taxes and a far weaker country. Now in its fourth year of real estate meltdown, America has many more to come. As do we.

What to do?

* It’s still a time to be selling, not buying. Take advantage of this real estate bear rally to unload. Then pray for the buyer.
* Want to vulch? Wait.
* Pay off debt, especially floating rate debt.
* Prepare for a lot less government in the years to come, just as energy prices rise and a climate crisis replaces the financial one.
* Buy a timeshare in my new bunker.
* Get self-employed.
* Challenge conventional wisdom. No nation ever spent its way to health. No family prospered through debt. There is still only one path to security.

The real estate market cannot collapse and boom at the same time. The government can’t lead and follow. Down is not up.