Entries from June 2009 ↓

People borrowing mortgage money today to buy homes in a panic, at record prices, are among the greatest fools. They are not investing, but rather renting debt. If interest rates had not been artificially collapsed by freaked-out central bankers trying to stave off a deflationary depression, there would be no housing bubble, part two.

The coming rise in rates is inevitable and unstoppable. This, combined with lingering unemployment and rotten economic growth levels, will pop this bubble with a vengeance. Those who thought the near-death experience of last autumn was a bullet dodged will surely awaken to see their wounds. The world’s still a dangerous place, no matter what the Canadian Real Estate Association tells you.

Some of my comments in this vein were included in the article below, published today in the Globe and Mail.

Toronto: Listed for $529,000, sold for $551,000. Semi, mutual drive, 1 bath.

By Rob Carrick, Globe and Mail (Saturday June 20, 2009)

It looks like a miraculous resurrection.

In the midst of recession, the average national price of Canadian resale homes hit a record level in May, and sales activity increased for the fourth consecutive month. While U.S. residential real estate prices have been falling for almost three years, Canada seems to have stumbled and picked itself up again in a span of 12 months. To some real estate agents, the market looks as good as it did before the global financial crisis began to bite last summer.

“Without getting nitpicky, yes it does,” said Toronto real estate agent Laurin Jeffrey. “I just lost out on a multiple offer last night on a house, and my client asked me to have a look at what’s going on with that sort of a house. In that price range and style of home, 14 out of 19 sales in the past 30 days have been at or above the asking price.”

The average national resale home price in May reached a record $319,757, up a tick from the previous record set in May, 2008, the Canadian Real Estate Association (CREA) reported this week. The group noted that the sales activity behind this increase was skewed by expensive markets such as Vancouver, Calgary and Edmonton, but it nevertheless declared that the “national resale housing market activity returned to prerecession levels in May 2009.”

Crisis averted in the housing market? Forget it. Prices may be climbing in some markets, but so are the interest rates that have fed the recent rise in sales. Meanwhile, incomes are stagnant, and jobs are disappearing in bunches. If you’re thinking of getting into the housing market right now, mind the cracks in its foundation.

The house that Mr. Jeffrey’s client failed to get was a semi-detached, two-storey, all-brick home in the leafy mid-town neighbourhood of Leaside. With three bedrooms, one bathroom, a detached garage and a mutual drive, it was listed at $529,900 – and went for $551,000. According to Mr. Jeffrey, houses in that price range have sold for an average of 105 per cent of their asking price in the past 30 days.

And Toronto, where the number of homes sold rose 1.9 per cent last month, wasn’t even one of the hottest markets in terms of sales activity. CREA figures show that sales in Victoria, Vancouver, Calgary and Edmonton were up between 11.3 and 18.7 per cent. It would be reasonable to expect that housing sales would be in a slump during a recession. But strangely, the economic downturn has actually helped to propel the real estate market higher.

For one thing, many people were too unnerved by the global financial crisis to buy late last year. So pent-up demand for housing in the first several months of 2009 played a role in the spring numbers.

“The kind of month-over-month increases we’ve seen in the last four months can’t go on forever,” said CREA chief economist Gregory Klump.

The Bank of Canada has also helped to juice the market, though inadvertently. By ratcheting interest rates lower to stimulate economic growth, the central bank has cleared the way for mortgage rates that remain at historically cheap levels even after recent increases. Fixed-rate mortgages with a five-year term can be had for about 4.25 per cent with a top discount right now, compared with 5.5-to-6 per cent in spring, 2008. A couple of months ago, five-year mortgages were less than 4 per cent.

But low rates are also one of the reasons analysts are worried about the surprising surge in the housing market. “It’s all happening because of the crack cocaine of housing, which is rock-bottom interest rates,” said Garth Turner, author of Greater Fool: The Troubled Future of Real Estate . “They’re so irresistible, especially to inexperienced first-time buyers. That’s what’s propelling the market.”

Mr. Turner’s concern is that rising rates will eventually propel the market lower by making houses less affordable. His level of confidence that the boom will last? Zero.

In his book, published in early 2008, Mr. Turner warned that the Canadian housing market was in a bubble just like its U.S. counterpart. After a peak-to-valley decline of almost 14 per cent in Canada’s national average price, he’s predicting another plunge for home prices that will be triggered in large part by rising interest rates.

“We’re now into the housing bubble, Part Two,” said Mr. Turner, a former member of Parliament who now gives financial seminars and promotes his books. “I think this bubble is going to burst later this year. It’s going to be short and intense.”

In the near term, though, he sees rising rates being used to get buyers to jump into the market immediately. “People are being told, ‘Your affordability is going down if you don’t buy now, you’re going to be forever shut out of the market.’ It’s the eternal siren song of real estate.”

Many economists doubt that the prime rate – the rate banks use as a base to calculate other lending rates – will increase before next spring, but it’s a different story with the longer-term rates that influence fixed-rate mortgages. They’ve already bounced off the lows they hit in the depths of the global financial crisis, and more increases are expected. Rising rates make houses less affordable, but this can be offset if housing prices are falling and incomes are rising. In many cities, though not all, prices are actually rising. As for income gains, they’re constrained by the recession.

Robert Hogue, senior economist at Royal Bank of Canada, said wages are still creeping higher, but many families have been affected by job losses. “Over all, household income has at best increased very slowly, if not kind of stalled for a bit,” he said. For Mr. Hogue, rising rates and house prices are a threat to a housing market that appears to be stabilizing. But his outlook isn’t all negative. When the job market improves, he believes that household income will rise and help make houses more affordable.

“The moment we have the labour market picking up, to me that would be the sign that says we’re in the clear now.”

Original article is here.

Being unemployable, I wander the country a lot, riding from town to town stirring up base emotions. One observation: People in BC are nuts. At least the ones who think it’s normal to spend a million dollars on a house in a former lumber town. Or half that amount on a concrete box in the air over downtown Van. Or four times that sum on a moist Victoriana money pit in Victoria.

If you ever lack proof Canadians can out-bubble the Yanks, look west. In fact, when I gave a speech last autumn to a sea of US realtors in Nashville, I flashed a current Vancouver listing on the screen – a crappy clapboard bung on the market for $949,000 – and the crowd roared. And why not? The average home value in the US is under $150,000.

No doubt in my mind that BC real estate is sitting on a fault line and ready for the big one. When it takes 70% of disposable income for the average Vancouver family to carry the average home, you know delusion has replaced logic.

Here’s an example of what I mean – yet another ‘Hi Garth’ letter (I am currently being buried in these things). Check this out:

Hi Garth: I am new to your blog.  I was introduced to you a few months ago by a girlfriend and she dragged me to one of your seminars.  My girlfriend has been trying to convince me to sell for over a yr now and of course I should of listened to her.  I believed like a fool the market will hold out because of our amazing mountains here in BC and with the Olympics ins 2010.  She sold her investment in Kamloops at the right time.  Damn her!!!

I am a single mom with all my net worth in Real Estate.  I invested at the right time and used equity to buy property. I have a Duplex worth 655-700,000.  If I sold when my friend told me to it could of fetched me 800,00 to 850,000+++. Last Feb my neighbour sold one half for 455,000 with no renos done!!!  I bought the side by side duplex for 440,000 and it is currently generating 4,100 income. I have a 500,000  mortgage on it.  I also have a chalet rental generating 1600 income with a mortgage of 220,000. It is currently up for sale and I had to drop my price 4 times now from 320 to 289,000.  I could of had it sold but I had stupid tenants that just wouldn’t pay rent or leave.  Plus they were selling and growing on the property.  I had multiple offers but I could not garauntee the vacancy and plus the tenants would scream at the potential buyers to get of the f’n  property.  It was a nightmare.  The tenants from hell  are gone now but if I sold I would of used the proceeds to invest in oil after reading your blog.  I know I need to diversify my portfolio.

I am 40 yrs old , I have 2 kids, and  have no cash besides the paper money.  I have no RRSP’s nothing but land. After reading more and more of your blogs everyday.  I want to sell everything even my new house that I am living in and just rent for $1400.00 and live a simple life.

What do you think I should do Garth?  Cash it all out and invest it in energy or just sit tight for 5 yrs hoping the market will turn around.  I know I don’t want to be a landlord much longer.  Fed up with tenants.

Single mom looking for the right direction.

Well, SMLFTRD, sounds like you have $1.3 million in real estate, over $700,000 in debt and an income stream of $5,700 a month. That translates into a net worth of $600,000 and an annual rental income of  more than $68,000.

So, what kind of single mom are you? Sheesh.

In any case, sounds like you are finished being a landlord, and afraid real estate values in BC will tumble, wiping out the equity you’ve built. Both are completely understandable. In fact, I can see ‘demand’ west coast real estate falling sharply within the next couple of years, once that Olympic nonsense is over and done with and the bills are pouring in. At that time, interest rates will be substantially higher, the logging industry will still be a mess and the river of Asian money flowing into the province will be turning into a creek.

After all, the economic centre of the world was already shifting from America to China even before subprimes, Wall Street greed, collateralized debt obligations and $10 trillion in borrowed bailout money. Now there’s no doubt. The US middle class is shrinking as fast as the Chinese one is swelling.

So, this would be a good time to sell, before rising mortgage rates make BC real estate even less affordable. Park your cash in financial assets and buy back in five years from now from sellers desperate to get their hands on remaining equity. Boomers will be especially tasty prey for property vultures, since they’ve pretty much skewered their own retirement by being house-rich and cash-poor. At the end of that day, of course, cash is king. You can’t sell off a bedroom to buy gas and groceries.

As for being a landlord, that totally sucks. Provincial laws have been rewritten in favour of tenants, to the extent you can’t just toss out someone who refuses to pay rent. Properties can be trashed, without any recourse for the owner and you’ve already experienced what a loser occupant can do to screw you out of a sale.

So, Single Millionaire Mountain Mom, good choice to bail.

You can also send along a photo and email address for the pathetic home-lusting malcontents who scurry in the dank corners of this blog. They already love you.