The price of newly-built homes in the 6,000,000-person GTA stabilized last month, which means they stopped falling. The realtors and developers say this is more proof the storm may be over, since ‘people are buying again.’
This complements the resale market where, as I’ve been showing you, all hell is abreakin’ loose. Sales are up by a third over last year and homes have just hit a new record high valuation – astonishing, in the middle of a recession.
That’s the headline news. There is always an understory.
The last post demonstrated clearly how subprime lending practices have returned to the market with a vengeance. Mortgage originators are shovelling money out the door, often with no income verification and no appraisal. Borrowers are lined up to get their hands on the cheapest funds since money was invented. Naturally this tidal wave of bargain financing is spurring house sales and fuelling higher prices.
The understory, then, is how this recession has played a role in destroying – albeit temporarily – the checks and balances which keep a market stable, and assets affordable.
First, the price of money has been artificially crashed by central bankers and federal governments desperate to prevent a deflationary economic correction after several decades of an inflationary credit-crazy excess. So, when mortgage money can be had in the 2% range, how can you expect people not to gorge?
Second, although everyone knows what caused the financial crash of 2008 – an unregulated credit bubble begetting asset hyperinflation – nobody is apparently willing to do much about it. Certainly not now, when governments are desperate to see people spending their brains out. Therefore, we have the kind of subprimal, fog-a-mirror lending practices described here yesterday.
Third, government has become the greatest profligate of all, as overspending today ensures a worse tomorrow. Forgetting recent history, most Canadians think a $50 billion annual budget shortfall in Ottawa is somebody else’s problem. It’s financially impossible now for higher interest rates and stiffer taxes within the next few years to be avoided. Not when federal stimulus money is, for example, paying Bill Clinton’s $175,000 speaking fee at Toronto’s upcoming fall fair. As if he needs either.
But here’s another small example, of why this will end badly – and how easy money has perverted a marketplace. It comes as an email from another front-line mortgage player:
This mortgage was funded recently. The clients transferred by military. He is in the service and she’s on a long term disability. The combined income is $81,900.
They sold their condo for $296,000. They had 100% financed it in 07 with a purchase price of $289,000. The payout on mortgage including penalty was $305,000, so they were under water by $10,000.
They purchased in new town for $281,220, and the downpayment came from client’s credit line – 5 year rate at 3.74%. Here is where it get’s interesting. By virtue of being in the military these costs are covered for the client:
Real estate commission and GST on sale $14,295. Legal fees on sale, $500. Portion of mortgage penalty paid by military, $7200. CMHC Fee on new mortgage, $14,061. Land transfer tax, $3,624. Legal fees for new mortgage, $1,500. Buy down of fixed interest rate, $6,400. Plus moving expenses.
The total: $47,500. Can we afford this?
No-money-down real estate buyers who sold for a loss, and then immediately buy, once again with nothing down. They get 100% financing with the risk absorbed by the taxpayer-backed CMHC. Even the insurance premium is paid by you. All closing costs are handled with public money.
And this sale will be reported by the local homebuilders’ association as more evidence consumer confidence is back.
Sadly, that ain’t all.
