Entries from September 2009 ↓

Buy now, or never, Part Trois.

My last post savaged Coldwell Banker as being media manipulators and inhabitants of an ethical swamp. The Re/Max lifeform swims there as well, confirmed by this week’s press release predicting ‘significant gains’ for the Canadian housing market.

Sadly, folks in the real estate business have a knack for ensuring booms become busts, when everyone (them included) would benefit from a balanced market. The correct and ethical statement right now would caution buyers of likely mortgage rate hikes, and encourage larger downpayments with the equity to withstand the inevitable. Instead, housing at its most expensive price point is being sold as a can’t-lose investment, guaranteed to go higher.

If these guys sold stocks and said that, they’d be sealing driveways.

So, we have ideal conditions for a slow death spiral.

• Investors who think the only risk is not buying.

• Industry spokespeople doing the dump-and-dump.

• Lazy, ad-starved, compromised media running advertisements as news.

• Lenders guiding first-time buyers into the most dangerous of loans, VRMs and 35-year ams. These are not mortgages. This is renting money.

Time to go to a caller: Hi, you’re on…

Hi Garth: My partner and i were under the impression buy now or never.  We’re both 30 and just started our careers…as professionals.  We have big future earning potential.  We thought that the interest rates are so low that we should lock one in at 3.89 for 5 years and enjoy the benefits of building equity.  We fancied ourselves smart and thought we’d get a house with an apartment that we could rent out to offset costs.  Then, we got taken for a ride.

We found a house and made an offer.  The next day our agent advised us that there were multiple offers and if we wanted the house that bad we should offer 5k over list price.  We wanted the house real bad so we took her advice.  Then, the next day, she told us that the soil was contaminated.  It turns out that she knew this before advising us to offer well above the list price because she let it slip that the property that she owns one street over gets the same notices.  She also tried to convice us to remove our financing and home inspection conditions.  We walked away…thank God!

Now i’m all creeped out with the idea of buying.  I feel that it’s a dirty business, and my previous assumptions about the current market have been put into question.  I don’t think i know at all what i’m doing/talking about.

So, my question to you is, would you say that it is always bad to buy now?  What about buying a house with a legal apartment? If we shouldn’t buy now what can we do to make ourselves feel better about knowing that we’re not building equity?  In general, what kind of advice would you give to first time home buyers? I’m really happy that i found your blog. – DL in T.O.

It’s always a good time to buy real estate, if you know what you’re doing. And you don’t. You have grounds to lodge a complaint against the agent on several counts, and I encourage you to do so. Do not get into a bidding war. Do not remove protective clauses from an offer. And find an agent who will work for you exclusively as buyers. Preferably one with morals.

As for buying now, get an income-producing property like a duplex if you must buy. Or a smaller home further out. Or, wait. Another year of rent won’t kill you, and could in fact be the smartest financial decision possible. After all, if you get a house in a bidding war and finance it with a 35-year amortization, all of your monthly is interest – no equity. Then, what if the market drops by 5% or 10% in a year or two? No equity, in fact negative equity. Then, what happens in five years if mortgage rates double? The market will reflect that. No equity.

You just dodged a bullet. Keep your head down.

And on line two, Andrew, also calling from Toronto…

Hey Garth: Love your blogs, and I have totally become a bear on this economy and real estate. I would really appreciate your opinion on a dilemma of mine as it is fairly unique, and everyone seems to be giving me the same spiel. I would like a contrarian view.

I am 26 years old and newly engaged. My fiancee and I make a gross salary of about $200K as we are both professionals. We both live with our respected families and thus, save a lot of money in the process. We have approximately $100K saved up and would like to put a downpayment on a nice detached home in mid-town Toronto where there are shops, restaurants and all the goodies a young couple could ask for.

We obviously do not want to be buying at the peak of this madness, but we need to move somewhere once hitched, and to me, renting is out of the question. Do we wait it out a year, and live happily married but in my parents house? Do we buy a condo, or something a lot cheaper than we can afford, and move up in a few years? Do we take the plunge and buy in a great neighborhood where its value won’t deflate as much? I have very little patience, so I am afraid of doing something rash, like buying a $700K home, even though we can afford it. Your view is greatly appreciated.

OK, so you’re a ‘total bear’ who, at 26, is making 200K with your girlfriend, you have a hundred in the bank and want a nice detached home in mid-town Toronto, which will cost at least seven large. What’s wrong with this picture?

Only that a smart guy like you could be so blinkered. The options are not just (a) living in your parents’ basement or (b) buying a home your parents probably never thought they could afford.

Sounds like you’re paying lip service to the ‘bear’ thing and really want to impress your babe with a $600,000 mortgage. Fine, go ahead. But understand the risk in blowing 100% of your cash on a single asset, bought at its highest price to date, which comes with an inescapable amount of debt six times greater. The only possible way out of that is if the property appreciates, if you can withstand the mortgage renewal, if she doesn’t get pregnant and if the boss doesn’t discover your true nature.

If you’re asking for advice, put half the cash down on an affordable $300K property with a far better chance of selling in any kind of market, and invest the rest in the kind of growth assets which will richly reward you in 20 years.

But, you’ll probably buy a Porsche.

Did I mention this will not end well?

Buy now or never, Part Deux.

The destructive financial decisions people all around us now make are not reached in isolation. When folks buy assets at their most expensive and take on debt which will only grow harder to pay, they do so because they believe the risk is offset by a bigger reward. Usually, that’s greed.

It`s what got folks buying worthless dot.coms. It created a frenzy to get into Bre-X. Greed propelled Nortel to $130 a share. It led reasonable people into the arms of Bernie Madoff and Earl Jones (above).

And along the way, greed always has friends. One of them is the media.

The real estate pumpers understand that. It’s why Royal LePage and Re/Max issue reports on cottages, first-time buyers and luxury homes. They know each one is good for free, uncritical ink from an uncaring, lazy media. Real estate ‘news’ ain’t news anymore – it’s lifestyle infotainment, usually run word-for-word from corporate news releases. Trust me. I know.

Sadly, though, the printed and broadcast message is then used by the uninformed to justify their actions. Real estate sales numbers are subsequently reported as evidence of the market’s health. It’s a vicious circle of manipulation and consequence.

Fresh evidence came Wednesday with the release of a Coldwell Banker puff piece comparing Canadian real estate prices with those in the swishiest US markets and international destinations. Of course, there is no comparison between say Rome ($1.2 million US for a middle-class house) and Vancouver ($1.174 million US), except that people in BC are on drugs, while Romans live in a city of 2.8 million people that was once the capital of the world and cradled most of our civilization and art. Other than that, it’s a great tool to use if you just bought a shack in North Van.

Nonetheless, as the realtor’s release-cum-story asserted: “While Canadian home prices have been on the rise again following a brief market downturn, today’s historically low interest rates have kept the dream of homeownership within reach for most of today’s homebuyers,” says John Geha, president of Coldwell Banker Canada Operations ULC. “It is particularly interesting to compare the affordability levels now seen across North America and other global centers. Compared to many major markets throughout the world, Canadian real estate looks like a bargain.”

Yeah, right. The average income in this country is $70,500. The average house now costs 4.6 times the average income. In Toronto, where average income is $72,800, it’s 5.4 times. In Vancouver, where the average income is $68,900, it’s 10.6 times.

The US real estate bubble imploded when house prices hit five times income.

Coldwell Banker should be ashamed for making invalid comparisons and reaching dumb, sweeping, irresponsible conclusions. But the company doesn’t care. It got ink, which was the point. The media which reported this – from the CBC to the Globe and Mail – are probably more culpable for carrying the piece without comment or context.

The biggest losers, of course, are the ones who will swallow this stuff.

But it’s too late. Here’s another one.

Enola Gay is in the air.

For Garth's political blog, go here.