Entries from September 2009 ↓

The 'Sycamore' on paper. 36 feet never looked so wide.

One night last week, I’m told, 50 young couples were camped outside a sales trailer in the Toronto burb of Milton. It was unseasonably cold.  And uncommonly stupid.

The trailer belongs to mega-builder Mattamy Homes, which is in the business of giving first-time buyers ‘affordable’ houses with all the trimmings. The event was a new release of homes on lots ranging all the way from 34 feet wide to an elephantine 36 feet. Prices, $316,000 to $426,000.

The houses are not built, of course. Buying one is consequently a leap of faith – as buyers found out last year when area real estate values crashed and yet trapped couples were required to close on their new homes. Meanwhile within two miles of this trailer there’s a slew of homes for sale that actually do exist – resales, erected by the same builder. But ya know kids. New, new, new.

Why camp out, though? Why stay in the cold all night, just to be sleep-deprived and zonked when you make the biggest purchase of your life and walk into 35 years of debt?

Simply because we’ve entered a new phase of the bubble. The last one – or damn close to it. This is a moment I have seen before in previous booms, when the endgame is marked by one overwhelming sentiment: Buy now, or buy never.

This is a line being used increasingly by industry hucksters, builders and marketers. They breed fear in young hearts that prices will only continue to rise, shutting the timid out ‘forever.’ And these days they warn that coming interest rate increases will suddenly goose mortgage costs and disqualify those who now sleep on concrete to get a $400,000 home with $20,000 down. The terrifying thought is that soon it might take a hideous 10% or an unattainable 15% deposit to get a three-bedroom, three-bathroom, two-car garage, full-basement detached home with a paved drive and brick exterior.

Imagine.

But the evidence mounts that all the words spewed here and other places where caution breeds, are meaningless. Buyers will buy. Emotions will rule. The tide of hormones will prove too deep to damn. So stand back, and mind the spray.

And it ain’t just kids:

My wife and I, in our mid-40s, have never bought real estate, as a result of either being in the wrong place at the wrong time (essentially moving to insanely expensive areas where we were pretty much priced out from the moment we arrived–we lived in Silicon Valley during the boom, for instance), or being naïvely bearish on real estate (when we moved back to Vancouver in 1999 I was convinced the dot com bust was the beginning of a disastrous period for real estate, never mind everything else).

If we bought today, we’d be over 70 by the time a 25-year mortgage was paid off. We have about $200K to put down, and a household income about double the Vancouver median. The bank will rent us far more money than we would dare spend, but a property around about $700K would result in payments a little shy of 50% of net income, which is significantly less than other Vancouverites are paying. Yes, I know there’s a possibility that we’d lose the downpayment in the first couple of years if prices turn around. But any formerly rational person would, at this point, have to admit that in this city there’s starting to be a very strong possibility that we wouldn’t, and they won’t. Talk of “new paradigms” and “it’s different here” begin not to sound quite so insane, because there’s really no other solid explanation offered, except maybe grow-ops, which I don’t buy.

Yes, I know fundamentals are out of whack. But they have been for ages. Renting, at our age, has moved past tired to exasperating. Essentially, we either buy now or we never do. Don’t try to tell me that prices will fall 40% after the stupid Olympics; I’m no longer buying it. 5%? Yeah, maybe. So what. Thoughts?

See what I mean? Hopeless.

“We either buy now or we never do.”

When you hear those words, duck.

Update:

Following publication of this post, the Vancouver letter-writer, above, sent me this gracious response:

What does this mean, exactly? You pull one line from my email and make a smug comment. This is commentary? This is advice?

Listen, I’ve been waiting (and waiting and waiting, and waiting) to buy, in large part because of bear blogs like yours. I listened, OK? I paid attention. But where did it get me?

What do you suggest? I wait until 2029, when prices are more in line with incomes (if they are), and get a mortgage when I’m in my 60s?

Sheesh.

For Garth's latest podcast, go here.

In case you missed the news, Alberta launched a $6oo million bond issue on Monday, which sold out in a few minutes.

This is interesting on a couple of counts. First, Alberta is now a bigger debtor, mortgaging the financial future of its citizens. This should tell us something about the current ‘recovery.’ Second, despite its Triple-A rating, the province’s underwriter convinced it to offer a slight premium over rival Government of Canada bonds. So, investors snapped up the higher yield.

So what?

So the next series of GoC bonds will have to compete with the new Alberta bonds at the dealer auction. And so interest rates creep higher – a salient fact since current mortgage rates are set in the bond market.

This is what competition for capital does, and you’re just seeing the first ripples in what will be a sea of new debt issues washing over the market in the next few years. The federal government’s budget shortfall alone will be $55,900,000,000 this fiscal year, and added to that will be $29,000,000,000 more in financing for Ontario, BC, Quebec and Alberta. So the bond market will see about $85 billion in new bonds from these two levels of government alone. In one year.

This is why interest rates will be percolating, whatever the Bank of Canada does. Eighty-five billion dollars will leave investors’ hands to buy bonds only if the return on capital is both adequate and competitive.

Meanwhile there are steady indications banks will not be happy for long lending money at 2.25%, the current prime rate – the lowest it has been this century. Blog dogs have been peppering me in the last few days with copies of a letter TD Bank’s been sending out to LOC customers giving notice of a rate hike.

But these are not just any old lines of credit – instead, they are fully secured, real estate-backed LOCs which essentially pose zero risk to the bank. And it’s not just a wee rate increase, but rather a massive 44% surge in the cost of borrowing – from price plus zero, to prime plus 1%.

Why would the bank do this now?

As some wise folks have pointed out, banks can now enjoy a government guarantee for their HELOCs by funding them using CMHC’s mortgage-backed securities program. The bad news is the money is coming from the bond market, where mortgages are also funded. And when upward pressure on bond yields is felt, bond prices drop as investors demand more of a premium to own fixed-income securities.

There is little the Bank of Canada can do about this, since its usual bag of tricks (drawdowns, redeposits, Specials and SRAs) is aimed at keeping rates in a narrow when banks borrow from each other (which happens every night). What someone is willing to pay for a bond, Alberta, Canada, Nova Scotia or Lululemon, is another matter entirely.

The important point is that Alberta (like Canada) has the highest possible debt rating – which means it can get away with paying the lowest rate of interest, and still flog its bonds. The premium just unveiled means competing bonds with similar ratings and maturities will trade at a discount to face value. So new investors will pay less than par for existing debt, which means they buy $100 for (say) $98, effectively raising the yield to maturity.

Translation: Rates are rising. They will continue to rise. The sheer mass of new borrowings ensures it. This is whether or not the prime pops, or the central bank changes its cheap money policy. If you depend on borrowed money which comes from the bond market – like a secured line of credit or a mortgage – you should know this.

Three per cent mortgages are doomed.

Moral: Unless you own it, debt sucks. Even for a cowboy.