Entries from October 2009 ↓

A few days ago I wrote about being a contrarian. Lately I’m feeling crowded.

This week, for example, the latest numbers showed the Canadian economy is contracting, not expanding. Duh. Like we needed to count anything to know that.

The H1N1 saga is going from scare to farce, and on its way to panic. There will be economic ramifications of this. Count on it.

The US GDP grew by an astounding amount but the stock market caved. Why? Because while you may be able to stimulate some things into a better mood, but the economy ain’t one of them. Give people money to buy stuff, and they will. Just don’t try cutting them off.

Oil prices at triple digits? It’s the latest scandalizing buzz, just like the Canadian dollar at par. And you read that stuff here a-g-e-s ago.

And real estate? Pshaw. The MSM just noticed we have a bubble brewing, thanks to that wild & crazy dude, Mark Carney. I mean, look at this. Greedy vendors. Rapacious buyers. Gluttonous lenders. Giddy realtors. It’s all there – the classic ingredients of an asset ready to pop, thanks to interest rates so low they have turned into a narcotic.

But, not news here. This just means it’s probably coming faster.

Still, it hurts. Give me a hug. I’m going m-m-m-mainstream.

Two houses, two families, two cities, two questions. No, this is not reality TV. Just reality.

Hi Garth: I’m in a little pickle of a jam,and I need some hard advice/guidance. I just turned 24 this past september, i have a small family 2 kids and a lovely wife. I am on the verge of paying off my house through a lot of hard work and a few good little investments. I have put ALL of my hard earned money into my house. We built a house ourselves and saved a fair bit of money so we have some equity built in. But here’s my problem, sure my house is going to be paid for but i have no cash , zero because its all in the house. I am proud of paying off my house but its a very bitter sweet feeling, all my money in one investment, scares me! i don’t know when work will dry up, could be this winter or maybe i’ll stay busy for another year, i don’t know

i was raised and told to pay the house off first before any toys, cars, vacations. we did our best. what should i do, we have been trying to sell our house because i don’t like the idea of putting all my money in one place, i should have been more thoughtful, we have had the house listed for almost a year and dropped the house price nearly 150,000 dollars, ( shows how inflated the housing market is). We are starting to lose money on the house, and thinking about staying knowing that the housing market will never reach the heights of what we seen. We have had a lot of showings, even offers but they have all fallen through.

there seems to be no buyers, a lot of tire kickers. I took action and i got a heloc out against my house in case of emergency, so I have some cash flow in a sense. I’ve exhausted my options, and I’m looking for options, ideas, any angle that i have missed. I do realise how lucky i am to have a soon to be paid for house at my age. maybe im over reacting, But as a father of 2 little ones you always worry about the future.

I don’t have issues with you posting this on your greaterfools website. As I would like to know what peoples thoughts are. I know my grammar sucks, what can I say I’m a welder. – Paul C.

No shame, pal. You’ve obviously succeeded according to the rules you were taught. At your age to own a home free of debt is unimaginable for many.

Having said that, you’re right to worry. If demand for your trade wanes, you have no reserves to carry you through (and it sounds like you’re the sole source of income). Arranging for a line of credit was smart, since that will give you emergency funds, but it’s no solution to having every single egg in one basket.

If financial security is your goal, then you’ve little option but to sell, raise cash, relocate, downsize and get the extra money working for you and your family. If the property’s not moving, then it’s at the wrong price. You may feel like you are ‘losing’ money by knocking the asking price down again, but after a year it’s the only path to follow.

Try taking it off the market until after Christmas, then list it again at a lower level. That way it can come out as a fresh new listing, instead of a tired dreg. And you might want to spring for a staging.

Thanks for reminding us of how a house can become a trap.

Hi Garth: I have no trouble admitting that I am a fool, but I am hoping that there are many greater fools than myself and I am doing my best to educate myself out of foolishness. Please bear with me, my understanding of economics, politics, and finances is sadly limited. I have two questions for you and sincerely hope you can help me understand the greater picture better. I am sure you get a lot of mail, and I know you can’t possibly answer all of it, but I can hope right?

My questions:

1.When the Canadian government intervened and pushed the interest rate down to keep the real estate business moving to keep money moving and keep people spending, what other options did they have to stimulate spending in the face of the rapid change in the global economy?

1. Can you see any way that this RE bubble bursting situation can be avoided at this point? What would it take, from the government, banks, or the public?

Don’t get me wrong, I am all for it bursting. We are holding our breath and keeping our happy little family of three in a 1 bedroom 560sq ft condo in Kits (that crazy Realtors have priced at $400,000) and waiting for the day when the cash we’ve saved up will be worth something a wee bit larger. While the Realtors keep telling us to fear the rising interest rates, the math doesn’t work – how do you justify bidding up an already overpriced home by another $200,000? I’ll keep working on the down payment, take a raise in interest rates, forget the bidding war increase, and possibly have a more reasonable price instead - thank you very much!

Thank you for your blog. You have helped me understand many issues that I wasn’t able to piece together on my own and you’ve got my husband and I both hooked.

Family of sardines in Vancouver

Those are not fool questions. As for monetary policy, the Bank of Canada moved lockstep with many other central banks to crash rates in the wake of the market meltdown and the collapse of credit markets last year. Was it necessary?

History will tell. We can’t yet. Certainly there was concern banks could fall like dominoes and governments had a role in backstopping the system. That’s why Ottawa spent tens of billions buying up bank mortgages. It’s also why the BoC moved to flood the system with liquidity and ensure the banks had access to all the money they needed.

But that doesn’t exactly explain why consumer rates went so low and have stayed there so long, since (unlike the Yanks) we did not have a collapsed housing sector to reflate. In fact other than the mortgage orgy this year, the lowest rates in history have done little if anything for the car business, appliances or other durable goods sales. But it sure has blown gas into a real estate bubble which isn’t in anyone’s interests.

What can prevent this bubble from bursting? Ultimately, nothing. The pendulum has swung too far in one direction to stop at the middle now. Pent-up demand from last year has been satisfied. Future demand from next year has been sucked into the present by cheap money and the threat it might increase. Higher rates are a certainty in 2010 as governments compete for money and the US moves to support its currency.

This market will not just slow down, it will shudder to a halt.

But, seriously, they want $400,000 in Kits for 560 square feet? And three of you live there?

You want advice? Get out.

There’s so much more room on this side of the rocks. So much less delusion.

Have you stored your nuts yet? Split and stacked several cords of seasoned hardwood? Sold those ETFs? Listed your house?

If so, sweet. It’s time, I’d say, we got ready for winter.

The stock market has careened enough this week (600 points) to warrant a bead of sweat. GMAC, the financing arm of General Motors, has gone back to Washington for a bailout. Its third. Another country (albeit a dinky one, Norway), raised interest rates. US new home numbers are dismal. The US is on the verge of extending its $8,000-per-buyer real estate subsidy. And a new report says the affordability of Canadian houses has taken a dive.

Those things may not seem to have much connection, but there is much. They point to a potentially difficult winter in which we should expect an equity market pullback after months of torrid gains, a deterioration in the American economy causing job grief here, and the beginning of the end of the beaver bubble in real estate.

Why such predictions? Simple. You can’t build an economic recovery on duct tape and faerie droppings. At least, not for long.

The facts seems obvious to me.

The auto business is in just as bad shape as it was last winter when it was weeks away from collapse. That’s despite $70 billion in government money from Canada and the US. Car sales are down almost 40%, and the only bright spot came when Washington gave people $4,500 each to secure a new vehicle. The result of that genius move should have been clear to a grade schooler: If you pay people to buy stuff, they will. When you stop paying them, they stop buying.

The same logic is being applied in Canada with things like the Home Reno Tax Credit, which the feds claim has been a bonanza for the trades. So, let’s contemplate what happens at midnight on February 1st, when it ends. Yeah, in the middle of winter. More genius.

Ditto with the US grant of $8,000 tax credit for first-time homebuyers in the States. That’s been credited as the only reason resales have been going up, even if prices haven’t. But that ends in six weeks. What then?

And how about the artificially low, engineered interest rates? I mean what, exactly is Mark Carney trying to tell us? (Hint: rhetorical question.)

OTTAWA (CP) – Bank of Canada governor Mark Carney has repeated his concern that Canadians may be getting in over their heads in the purchase of homes, saying the government has ways of slowing the market. Carney told a Senate committee Wednesday afternoon that the central bank is conducting an analysis of whether Canadians are taking on too much debt, particularly in buying homes.

Canada’s housing market has rebounded more strongly than other parts of the economy with sales at times hitting record levels, although prices remain depressed from last year.

The central banker said “exceptionally low” mortgage rates are luring Canadians into taking on mortgage debt to purchase homes. Deputy governor Paul Jenkins said the effective variable rate is currently at 2.25 per cent, a post Second World War low…..

….Carney said he was speaking hypothetically, but added: “If this were to persist, there are other options. The housing market is subject to considerable regulation and policy influence.

“That would be the way to approach it.”

There you have it. More evidence the real estate asset bubble is being recognized for what it is – a giant debt trap with the potential to do to our middle class what it did to the American one. As I’ve been saying (and Mark has been reading), when people borrow at rates which will only go up to buy houses that will only come down, this won’t end well. Especially when most new buyers have basically no money, and wouldn’t even qualify if interest rates were not a third of what they should be.

But even so, as the Desjardins Bank report tells us this week, housing affordability is eroding in Canada as prices rise. Less affordable houses mean fewer buyers. Less demand, less bubble. So the only question is whether the regulators will let it die on its own, or move in and squish it. Or both.

Finally, it’s always instructive to look south, even when you’re a superior Canadian. American houses prices are back to 2003 levels, which means anyone who bought in the last six years has lost money. In some cities, like Cleveland and Detroit, they’re at 1995 levels. And this is after Americans have been showered with tax credits, tax rebates, low rates, corporate bailouts, mortgage relief programs and so much public spending that people not yet born will be paying for it.

So either governments keep it up. Or they stop. Or they extend. And then they stop.

Either way, same result.

So pass the axe.