Entries from November 2009 ↓

Fifteen months ago few people thought we might be mere days away from the cusp of a neo-depression. Indeed there are folks who doubt it still. Fact is, when Canadian officials walked into an emergency meeting one October day with US Treasury Secretary Henry Paulson, they were shocked.

Paulson sat down, said ‘this is Aramgeddon’ and warned there was a damn good chance banks and stock markets might not be opening up on the next business day. For the guys from Ottawa, it was a Depends moment.

This all goes to show you just never know what darn things will happen next. That’s a point the fun guys at global consulting powerhouse Watson Wyatt are making with publication of their latest bedtime work, “Extreme Risks.” They’re warning the world that in times such as these, prudent leaders of companies, and of countries, should expect and prepare for anything. Specifically, here are the top possibilities:

• depression

• hyperinflation

• excessive leverage

• a currency crisis

• a banking crisis

• sovereign default

• climate change

• political crisis

• insurance crisis

• protectionism

• disunity in Europe

• the end of capitalism

• the end of fiat money

• war

• a killer pandemic.

Now, speaking of extreme risk, we whisk you to that paradise known as Saskatoon, where there is at least one decent building, the Bessborough Hotel, and one distraught guy:

Hi Garth: I picked up your book today, and have already started reading it. I think I already know what your answer is going to be, but maybe I’m wrong, so I am going to ask you anyway. I am in the midst of buying a new house in Saskatoon.  This have been ongoing since September, 2009.  The plans are drawn, the lot is picked, the mortgage is preapproved, I have a builder ready.  He actually got back today, so time is of the essence, and I hope you are able to write me back, urgently!

I am 30 year old single father, who makes around $50,000 per year.  I currently own a house in a good area with a rental suite.  I owe $235,000 on my house, and worse case, I could get $300,000, if not more, right now.  If I rent out the top and bottom on this house, I would approximately get $2300 worst case scenerio.  So, with that being said…

I have to put down a down payment of $20,000 on this house to be built.  It is a 1260 sq.ft. bi-level, with a 2 bedroom legal suite on a corner lot, in a brand new area, with a double attached garage.  I have already put $1150, non-refundable, towards the drawings.  I am going to keep my current house and rent it as a double unit.  I will also rent the suite in the new house, and live on the main floor.  I will be living rent free because of the low interest rates right now.

Should I continue and go forward with this house, or am I making a huge mistake? P.S. Saskatchewan is just entering a recession. Now, my builder was on holidays until today, So I know we are going to be communicating any day now, and the wood is already on the property.

I also already cashed out my RRSP, for this down payment 2 weeks ago, and I did get turned down by 2 mortgage brokers, but the third approved me. So, even if I say wait for a year, or two to buy, I may not get approved for this much ever again. One other thing, new house prices are down 5% from September 2008 to September 2009!  I got the contract in October.  There are comparables with less square footage, but upgrades for $425,000 on the market.

I also plan on buying another one in a couple of years, once I pay some of these two down a bit, and have some extra money for a new down payment.

What is your suggestion? Respectfully, Joe

P.S. I am basically going to try and wait for your reply, and I am going to base a lot of my decision on what you say.  Thanks again.

You’re kidding, right Joe?

I mean, you seem to have only $65,000 in equity and $20,000 in cash (robbed from your RRSPs), and yet contemplate buying a $400,000 house while you keep your existing $300,000 home – for as total debt load of, what, $615,000? All on a salary of fifty large?

You say two of three mortgage brokers turned you down. Did the other two hurt themselves when they fell down laughing?

After all, mortgage debts of $615,000, even financed with a VRM of 2.25% would cost $32,000 a year in payments and require an income almost twice as large as yours. Further, as you must know, interest rates have only one direction in which to move, which means you will be murdered after you are killed. And what’s this trash talk about spending $400,000 on a 1,260-square-foot home? In Saskatoon?

If you insist on being a complete greater fool, then sell your existing home and at least muster a half-decent down payment to put on the new place. Better idea, just kiss off the $1,150 you spent on drawings (that was a genius move) and stay where you are. You’re a real estate junkie, Joe, and not a good one.

Now call the damn builder.

Update:

Joe has emailed with more questions. I submit them to you for a response. I’m done with the guy. — Garth

Hey Garth, Thanks for your quick reply.
I have a few more questions for you, I hope you can answer. What do you propose the real estate market is going to do here in Saskatchewan(mainly Saskatoon)? And then wouldn’t it be wise to even sell my existing house and rent until the market is way lower?
Be specific.  Be point blank.  You even give me an option to buy that new house with a bigger down payment, yet if it was going to be worth nothing, or say a lot less, then why should that even be an option(to buy it)?
I know you say it would be better to stay where I was, and kiss my $1150 good bye. Though,my question to you was not about affordability, but more as if the market is going to slump so bad, and then I’m stuck with this huge debt, and how long it is projected to come back?
But, say the affordability worked, would or could it be worth it to buy this house?
Basically, I am trying to get a clear cut picture of how you think Saskatoon realestate is going to be in 1 year? 3 years? 5 years? etc Also, I see you are an author, you have done a lot of public speaking, you sell bestseller books, you are in politics, and schools and papers, you are an entrepreneur, but do you or have you invested in real estate?

In the Spring of 1989 the average house in Toronto cost $261,000, which was 250% higher than in 1980. What started as a boom, fuelled by inflation, turned into an asset bubble, propelled by emotion. Shortly after that, interest rates rose, the economy tanked and we were in recession.

In 1993 the cost of the average Toronto house had plunged $189,000 – for a peak-to-trough decline of 27.5%.

Now, there are a few points worth remembering (all you kids in your twenties and early thirties sit up and write this down):

• That decline in Toronto (and it happened in Vantown and Cowtown, too) was equal in magnitude to the crash US housing is now going through. Guess it can happen here, too.

• The collapse in prices did not take place in a few steamy weeks, or a number of months, or even in a couple of years. Instead it was a slow, grinding, torturous and relentless deflate that sucked equity out of homes every week, year after year.

• House prices did not regain their 1989 level until 2002 – a staggering 13 years, and even then homeowners had nothing to show for more than a decade of inflation and rising ownership costs but compounded losses.

• In 1988 and 1989 the Toronto real estate scene was rife with multiple offers, hormonal bidding wars, young couples camping out in front of sales trailers, condo towers springing from every vacant lot, and an overwhelming sense anyone who did not buy then, would forever be priced out. Any of this sound familiar?

It should. And it will. If you have little equity, or have yet to buy, be happy you’re reading this while there’s still time make the right choices.

And now we go to…

Hi Garth: I’m from the land of 80k trucks with 6” lift kits and metal bumper testicles – Red Deer, Alberta.

I just sold my house because I don’t like the location and am looking for another.  I put a 3 month possession on it and had the buyer put a $20k down payment to secure the deal.  My house was paid off and I have the money to buy again but I think the prices are inflated.  Here you need to spend minimum of $450k for a nice house (1400 sq ft, 5 years old, good location).  I stumbled on your website, bought your books at chapters and now regularly read your blog for education and entertainment.   I’m thinking of waiting now and not purchasing until prices deflate.

Here’s my question.  What could possibly cause prices to rise and keep me out of the market (inflation, oil prices)?  I’m no economic expert and agree with you that  the odds are against this, but housing -  isn’t inflation a risk to driving up housing prices?

Dear Swinging Testicles: Four and a half large is way too much to pay for a house in Red Deer, unless it’s next door to Hooters. See what I mean? You don’t have one. This is a city of 90,000 people with marginal growth and a wholly-inflated real estate market. Of course houses are over-valued and, yes, you should wait  – but the decline will not happen in three months.

Lots of posters here think inflation will come along and rescue their over-mortgaged lives by spiking real estate values. Will not happen. While inflation will increase, certainly enough to get the cost of money moving higher, it won’t save the housing market from the ravages of higher mortgage rates, persistently high unemployment and a moribund economy that has even Alberta running red.

As for oil, yes, it’s on the way to $100 a barrel and beyond, based on rising global demand, mostly from Chindia. But I have yet to understand how oil at $100, as opposed to $77 oil, makes life any better for average families in Edmonton or Red Deer. Do household incomes rise? Are Albertans immune from higher home heating costs or $1.30-a-litre gas for those testo trucks?

No, ST, no reasons other than emotion to justify $450,000, 1,400-foot houses in RD.

And I’ll be there in January to swing with you.