Entries from December 2009 ↓

Normal people travel when the weather is nice. But when have I been normal?

Hence, next month I will be hither and thither in Nova Scotia, Ontario, Alberta and BC, yakking about my new book but mainly doing a series of free financial seminars. I actually love this stuff because it’s like a blog, but with body parts. A  chance to mingle with folks and talk about the journey we find ourselves on together.

And maybe I’ll meet Mary:

Hi Garth: We live in Kelowna and I see you are coming here in March. We’ll get out to your talk. In the meantime, we have been contemplating selling our house and renting something, but are confused by the current market. Realtors around here are saying that Kelowna is different than other Canadian cities and that it should be able to ride out the fluctuations in the remainder of the country. Right now, our home is worth what we paid for it 2.5 years ago, maybe a few thousand more at most.

What do you foresee for this area and, if you suggest selling, would there be any urgency to that advice? Regards, Mary.

‘Kelowna is different.’ Well, Mary, so is Halifax. And Red Deer. And Toronto and Ottawa. And especially Vancouver.

There’s not a city in Canada, or a neighbourhood realtor, who will admit that economic trends, national fiscal and monetary policy or broad-based consumer sentiment, apply locally. In every town I visit, the same refrain is trotted out.

It echoes what people told me during the dot-com era when profitless companies were selling for hundreds of times earnings. When investors could not get enough Bre-X or Nortel when valuations were absurd. I heard the same in the late Eighties when real estate was supposed to go up forever, just before it crashed. And I hear it now from people lined up to buy gold coins, or launched into bidding wars for houses.

And I chuckle into my long, flowing and quite touchable white beard, because if I’ve learned one thing, it’s this: It’s never different, because people don’t change.

Kelowna is in for a kicking.

I say this based on a working knowledge of a place I visit at least twice a year, and watch the rest of the time. It has an aging population of Boomer old farts like me who have the majority of their net worth tied up in real estate and will be acting like all their colleagues over the next few years. Selling. It has a very narrow and undiversified economic base, and has lost some critical manufacturing facilities recently. It has an arid climate which won’t be helped much by our changing climate, and memories of big fires that don’t fade.

Kelowna’s real estate market last month saw sales drop by 30%, while the days on market raced ahead more than 33%. The average price is off a little, but there’s every reason to believe the spring will bring a surge of new listings (as in every other market), with a rise in supply overwhelming demand. Prices will likely suffer as a result. But 2010 will also bring to the Okanagan exactly what every other city in Canada will see – far smaller numbers of first-time buyers as Ottawa moves to increase down payments and the Bank of Canada starts kicking rates.

Not only that, but Kelowna – along with Vancouver, Toronto, Oshawa and Kamloops – will see the cost of owning, buying and selling real estate jump in July with the introduction of the HST.

So, Mary, you’re in luck. You have a very narrow window of opportunity in which to act. As new buyers pounce before the March federal budget, before the late-summer mortgage rate jump, before the July HST hammer, and in the midst of your delusional, dragged-out, indebted, Olympic mania, this is your moment to sell. And I mean now.

By the time I get to Kelowna in March, too late.

But still come to see me. And tell me you did it.

The day a gang of my Conservative colleagues punted me out of the federal party caucus room for the high crime of being a populist, Jim Flaherty took to the microphone, looked stern as hell and addressed the gathering.

“Garth Turner,” the finance minister said, “is not running an alternative government.” Several minutes later a snap vote was called, and I was on my way to the showers. Or, at least, to sit as an independent MP, no long a thorn in the prime minister’s powerful paw. No longer in government.

Now I don’t mention this to reignite old wars because I actually suck as a politician. I’d also throw me out. Too mouthy. Too opinionated. Too damn many ideas. Too challenging of authority. Too much a loner and a blogger and a democrat. Worse, I’d been the only MP in Ottawa who tried to stop 0/40 mortgages – something Mr. Flaherty himself initiated.

In fact, the finance minister was pissed at me for a vocal media campaign I was waging to have income-splitting brought in for married couples, after I’d convinced him to do the same for retired folks. I was also pushing hard for a tax-free savings account, and lobbying him to go easy on income trusts since so many seniors were utterly dependent on their cash flow.

But you know the rest. Income-splitting is still elusive, and he nuked income trusts. And me.

So I mention this as a little warning to those who think he is incapable of turning the ill-conceived 5/35 mortgage game into a much more prudent 10/30 situation. This could well happen in the March budget, meaning anyone who wants to buy a house and get mortgage insurance (which is virtually every new purchaser) would need a 10% downpayment and could only amortize as long as 30 years, bringing bigger monthlies.

This idea has many people apoplectic.

Says mortgage lender Marcus Tzaferis, “Twenty-five per cent of buyers – these people that are buying with 5% down and those that are buying with 35-year amortizations – won’t be able to purchase anymore.”

Adds the mortgage brokers association in BC: “First time buyers drive the housing market. Raising interest rates and reducing amortization periods will severely impact affordability for this important demographic group… potentially causing home values to decrease, penalizing people who have bought into the market over the last two or three years.”

And I mentioned a day or two ago CIBC economist Benny Tal laments that 10/30 would be like “a hammer to kill a fly.” He hasn’t seen the kind of flies I have in the bunker…

I sure expect a vociferous campaign against any tightening up of mortgage lending standards in the next couple of months, along with a mad rush by the few couples remaining who don’t own a home to snag one while they still don’t need money to do so. I’m also thinking we’ll be seeing an explosion of new listings come February or so, as it dawns on homeowners that they may just have missed the last stop for the real estate gravy train.

Of course, the fact bank economists and mortgage brokers are wailing about the massive hit this would cause to the market makes a lie of their other claims that 5/35 buyers constitute just a small and manageable slice of the action. Lots of them have recently been throwing around a misleading and bogus stat that only 4% of the country’s mortgages are of this nature.

Wrong. At least according to Benny Tal’s own  numbers – which show of all the financed homes in Canada, over 12% have mortgages greater than 80% of the property’s value. That means if real estate values were to fall by 20%, then 12% of all families with houses would be in negative equity. For comparison sake, after a 5-year real estate collapse, 18% of US families with mortgages are in that situation – enough to decimate the middle class and cause the worst downturn since the 1930s.

Of course, 12% is not 18%, but it’s close enough.

The real story is something else, though. The vast majority of all new mortgage originations for the past year have been 5/35 deals – at the very time when prices have hit an all-time high, mortgage amounts have never been larger, and household debt levels have achieved a US-style crescendo. So, anyone with just 5% of their skin in the game is almost 100% guaranteed to have a singed butt if the market returns to a normal state, let alone correct recent excesses.

Oh yeah, and mortgage rates will be resetting as well, according to central banker Mark Carney. More trouble for the equityless homeowners.

All this is the consequence of radical, experimental federal policy – like taking interest rates down to 0.25% . Or waking up one day and legalizing zero down payments for houses. Or reversing yourself two years later. Or creaming income trust investors.

A 10/30 mortgage would say it clearly: We screwed up.

And it’s probably coming. Much sooner than my redemption.