Entries from February 2010 ↓

Hear Garth in T.O. tonight @ 7. Here.

In the spring of 2005, US housing prices were at record highs – just like now in Canada – and had increased about 20% in the previous year – same as here. Real estate was everyone’s fav investment.

And why not? The experts said it was okay. No danger. Keep on buying.

“Our analysis reveals little evidence of a housing bubble. In high appreciation markets… current housing prices are not cheap, but our calculations do not reveal large price increases in excess of fundamentals.”

That, if you can believe it, came from a Federal Reserve Bank of New York report written by three of the country’s best real estate economists.

Four months later, the market started to crumble. Five years later, prices across America have collapsed from 20% to 70%, one in four homeowners is in negative equity, seven million families have lost their homes to foreclosure, the middle class has been eviscerated, properties sell for less than $100 in several cities and the US has plunged into recession and debt on the back of a mortgage crisis. It’s the worst event since the Great Depression. Because of a bubble the experts told citizens did not exist.

I thought of that today when I heard the words “Re/Max.”

The country’s biggest property pumper came out with one of its publicity barrages, which are routinely licked up by the MSM. Here are two of my favourite quotes, both from Elton Ash, Re/Max executive vice president, Western Canada – one from each side of his mouth:

“I’m confident that we are not going into a bubble situation. I don`t think that the Canadian buyer is that naive at all.”

“Affordability is the catalyst for the vast majority of purchasers in today’s housing market… There is a growing sense, on both sides of the fence, that the time to act is now.”

Notice the suck-and-blow? On one hand, new buyers are told this is a stable market without the dangerous excess of a bubble (just like US suckers were reassured). But on the other hand Re/Max and others try to whip the market into a crescendo of Spring buying, creating that ‘buy now or buy never’ mentality which always marks a bubble top.

And it’s working. At least as far as the slobbering, sycophantic media is concerned.

“Calgary will experience a ‘very active’ spring housing market as improved an economic outlook combined with record low interest rates and affordable housing are ‘fuelling recovery’ in residential real estate sales..” said the Herald.

“Toronto leads the country when it comes to a lack of listings on the real estate market, contributing to upward pressure on pricing, according to a report by Re/Max” said the Star.

“Re/Max said Wednesday that housing supply is drying up relative to the number of people looking to buy,” said Canwest News. “It said expected higher interest rates from the Bank of Canada by mid-year, tougher mortgage conditions imposed by the federal government effective in April, and the implementation of harmonized sales taxes in Ontario and BC in July should cause a surge in demand this spring.”

And that’s just what Re/Max wants. By pouring accelerant on the hot coals of the housing market, these self-dealers seek to squeeze out every last dollar of commission before the inevitable dousing. Why else churn out media releases telling people listings are scant, when they’re in fact increasing? Why encourage young buyers to slither hopelessly into debt if the market is about to cool? Why downplay fears of a bubble, only to pour every corporate resource into gassing it up further?

If I were F, I’d be pissed. Only a week after trying to dampen the fire down by tightening up mortgage regs, the finance minister sees his modest work dashed by these house monkeys.

So, let’s remember. There are those among us who, in serving themselves, serve no one.

BTW, between 1980 and the late 1990s the average US house price-to-income ratio was 3. By 2006, when the market crashed, it had reached 4.6 – termed seriously unaffordable.

Today the ratio in Canada is 5.2. Toronto, 5.7. Vancouver, 9.3. Re/Max, 0.

Well, blah, blah, blah.

Sure, the latest index of consumer sentiment in the US just hit the wall, skidding markets. The world’s biggest carmaker is imploding. There’s new worry deflation will make an ugly comeback. Yeah, interest rates will rise, the HST arrive, mortgage screws tighten, taxes increase, public finances collapse and blah, blah, blah.

So what?  Just stop reading that damn blog!

(This arrived yesterday:)

Hi Garth: My spouse reads your blog religiously. Here my problem… you keep saying don’t buy!!!

We have over $200K+ as a down payment, no debt, have been married 10 years, have stable jobs, great educations, and have a 3 year old, so we’re busting at the seams in our little “home sweet home/ one-bedroom rat hole”. We live well below our means, but frankly, I want 4 walls and small backyard. Small bungalow or even semi is fine!!!

Any chance you can tell him to buck it up, buy a home and live in it for the next 25 years and eat the inflated prices? Pretty please. Because saving money is addictive and protects against job loss, but sooner or later a man needs to part with some money in exchange for some peace and harmony in the home

Any chance you might provide a little advice to my “better half” to let go of the reins and jump in (even 2-3 months down the road or sometime before our kid goes to university????).

Signed, Desperate for 4 Walls and a Small Patch of Grass

Dear Desperate:

I have no idea who your husband is, if he posts on this site, is a regular blog dog, or just furtively reads on his laptop in the bathroom with his wireless turbo stick. Whatever. I feel for you. He has learned his lesson well.

But let’s put this in context. There are countless husbands addicted to stuff, who view a massive home as proof of success. Especially in Calgary. They mortgage to the hilt, buy $1,800 stainless barbeques and Escalades in a colour to match their soffits. The garage is jammed with a quad, a Harley, a fast sled and a cigarette boat – all used once.

Meanwhile the investment account is empty, RRSPs have dry rot and monthlies consume every cent of disposable income. This, Desperada, could be your lot – a future of nothingness, full of guy droppings.

In contrast, you have prudent, careful, saintly saver. If somebody loses a job, you’re covered. When the Escalade guy in Calgary goes bust, you’re still okay. If Obama chokes and the global economy staggers, you can watch it unfold in safety. You owe nothing and bow to nobody.

Your tightwad, clutchy husband has put you into a unique class of Canadians – those who actually have freedom of choice without financial fear. It’s a select group with no need to moan about runaway property tax bills, rising mortgage rates, cracked foundations or earwigs. Enjoy these carefree days of unbridled happiness that this blog has brought into your life!

Ah, did you say two hundred large? Ten years in a rat hole? A child trapped in there with you? Threatened marital Lysistrata?

I am so proud.

What comes next? Hear Garth speak in these cities...

Toronto ON, Thursday Feb. 25, 7 pm, Scarborough Chapters.

Langley BC, Saturday Feb. 27, 2 pm, Coast Hotel

London ON, Tuesday March 9, 7 pm, North London Chapters

Kitchener ON, Wednesday March 10, 7 pm, Kitchener Chapters

Kelowna BC, Saturday March 13, 2 pm, Ramada Hotel

Calgary AB, Wednesday March 31, 7 pm, Register here.

Are Boomers to blame for the mess ahead? A pile of people thought that’s what I said yesterday. Discrimination. Ageism.

But actually, no. I count Boomers among my friends. True, many of them are now on life support. Others don’t get out much this time of year since the snow shorts out their scooters. But they’re fine people. I mean, despite the drool.

In reality, our aging population and the big Boomer housing dump ahead are not the major hurdles real estate investors – and the economy – face right now. The giant health care and tax crisis is probably two or three federal governments away, hitting us with a vengeance around 2020. That will be when today’s desperate twentysomething first-time homebuyers are approaching middle age, with 95% of their net worth in their houses, 10% mortgages, no liquid assets and looking at a phased-in 70% marginal middle class tax rate.

Stop shaking your head. It’s coming.

The blame will not belong to health care-sucking seniors, but rather to the crew who were running the joint in the aftermath of the 2008-9 financial meltdown.  They blew it. (But you don’t have to.)

Every government in the country is spending more than it’s bringing in, which means massive borrowing from the future. Borrowing now means more tax and less spending later. We’ve seen this movie before. It gave us the GST.

If employment had soared as a result of the billions spent, if factories were reopening and the private sector economy was rebounding, the public debt might have been worth it. But in reality, this economy will come off government drugs barely alive and stay flaccid for years. In the meantime, we all pay more.

Mistake one.

The other head-up-butt macroeconomic policy plop comes from the geniuses at the Bank of Canada. By mindlessly clinging to dirt-cheap interest rates, they oversee the creation of a private debt balloon as dangerous as the public one. As I outlined briefly below, Canadian households have never owed as much as now. Consumer and mortgage debt is off the chart. Incomes have stagnated. Inflation’s coming back. Gas is a buck a litre. And, of course, the price of middle-class shelter is outpricing the middle class.

Sure, F finger-tightened a few nuts on the mortgage rules last week, blowing off some no-money property virgins. But that does nothing to address the real threat – that absurd rates have allowed more a debt binge. That’s aggravated the Canadian financial disease, which is the accumulation of net worth in a single asset – the house.

Here’s a good example. In Vancouver, now more demented than usual, a piece of junk SFH costs nine large. Not far from neighbourhoods full of them, the No.2 guy at the BoC was speaking yesterday at a financial conference.

“At the moment, we are certainly seeing a certain amount of the recovery in the Canadian economy coming from the housing sector” Paul Jenkins said, apparently sober. “I would certainly not say we are looking at a housing bubble.”

But all Paul had to do was look out the window, a little to the north, to see Bubble City laid out before him. He knows it’s there, of course. But this is politics, not economics. Mr. Jenkins and his boss Mark Carney must surely know what happened when The Maestro tried the same tactic.

For the first half of his 18-year rule as head of the US central bank, known as the Fed, Alan Greenspan was a cautious, steady eddy kinda guy. He bobbed and weaved with economic cycles, moderately adjusting rates and money supply, and avoiding disaster. But in the second half, he presided over the two greatest and most destructive asset bubbles in America’s history. The dot-com bust wiped out $2 trillion in wealth, and they’re still collecting bodies from the housing crash.

Greenspan allowed both to form due to lax regulatory oversight and, most significantly, too-cheap rates. In fact, the US real estate bubble could end up destroying the States for a generation or two, throwing it into unrepayable public debt after hollowing out the net worth of the middle class. By refusing to act address the bubble with higher rates, lest he look bad for weakening the whole economy, Greenspan ended up blowing the entire wad.

There’s only one reason a house today costs 20% more than it did a year ago. Or that untold numbers of young couples are now dangerously leveraged. Or that average families can’t afford average homes. Or that the legacy of these times will be debt, not equity.

Mark. Dude. It’s time.

Note: The ‘duck’ photo originally illustrating this post was clearly too graphic for many. It has been replaced as a consequence. — Garth