Entries from March 2010 ↓

Garth In Edmonton, Tues @ 7. Delta South.

Let’s say it’s late 2007 and you’re smitten.

The local real estate market’s humming. Prices are soaring and wealth effect’s in the air. Despite the meltdown in US housing prices, you know it’s different here. Why else would the feds have recently legalized 0% down and 40-year mortgages? If you want a condo and have no money, CMHC’s your bud.

You buy a unit in an elegant new development soon to be built. On a condo worth $420,000 you plunk down a little less than 5%  – twenty grand. Mortgage financing is approved, including 95% mortgage insurance from the Crown Corp. Ka-ching.

Flash forward to 2010. The building’s up and the condo’s ready. But the pre-closing appraisal shows it’s now worth $335,000, not $420,000. CMHC chokes, saying it will approve a mortgage of $313,000, not four hundred. You have to fork over close to $90,000 in extra cash to do the deal, plus final costs for a closing day surprise of $100,000.

This means you’ll have $120,000 cash into a condo with a $313,000 mortgage, which is worth $335,000.  The instant loss: $98,000.

What would you do?

Well, Danny Cote told Calgary’s London at Heritage Station development to stuff it. In response, the condo floggers are suing him for his deposit plus the difference between what he agreed to pay and what the condo is now worth, or $105,000. Even if Danny wins the case, litigation will cost at least twenty large, which means he ends up with no condo and no deposit.

Sadly, though, he won’t win. It’s contract law. It’s simple. And it’s a lesson “a significant number” of other buyers in this oddly-named 369-unit building are also destined to learn.

This story made the local CTV news the other night in Calgary, just as the Toronto CTV station was reporting people had camped out for as long as two weeks to buy into a new condo/townhouse development in atmospheric Mississauga. Both of these events should be taken as harbingers of times to come. The delusion of crowds, the wisdom of donkeys etc.

Danny, of course, was a fool.

He bought a home worth the better part of a half million dollars when he didn’t have enough money to purchase a new minivan

He bought from plans in an unbuilt building in a rising market with no escape clause.

He probably didn’t consult with a lawyer before signing the contract. No counsellor worth spit, you see, would allow a forward contract of more than two years in length to be one-sided in favour of the seller.

He believed the experts and the house-humpers. He accepted the endless ascendency of real estate. He believed he, too, could have a dream home of granite and glass with 4.76% down. If this were not Canada, not gleaming Calgary with $140 oil, then could such things be possible?

Well, Danny Disaster, bend over. The world’s about to have its way with you. In this instance, the developer is not to blame. The building was financed and built on the strength of the 369 fools of who signed contracts. Even the mortgage insurance company is blameless. How can you expect it to finance a negative equity mortgage?

No sympathy here, dude. Just empathy.

You’re a poster boy for what-was-I-thinking? And a 3:26 TV clip.

Some weeks ago I told you that I donned my squirrel hat and best fluorescent hunting vest and pointed the camo Hummer towards the Big Smoke.

There, ensconced in the granite and floral luxury of an uptown private club where people speak in iambic pentameter, I participated in a real estate roundtable sponsored by Post City Magazines. The topic (natch): Is there a housing bubble.

As I previously reported, of the eight participants, only one answered that question in the affirmative, And he had the faint whiff of rodent about him.

In any case, the piece has now been printed. Here ya go. (BTW, you will notice my absence – not silence – at the end. Had to leave early to feed the herd.)

But it’s often worth having a second set of eyes look at something. Especially experienced ones. So here is the scoop on Canada’s housing market, from some USA analysts:

• For the first time ever, house prices in Canada are double those in America.

• The average Canadian house is now overvalued by $71,000.

• Canadians are paying an average of 27% more for a home than it’s worth.

• Once the bubble bursts, prices will not recover until 2016.

This comes from Freddy Hutter, of the analytical chart-based web site TrendLines, who writes me: “Hi Garth. I  understand that u have been having problems with officaldom taking heed of your housing bubble warnings for almost four years.  I know what it feels like.  I was a voice in the wilderness in 1989!”

The fuzzy but informative graph above gives Hutter’s  vision of the US and Canadian markets, showing the while houses here are $70,000 too frothy, in the States they are now $15,000 too cheap. It certainly supports the argument made here recently for Sell Canada, Buy USA if you are into cross-border real estate arbitrage.

Hutter also echoes what we’ve been saying about CMHC, the government agency that by insuring loans makes our lenders reckless. Average downpayments shouldn’t be 5%, we’re told, but rather 10%, “until the downside risk dissipates.”

“This recommended action may be difficult in an environment where economists for four of Canada’s largest banks have been unequivocal in recent weeks that “there is no real estate bubble in Canada”.  We heard their same rationalizations in 1989 & from their counterparts south of the 49th in 2005!  Both events posed an assault on the Disposable Income of consumers, and wealth effect ramifications resulted in imminent Recessions within twenty-four months.  As elaborated in our Canadian Recession Meter, failure by the Bank of Canada & CMHC to address a winding down of the Housing Bubble could easily turn the expected 2012 economic downturn into a full fledged Recession.”

By the way, the average US home prices has dropped by 22% from its bubble peak. Hutter says we are 27% too expensive.

If you are unaware of what happened in Miami or Vegas, Phoenix or SoCal, now’s the time to find out. Especially if you live in Vancouver or Kelowna, Calgary or Toronto.

Oh wait, I forgot. It’s different here.

And here’s proof: Watch this.