While many people think he’s a towering dork, I admit to a fondness for Brad Lamb. After all, it takes a certain cowboy metrosexualness to shave your head, dress in black, drive a 21-foot-long Rolls, worship money and call reporters jerks.
Lamb, Toronto’s self-anointed Condo King, has also shown a flare for turning former ghettos into cool hoods, launching new projects as if they were space missions and making people within 200 feet feel inadequate. And he brags. Bigtime. “I have helped make people hundreds of people millionaires many times over,” he says. “Many of these people came to me with $20,000 of money borrowed from friends and family. Their adherence to my philosophy made them rich.”
Isn’t that so 2008?
Actually, Lamb’s tone has recently taken on a desperate tinge as the Toronto real estate market continues its melt. This week, for example, came news that new home sales in the GTA crashed by 45% last month from year-ago levels, while condo sales have just been reduced by a third. If it continues – and why not? – then this is a developer’s worst nightmare.
Shoots back the King: “Does anyone really believe Toronto’s real estate market is due for a large correction? This is the most patently absurd theory I’ve heard in 10 years. Those of you sitting on the sidelines are going to miss the boat again, as you have for the past 19 years. I suggest you wait until you get a clear sign that you should buy, however, you may be interrupted in the meantime by death.”
Yeah, I know. Towering dork talk. But I think the King has no clothes. This market is sick.
In addition to cratering new home sales, deals for existing houses are also tanking. In the first two weeks of this month they were down 22% from last autumn, and that followed a 34% crash in July. In fact, we are heading into what will be the fourth consecutive month of bummer sales in the country’s largest market.
And this is but one indicator of rot in the Kingdom of Lamb. New mortgage originations have taken a dive, meaning there’s less money in the deal pipeline. Builders have scaled back on new projects, which should tell you something. Mortgage lending standards are tighter while recent interest rate jumps have hiked variable rate mortgages – the sustaining nectar of first-time buyers. Unemployment in Toronto is 9.1%, a full point above the national average and close to the US level. Family debt’s a mess and wage gains are non-existent.
In short, Toronto is no place to start with a borrowed $20,000 and dreams of being a real estate millionaire. Instead, the condo towers are fraught with danger.
Now some point to the fact the average home price in the GTA, at $412,000, is still ahead of last year by 5% as proof all this doomer talk is groundless. Says the Toronto Real Estate Board: “Under current lending standards, the average selling price is affordable for a household earning the average income in the GTA. The annual price growth we have been experiencing has been justified by this positive affordability picture.”
But to put that into context, it now takes 5.5 times the average income to afford the average home. Compare this to the 4.6 times income level at which the US market collapsed in 2006. Also take into consideration that mortgages are still dirt cheap by any comparison, and destined to increase over the next few years as the Bank of Canada tries desperately to curtail borrowing. Also missing from TREB’s justification is the reality of existing debt – now that Canadians owe $1.45 for ever buck earned – accumulated by listening to people who’ve told them debt is good. Greed is better. Give me twenty grand, and I’ll reward you with a million…
(By the way, I’ll remind you of the mid-town house I bought in 1998 for a little over $500,000. I sold it a couple of years later for a profit of a hundred thousand. Recently it changed hands for $1.2 million – the same house, unchanged, no garage, no privacy, on a 30-foot lot, now missing the majestic tree in front since the basement wall caved in and had to be replaced.)
The last time real estate crashed in the GTA followed a mildly delusional bubble in 1989. It took 14 years for the average price to recover, during which any investor who bought at the top was too embarrassed to admit it. The losses on condos were catastrophic. Investors could not rent them to cover taxes and monthly fees, even when there was no mortgage to pay.
Today there are 19,000 new condo units coming to market in 2010. The city’s economy is torpid. Small business and manufacturing is suffering, and meanwhile stubborn, cocksure vendors cling to bubble prices, just ensuring the trip down will be faster and harder.
There’s no doubt a correction is in its formative stages, gathering force and momentum. The real question is when it impacts prices, how deep the damage will be, and what happens in 2011 and beyond.
After all, early vultures could end up road kill. Nailed by a wild-eyed, naked bald guy driving a Rolls.
I will have more to say about this November 9th at my Toronto speech.
Morning light streamed into in my prairie hotel room and found me covered in a light dusting of potash and wheat chaff, wearing a hideous green-and-yellow hoodie and missing a kidney. Then I awoke. Thank God it was but a dream – about the Saskatoon Association of Realtors, and how they deal with dudes from away who mess with the locals’ heads.
In fact, I returned to the Big Smoke from my recent jaunt with all my vital organs intact, and the sense that growing numbers of people are waking to reality. Not just about real estate, but the inherently changed nature of this economy. Finally.
I mean, just days ago the US Fed came close to declaring deflation, admitting that a few trillion have not repaired the economy. Canadian provinces – like staggering Ontario – are mired in historic piles of debt. Taxes are going up (the HST will be nation-wide before long), and unemployment is stuck above 8% nationally and 9.1% in the country’s largest city.
This means we’re not going into a double dip recession, because we never got out of the first one. It also means most Canadian families will soon be caught in a financial vice – deflating asset values on one hand as houses erode, and inflating prices on the other as taxes, energy, food and interest escalate. Oh yeah, and their wages have flatlined.
This sucks. So, what to do about it? Let’s go back to BC for a little inspiration.
Ten months ago I received this email, and posted it here:
I live in Delta, BC. with my girlfriend. Our house (purchased in 2000 for $283,000) is currently worth $620,000 (after $100,000 in renovations during the past three years and the real estate run-up). The mortgage currently sits at $180,000. I also have $50,000 sitting in my bank account ready to be invested.
I can either plunk that $50K into my mortgage, thus dropping the amount owed to $130,000. Or, I can take that $50K and put it into low-risk investments. Or, I can sell the house and move somewhere less pricey (further into the Fraser Valley, for example), pay the house fully out, and still have money to spare. I have no other debts, nor does my girlfriend, but we have just $40,000 in RRSPs and no other savings.
I know what’s going to happen in the next couple of years re: real estate, the economy, etc., and it’s the same scenario you envision. But the mortgage isn’t that big in the grand scheme of things, and we really do like this house. Seeing the mortgage we carry isn’t incapacitating, do you think we’d be foolish to just stay here?
Of course, I said he’d be dumb not to harvest the fat capital gain before the market turned. In fact, this was exactly my advice to a guy in Saskatoon this week who came up after my talk and said his $210,000 house (four years ago) was now worth $500,000. He’s hot to sell but his wife refuses to consider it for another five years, at which time she’ll retire and wants to move to Kelowna.
Dude, I said with uncharacteristic tenderness, are you wicked crazy? When else in your life are you gonna score a $300,000 tax-free-capital gain just for living someplace? That’s more money than your wife will earn in five years, and you risk missing selling at the top. Worse, I’m betting Saskatoon will take more of a hit than the Okanagan will, so if the goal is financial freedom, just be a decisive macho guy and sell it. She’ll eventually come round.
“It’s the house or my marriage,” he said, voice quivering. And I was reminded why I manage finances, not relationships.
Anyway, the Delta guy and his GF just wrote back. Here’s the update:
Well, we did it. After two years of looking at the numbers, watching a bubble form and now begin to deflate, my girlfriend and I have sold. We got a good price for it, though I know we just managed to catch the end of the “good” prices. So…once we pay off our existing mortgage, we will be $450,000 to the good. Not rich my any means, but not terrible, either. We are both, BTW, in our very early fifties. Now, I have another question for you and I hope you have the time to answer it. I feel it’s an important question, not just for me but for a whole bunch of people out there.
We need another place to live. The problem: To get into anything that isn’t either rundown or too small, we’re looking at $1600-$1900/month. That’s $20,000-plus over a year on rent, plus all utilities. Of course we’ll invest our money and cover some of it that way, but rents in this region are absurd.
Our other option: Buy a smaller, less opulent house out of town, where prices have already taken a small tumble and where they weren’t as insanely high to begin with. We would have less exposure to the real estate market than we had in the house we just sold, and we wouldn’t be crippled with mortgage payments. Of course, the value of whatever house we might buy would drop too, but at least we’d have much less money tied up in it and no mortgage.
Do you have a suggestion for us, and for other readers in similar situations? Thanks again for your blog.
This is simple. You have two viable options.
First, invest the $450K in a balanced portfolio with a great chance of earning 6-7% a year, yielding close to $30,000, or enough to cover $2,000 a month in rent, after tax. So, now you live for free and your portfolio stays intact.
(By the way, for that portfolio I’d suggest 40% fixed income, half in corporate and high-yield bonds, half in five or six bank and insurer preferreds, and 60% in growth assets, including sector ETFs, some REITs and trusts, and a smattering of hedged commodities and gold. If you don’t know how to do this, get a fee-based advisor.)
Second, if you do end up spending part of the nest egg on a home in a cheaper area, rent for at least a year until prices decline. Then pay cash, borrow back 50% of the equity through a HELOC, invest it as I have suggested above, make interest-only payments, and write 100% of them off your taxable income.
She will be so smitten she’ll propose.
See, I’m learning this sex stuff…
Hear Garth here:
Wolfville NS
Tuesday October 5, 7 pm, Ken-Wo Golf Club. Register here.
Lunenburg
Wednesday October 6, 7 pm, Fisheries Museum. Register here.
Halifax
Thursday October 7, 7 pm, Ashburn Golf Club. Register here.
Victoria BC
Wednesday October 13, 7 pm, Victoria Convention Centre. Register here.
Kelowna
Thursday October 14, 7 pm. Register here.
Surrey
Friday October 15, 7 pm. Register here.
