On the job, he’s a hero. Knocking down flames. Ripping into wrecked cars. Pumping life back into limp forms. But without a helmet or a fireman’s aura, he’s no action figure for his family.
Sammy lives in a major Alberta capital city that begins with E, has a $450,000 house with a $325,000 mortgage, three daughters, a quad, a stay-at-home wife, no savings, a sled, no TFSA, no RRSP, no educational savings plan, a boat and, at 46, plans to retire in nine years.
“Got it made,” he told me. “Don’t need to save. Have a pension.”
Indeed he does. It will pay $3,250 a month at age 55 – at which time he’ll have two daughters in university and a mortgage of about $300,000. In other words, he’s cooked. Assuming mortgage rates are normalized by 2020, his monthly should be $2,300. With insurance and property tax, about $2,800 – or more than his entire after-tax pension payment. As for food, gas, clothing, cable and his kids’ tuition, there’s always a few shifts at the the Wal-Mart on Mayfield NW.
But that’s not the real problem. It’s Sammy’s other houses – all three of them. Brand new, bought in the burbs from a builder for $325,000 each two years ago, now worth $285,000 on a good day. Total down payment for all three: $48,750. Total mortgage debt: $926,250. Total annual rent: $59,400. Total carrying costs: $52,200. Total equity: zero. In fact, the smoke eater’s in negative equity by $71,000 and with any vacancy or mortgage rate increase will also be in negative cash flow. Un. Mitigated. Disaster.
So, I asked, why the hell did you do it?
The answer was what you’d expect: (a) Real estate’s safe. (b) All the guys were buying. (c) The bank gave us the money.
So here’s the question: How does society keep financial numbnuts like Sammy from destroying themselves? Are we not on the same path of subprimordial mortgage excess that helped hobble the US middle class?
Of course we are.
And whatever arguments the real estate pumpers and Garth-baiters on this site throw up, there is one overwhelming reason why residential real estate as an asset class is so fried. It’s debt. And the ultimate blame for that (beyond the greed of the banks and the horny hormonal S&G lust of the masses) rests at the little Size 8 brogues worn by the one they call F.
Were it not for this guy, the 35-year-long mortgage would not exist and, quite possibly, down payments would be a more sensible 10%. In other words, if Sammy had to shell out almost a hundred grand for those houses, and be unable to rent them for enough to cover costs – even at generationally low loan rates – he probably would have an RESP for his daughters today.
Of course, I still recall the day when – as an MP on the House of Commons Finance Committee – I was the only one in the room who choked at F’s demand that we rubberstamp new rules allowing 40-year amortizations and 0% down payments. My little hissy fit was enough to cause Parliamentary hearings into the possible ramifications of bringing a US-style credit orgy to Canada, but it wasn’t enough to stop it. Those theatrics were sufficient, of course, to help get my sorry ass booted out of Stephen Harper’s caucus.
As you know, the 0/40 madness was hastily retracted within two years, but not before the foundation for a housing spiral had been built. Even so, replacing it with 5/35 financing was no real improvement, as today we witness young couples mobbing builders’ sales trailers to buy palaces with pennies, or watch as unsuspecting borrowers take an amortization that will mushroom their interest are perpetuate their family debt.
I mean, look at this. Even the bankers are recoiling at the size, scope and threat of the current debt Goliath.
TD CEO Ed Clark simply says current lending practices are “not a good thing” while his counterpart at BeeMo, Bill Downe, says tighter lending rules should be in the next federal budget. Adds Clark: “These are exactly the things that government should be doing.” Both are making the case for a return to the 25-year amortization.
As they should.
After all, it’s in the naked interests of bank shareholders to stymie a HouseAgeddon in Canada. We’ve all seen what a debt-induced real estate meltdown can do to the middle class to the south of us, destroying family equity, kneecapping consumer spending, creating structural unemployment and taking the financial system to the brink of failure. Until the feds address this, along with widespread zero-down housebuying, liar loans and cash-back bribes, we’re headed for the same rabbit hole that swallowed America.
I know F worships unfettered capitalism, manifest destiny and social Darwinism.
But there’s a greater good. And heroes to rescue.