Entries from February 2011 ↓

Careful what you wish for

First, the people whose email I quoted yesterday – you know, the ones who could pay cash for a $2 million fixer-upper in Vancouver but have wimped out – would like to respond. They claimed to have made a 45% gain on real estate in a couple of years, which some bloggers thought was a dog that didn’t hunt.

“The email was real,” sez they.  “Property bought for $885k and sold for $1.3m.  It is a unique property.  You can covert the existing structure into three units and build three additional units on the property.  Therefore, it is a development play and not a SFH (although it could be). Generally, children do not ask for advice. We sought advice in an attempt to make a reasoned and informed decision!”

While we’re at it, they also say this:

“The benchmark price for a detached home in Richmond BC went from $884k in Oct 2010 to $1,037k in January 2011.  Something is driving that market … and it is probably not horny RE virgins. Would a bank really lend someone a million $ with only 5% down?  At some point don’t you have to ask who the hell is buying all of the million $ plus homes?  You know how much the average family makes in Vancouver. You know the average cost of homes in Vancouver.  The former can’t support the later.  It makes no sense to me. Who the heck has the facts?  It makes even less sense to me that the majority of the sales are very high leverage transactions. Forget the banks for a moment, who on earth would take on a million dollar mortgage and sleep well at night?  I would suggest you would need to be fairly well off to do that or f*&^%ing stupid.  Have some fun – go to MLS and do a search in the entire GTA for detached homes over $2m – the number is 286.  In Greater Vancouver, that figure is 433 – over a much smaller land area.
THIS WILL NOT END WELL ….”

You bet. That’s exactly what I have tattooed on my stone-hard but surprisingly pliant and sensual butt. It’s a poignant reminder.

Now, let’s clear up something else. Interest rates. Tuesday morning the Bank of Canada does nothing. April 12th will likely be another story. So will May 31st and July 19th. In fact, by August it’s possible we’ll have had three hikes, with the prime at least 3.75% – or a fat 25% higher than now.

Some people doubt this, saying the central bank can’t risk the dollar rising or cutting the housing market off at the knees. But neither matter. The loonie’s damage to exporters, manufacturers and tourism has been done. Oil has seen to that. Meanwhile Mark Carney, the guy with his finger on the rate trigger, is as aware as anyone real estate must stop being a casino. When people are paying $1,037,000 for a vacant lot beneath the flight path at YVR, and the average SFH in Toronto is $755,000, we’re all nicely screwed.

But inflation will take the official blame for rate roulette. Especially because of this week’s GDP numbers. With the economy growing at an annual rate of 3.3% (thanks mostly to crude), there’s no doubt Carney will be laying an egg for Easter. This means people coming up to a mortgage renewal might want to lock in. And it certainly means anyone in the middle of a house deal should take some time off. As I’ve said here for months now, things will look a lot a helluva lot different in July.

As I’ve also said, this will be the start of a long trip back to normalized interest rates. Before the world ended in the winter of 08-09 and we got emergency money, the average five-year mortgage over the previous twenty years was  8.2%. My first mortgage in the Seventies when I was a child was 12%. They even got to 20% a decade later, when five-year mortgages were temporarily suspended and everyone had to borrow short.

In other words, 3% money is an aberration. It’s about to end. And those who bought homes only because they could afford them with cheapo loans better have a grow op in the basement. Sadly, not enough of us are good with plants – an excellent reason why housing will be a crappy place to have the bulk of your net worth.

But don’t believe me just because I’m hot. Here’s Derek Dunfield, a professor from MIT who also thinks rising rates will take their toll. He said this days ago:

“The historically high levels of household debt present two possible problems for the Canadian economy. One scenario is that interest rates rise, house prices drop, and more people begin defaulting on their credit card debt and mortgage obligations.”

Hmm. Bummer.

“An equally worrying – and perhaps more likely scenario,” says Dunfield, “is that interest rates go up a little, and more of people’s disposable income goes to repaying their debt, leading to a significant reduction in consumer spending. Since personal spending on consumer goods and services accounts for 58 per cent of the Canadian gross domestic product, this decrease would provoke a ‘made in Canada’ recession.”

How likely is this? Well, household debt now equals $1.5 trillion, which is three times the national debt.  Families owe (on average) $1.50 for each dollar earned. The average downpayment on a house has shrunk to a pathetic 7%. Nine out of ten new mortgages taken last year were for 35 years, because people couldn’t afford any other. And housing prices keep rising while savings vanish.

I hear 40% of all US realtors have vanished, kinda like barn owls or spotted turtles. American families have lost $5 trillion in wealth, since they once thought real estate would always go up.

Those around you may claim they never saw this coming. You have no excuse.

Suckas

At 9 am on Tuesday, after reporters have been locked in a windowless basement room for a spell, the Bank of Canada will release its latest interest rate announcement. It will be a bust.

Despite surging oil, swelling food costs, higher house prices and a jump in the core inflation rate, the central bank will hold firm on rates. But only for six weeks.

In fact, there are two shoes about to drop this spring for the real estate market. On March 18th the 35-year mortgage dies a well-deserved death, murdered by F. And on April 12th, interest rates begin a long and inexorable climb higher, sweeping mortgage costs along with them. The initial increase may be modest, just a quarter point, but there will likely be four or five more added by December, bringing the prime rate to more than 4%, and dragging VRMs with it.

As I’ve explained, the 35-year mortgage croak will be significant. Already we’ve seen suicidal young virgins – at the urging of ethically-challenged realtors – loading up on debt and attacking the market “before they are priced out forever.” Tricked into believing houses will be harder to buy after the rule change, they’re directly responsible for a surge in February sales. Sadly, of course, houses will actually be cheaper after the orgy is over. All that will be left are empty KY Jelly tubes and endless debt.

Hard to imagine how the mortgage rule change could have been handled more badly. The sixty-day lead time begat a flood of misleading propaganda aimed at convincing the most vulnerable and inexperienced of buyers they had to act immediately. It worked. Demand was brought forward. Prices rose. And the ensuing decline will be worse.

As for rates, well, don’t doubt Mark Carney. The central banker’s been itching for months to pull the trigger. He knows cheap credit – as exemplified by the 35-year feeding frenzy – will have disastrous long-term consequences. As family debt increases, future spending erodes. In an economy when 60% of everything depends on consumerism, you can hardly prosper when people are choking on loan payments. The only prudent action is to return rates to normal levels – which would put five-year mortgages back around 7%. Within 24 months, we’ll be there. Just in time for the 5/35 crowd who bought in the last few years to face renewal.

And guess what that means? And did I mention all those geriatric hippies who’ll be hitting 65 at the same time, with big houses and no dough? Such fun.

Meanwhile, let’s talk Yellow Peril.

As this blog bears witness, many Canadians now blame unaffordable home prices on immigrant or offshore purchasers from Mainland China. Anecdotal evidence supports that. Areas of the GTA, like Richmond Hill, Markham and Unionville, are peppered with Asian homeowners. In the Lower Mainland, Richmond is turning into a Chinese-dominated community while upscale neighbourhoods such as Vancouver’s west side are the backdrops for Asian-only bidding wars.

This Asian Invasion has been wildly amplified by the media, prompted by real estate promoters who’ve found it handy to have a Chinese monster on their marketing team. In Vancouver that includes The Key, which sponsored that infamous “Chinese buyers” helicopter ride over a terrified White Rock – all to make pre-sales in a condo building. It  came to a head on Saturday when a scary story in the Vancouver Sun quoted Key honcho Cam Good saying: “There are literally planeloads of Chinese coming here to buy real estate.” Good then went on to claim he’s sold more than 500 homes to mainland Chinese investors and immigrants in the last few weeks in Vancouver and Toronto.

That would be quite a feat, of course, since it’d amount to about 8% of all the houses sold in those two cities. Even more impressive, considering there are almost 30,000 realtors in Vancouver and the GTA.

So, Cam sold 500. The others averaged 0.2 each. I think somebody is full of 拉屎.

If the two most active Canadian real estate markets are being held aloft by those pesky, filthy-rich, neighbourhood-busting, price-exploding, airplane-stuffing Mainland Chinese, then you’d think there would be some empirical evidence of it. Like, you know, facts.

Instead we get promotional crap like this, duly parroted by our MSM repeaters: “We predict that this will be a dominant trend for a long time,” Scott Brown, senior vice president, Western Canada for Colliers International residential marketing, said in an interview. “Some of the most expensive real estate is only being marketed to Chinese buyers. And Vancouver and Toronto are very popular.”

That’s convincing.

But perhaps I’m just a gnarly old cynic who has seen too many people fall for the ‘buy now or buy never’ mantra. I’ve seen it with houses, Bre-X, dot-coms, cottages, sun belt and Nortel. Incredibly, it works every time. All it takes is a threat, some confused reporters, a hot marketing guy and people who’ll believe anything if they hear it enough times.

And here are two right now.

My wife and I each have professional degrees and have VERY good jobs.  We are conservative and big savers. We just sold a property for 45% more than we paid in 2008.

We could purchase a home in the $1m to $2m price range with cash.  We simply can’t fathom paying that for the properties that are listed in that range (except perhaps some in West Vancouver). We can’t bring ourselves to buy what appears to be grossly over priced real estate.  Our issue is that we need to live in Vancouver for work.

We are also concerned that the wave of investment from mainland China will not abate and we will eventually be completely priced out of the market.  One could argue that logic would dictate otherwise since many of these properties are sitting vacant (I understand that two thirds of the Shaw Tower is empty).

I can’t believe I am about to ask the following question but is it possible that Vancouver is in fact different and will be the exception to the rule? Have you carefully analyzed the Vancouver real estate market? It is perhaps easy to blog that the market is unsustainable in the context of Canada (cost of homes relative to average income) but can foreign investment skew the market significantly and permanently?

See what I mean. Yellow Peril. This will not end well.

Priced to sell - $2,199,000

“Rare opportunity to own a half block from Locarno Beach on freehold 60 by 95 lot. Build your dream home on one of Vancouver’s most prestigious streets.” Listing here.