Entries from February 2011 ↓

Trevor and a buddy plan to buy a house in an Ontario university town and get rich. Trev’s in school. Bud works. They figure on spending $250,000 with 5% down and a 35-year mortgage before they vanish in three weeks.

“We know Canadian housing is a ticking time bomb,” says Trev, “but we don’t care.” In fact they have it all figured out…

“Locking in at historic low rates is everything.  As inflation heats up, our debt is serviced with cheaper money.  As long as the gov throws interest free loans at students we will always have 3 other babes to share the house with us.  If the value of the house drops 10%, who cares?  Our mortgage will be a whopping 1k a month and we’ll be generating over 2k.  Worst case scenario we are on the hook for 500 each if we can’t rent it out; exactly what we would be paying otherwise in rent.  Rinse and repeat as long as politicians are dumb enough to keep underwriting our loans.

“The boys are gunna get rich!”

Well, that sounds simple. Indeed, mortgage payments on $245,000 (the purchase price less 5% plus CMHC insurance) would be about $1,000 a month at 3% with a 35-year amortization. Of course with insurance and property tax, plus utilities and a backhoe to clean the living areas up every few months, it would pump that higher.

But, you know, the young hormones have a point. And it goes to the heart of why real estate is a doomed asset class.

Here you’ve got two guys, only one employed, with about $12,000 between them. With that amount of money – just a bit more than David Beckham paid for a hooker (but a real good one) – they can secure traditional bank financing and buy a $250,000 property. With ridiculous mortgage rates and amortizations lasting half a lifetime, they can carry the place for less than they’d pay in rent. How can they lose?

Well easy, actually. But that’s not my point. These two mini-Trumps would have $245,000 in debt, and after making five years of payments ($56,572, plus other costs), they would still owe about $225,000. In other words, interest payments alone would be $35,220 – the money it costs to rent a pile of money.

That means if real estate tanks 20% and the house is valued at $200,000, the geniuses have to keep it and pay a mortgage worth more than the property, or sell it and come up with a cheque on closing day for $35,000. So after five years they would have received $120,000 in income, and spent $104,072, or about $118,000 with property taxes and insurance, for a profit of $1,000 each.

Or, the market could lose 25%. Or they could run out of tenants. Or that 3% VRM could swell to 5%. Or the roof could quit.

The point is that most first-time homebuyers – who form the fuel for the real estate inferno – think about carrying costs, not consequences. Debt is an unrepayable abstraction. The point is never to actually stop owing money, just to start owning stuff.

It’s an identical attitude to that which propelled the US housing market to bubblicious heights, as people ignored the fact teaser rates would inevitably increase, home values would correct or cheap money masked the size of the obligation they were swallowing. In Canada this time around, rock-bottom loan costs, reckless lenders, irresponsible down payment requirements and too-long amortizations have done the job of American subprimes.

So, guys like Trev figure a grand a month gets him a house. And when was the last time in his short, untroubled life that real estate ever went down?

Lately I’ve shared with you the efforts of realtors and mortgage brokers to egg on young innocents like this. As the March 18th deadline looms for the end of 35-year loans (shortened to a still-too-long thirty years), the Trevors of this world are being told they have to borrow and spend now. The flyer below, sent out as a massive email blast, is a good example. Buy immediately, it says, and “save up to $200 a month in mortgage payments,” avoid finding “an additional $35,000” and “be able to afford $28,000-$63,000 more home.”

Of course, it’s a trap. Once the new rules kick in, the fact fewer virgins will be able to buy means reduced demand, lower prices and less debt. By accelerating a buying decision, these kids will pay more, owe more and own less once sales tumble. It’s a cruel joke everyone in the real estate industry knows, and yet nobody (to my knowledge) has had the integrity to mouth.

Like I said. Babe magnet Trev is right.

“We know Canadian housing is a ticking time bomb, but we don’t care.”

Because it’s wicked hard to have a real estate blog and not make fun of Vancouver, I’ll continue. The entire Lower Mainland is hilarious. But first a word about godless Toronto.

The property pumpers at places like The Toronto Star may continue to blow sunshine up every public orifice they can find, but this market’s turning into a sick puppy. Unless properties are priced below expectations, they sit. Over 17,000 new condo units will flood in during 2011, burying demand. And once March 18th is in the rear view mirror, the stage is set for price declines – especially when higher interest rates kick in (the next announcement is at 9 am on Tuesday March 1st).

For the eighth consecutive month, year-over-year sales numbers are negative. This is meaningful. Since June of 2010 fewer deals have taken place than in the same month a year earlier. For the first half of February, it’s a decline of 13%.

But while sales continue to go down, prices continue to go up – another classic indication of a market in distress. The average GTA price has swollen 5% in a year to $451,257. That’s 4.7 times the average family income, which puts it just above the ratio at which the US housing market collapsed. But this is misleading.  The average SFH in 416 now sells for $751,366, or almost 8 times average income, a number which has risen 9% in the past twelve months, or roughly four times the rate of inflation.

And the average income gain in the country’s largest city in the past year? Zero. Meanwhile debt has romped higher and now sits at $1.50 for every dollar a family earns. So it’s not too hard to see where this 9% hike in the value of a single-family home came from – money borrowed at historically low rates.

So, this is why we’re screwed. At least those of us with scant equity and fat mortgages, or dumb enough to keep the bulk of our net worth in a single assets – a house. Over the next 90 days we know (a) the 35-year mortgage will croak, (b) first-time buyers will give up and go back to coping with puberty, (c) the Bank of Canada will do its thing, hiking VRMs, (d) the bond market will goose 5-year mortgages and (e) rising food and gas prices will suck. So how can we be headed into anything other than a buyer’s market?

And it will be a long one. Correction first, then a melt. By this time next year the only things I’ll have to write about — squirrel brownies and yummy underwear.

Meanwhile in Burnaby, home of the faux condo lineup, idiot reporters and worse weather than Gander, we have more eyewitness reports on that scandalous marketing fiasco. As you know, somebody advertised on Craigslist for rent-a-buyers to queue up outside the sales centre for ‘The Sovereign’, a 40-something storey tower in the centre of this world-class, cosmo city.

If you build it, they will come. If you pay them, they’ll come sooner. And enough came that Global TV rushed a crack news team down to film the fakers, then rushed to air with a story about the return of condomania. It was pathos. But the funny kind.

Some additional things you might want to know if tomorrow morning you wake up with an uncontrollable urge to live beside a Sav-On store and payday loan shop, with a  fabulous west coast a view of the Staples parking lot across the street:

You can buy a unit in The Sovereign for only $260,000, but it contains just 388 square feet. My Harley lives in more room.

So maybe a two-bedroom ‘estate home’ would suit you better. Here 1,000 square feet starts at $700,000, and lucky buyers can get “upgrades” such as laminate wood flooring (I think you can buy that at Staples) and a real electric fireplace. Can you imagine how any babe would put out after lounging before a heatless appliance on a quarter inch of plastic-over-concrete? Where do I, pant, sign?

By the way, balconies are included in the square footage totals. Extra parking spaces can be had for $20,000. Completion is in 2014, or maybe never. Buyers must put down 20%, a full three years before buying – the lost use of which will be used to subsidize the mortgage rate for the first 80 lucky victims.

Ah yes, and word has it the people who loaned their bodies for marketing, and laughed as they gave interviews to Global, were paid $1,000 for three days.

Did I mention we were screwed?