Entries from March 2011 ↓

Is this blog too, you know, sexy? Does it make you uncomfortable with its arousing financial metaphors and suggestive fiscal foreplay? Do you finish key paragraphs and need to pant? Are you convinced after reading this that people can smell it on you? Do you minimize when your spouse walks in? Have your kids started turning tricks after glimpsing my photos?

Have you been drawn here again today, a vessel of heaving desires, yearning to be sated, but knowing only shame will come of it? Then join Julie.

She writes:

I have read a couple of your books and have great respect for your opinion.  My nephew is in his mid-twenties, recently married, and learning about the housing market.  I would like to send him your blog as an antidote to all the “Buy a house now!” propaganda directed at people in his situation.  However, I find myself reluctant to send him some of your blog articles which might be helpful.  I could send him Bad Advice (II) which shows him how a couple can lose big by buying a house. But he is gonna be weirded out by the guys in bathing suits.  I could send him Mea Culpa, but it has this rather intense phrase: “the hope is that young couples will deep throat enough debt to stimulate the economy”.  I do not want him to be offended by this phrase, or worse, write back and ask me what it means.  That movie is before his time.

I am concerned that using intense language will leave you preaching to the choir, and will turn off people who need to  hear your message.  Could you perhaps provide two versions of your blog – one written to express yourself freely and one written to a PG audience?

Dear dogs, I need an answer on this. Do I scare your kids? Even the mid-twenties, sensitive, momsy kind? More importantly, is my message lost within the taut ripples of my massive masculinity? How shall I answer Julie?

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Days ago, as mentioned, I was asked to be part of a panel on the state of real estate for an upscale Toronto magazine. Below is an abbreviated and lightly edited version of that discussion. You will find the full article here.

At our last roundtable, our experts were, again, optimistic about the future of Toronto real estate. Top carriage trade realtor Elise Kalles suggested that the perceived market slowdown was a “seasonal” issue, not an economic one. Sherry Cooper, executive vice-president and chief economist at BMO Financial Group, agreed. Garth Turner, our panel’s outspoken business and real estate commentator (and former MP), had a doomier-and-gloomier outlook: “The economy is not eternal,” he proclaimed, “it seems clear we’re in a period of deflationary angst.”

Sherry Cooper: The year 2010 was a great year for Toronto real estate, and despite the concern about over-leveraged households, sales held up while price increases were moderated. Over time, home values increase with incomes. Indeed, average resale prices and personal incomes both rose 5.7 per cent per annum in Canada in the past 30 years. However, prices more than doubled (113 per cent) in the decade to late 2007 and grew twice as fast as incomes from 2002 to 2007 — largely due to the dramatic decline in mortgage interest rates and the easing in credit conditions by the Canada Mortgage and Housing Corporation (CMHC). Even after sliding 13 per cent through the recession, prices quickly rebounded and are now 10 per cent above their 2007 peak for Canada as a whole. Looking ahead, incomes should grow faster than prices in the next one and a half years — the time frame in which interest rates are expected to normalize — allowing valuations to improve. If incomes climb eight per cent and prices stabilize, as I expect, the current overvaluation would fall to six per cent, hardly the stuff of corrections.

Harry Stinson: Frankly, I am becoming uncomfortable with Toronto prices. Typical “new construction” prices in Toronto are moving past the point of sensibility, in terms of positive cash flow or resale upside.  More and more I am hearing people tell me about their “great investment”: a one- bedroom for only $500,000, in a new building the name of which temporarily escapes them at this moment — but it’s definitely in a “hot area.” With apologies to President’s Choice, the term that comes to mind is “memories of ’89,” when condos eased into becoming a financial commodity rather than accommodation. When the majority of suites in most new projects are pre-sold to investors being wined and dined at lavish “VIP” receptions, my spidey sense starts tingling. I don’t anticipate an across-the-board price correction, nor a wave of U.S.-style foreclosures. But the premium price bandwagon is overcrowded, and it would not surprise me if a number of projects were redesigned, repackaged or even deferred.

Garth Turner: It is comforting to hear Harry Stinson has joined the ranks of the realistic. Those who cry that Canada cannot and will not have a “U.S.-style” housing correction are wasting their breath. A Canadian-style correction, given the tapped-out status of most families, is enough to worry about. A correction of, say, 15 per cent followed by a slow multi-year melt will be enough to make newbie, equity-less buyers or boomers with the bulk of their net worth in a house, regret that they were ever lulled into a complacent stupor by the real estate and banking cartel.

Harry Stinson: I am not booking passage on “Garth’s ark” quite yet, but I’m certainly no longer of the “Don’t worry, be happy” state of mind. And even if there is a correction, I don’t foresee a wave of Canadian defaults. When prices dropped seriously in the early 1990s, most [Canadian] owners simply held on.

Garth Turner: True enough, Harry. But the problem is not defaults, it’s negative equity. That dissipates the wealth effect, which rising house values give and nukes consumer spending. We do not need a “U.S.-style” housing collapse here to reap similar results. When most middle-class people have most of their net worth in one thing, time to split. Still some room on the ark, pal. The lemmings left for an open house.

Harry Stinson: Well, I will put my first-class ark ticket on my credit card.

Garth Turner: Excellent. I have an Ark Miles program.

Barry Cohen: Residential real estate in the Greater Toronto Area has posted one of the healthiest decades on record, with prices steadily increasing since 2000. Housing values have risen 77 per cent, up from $243,255 in 2000 to $431,463 in 2010. Given the current trajectory, since the levelling of 1996, real estate only has one place to go … UP. Unlike other Canadian markets that have seen serious double-digit increases in average price, housing in the GTA has appreciated at a stable, healthy pace, a five and six per cent yearly rate. Given the many failed predictions over the past 15 years, why correct now? They have hardly got it right thus far. While the housing units of sales may appear to have softened somewhat from 2010 levels, due to the limited supply, the market is expected to remain hearty, with the average price forecast to climb a modest but healthy and sustainable two to four per cent by year-end. What’s wrong with that?

Garth Turner: This is the kind of statement that so misleads inexperienced, impressionable, house-horny young buyers. I almost fear it is intended to do so. But I’m worried even more that you believe it. Real estate is an asset class like all others. It does not go up forever. It is heavily influenced by economic factors as well as hormones. And those who say buy now or buy never are almost always the sellers. I would counsel first-time buyers to put their desires back in their pants and wait for an inevitable price correction. Buying today with five per cent down is to condemn them to being underwater with the first move downwards. Barry’s good at pumping sunshine up rear ends, but not so much at being responsible.

Brad Lamb: Two thousand and ten was not the best year in total sales in the history of Toronto. It was actually the third. It was, however, a very good year. It also appears that 2011 will be a strong year as well. I expect that 80,000 resales will take place this year, making 2011 a year not unlike 2003 in volume.  We do have a problem in Toronto. Prices are rising too fast. This is an issue for basic affordability. It is also a problem for condominium investors looking to carry an investment with a 25 per cent down payment. They can’t. If these five to 10 per cent annual increases continue, we will have a correction regardless of the strength of the economy. Essentially, what will happen is new development sites will have to shut down due to poor sales. Garth’s scenario is unlikely. Most of the risky mortgages were done two years ago, and by and large, these buyers now have excellent levels of equity. The U.S. meltdown was initiated through wildly inappropriate lending practices due to a unique banking and mortgage system in the U.S. We do not practice anything remotely like the U.S. model.

Garth Turner: This is a handy piece of Canadian myth, which also goes to the nature of the question regarding condos. Those property virgins enticed into buying with 5/35 financing two years ago only have equity now because of the illusory nature of market valuations. They have not paid a thousand bucks off their principals nor dumped in more cash. They are repeating the faux market mistakes of our American friends, thinking that unrealized capital gains are in fact real money. They’re not. And they will vanish in the slightest of market corrections. This is the danger that it seems nobody on this panel is willing to acknowledge (except Harry, who knows better), given the ritualistic chanting of “real estate always goes up” I’m hearing. It’s hard having a cogent argument with cheerleaders. Too damn flirty. We have allowed people without money to buy houses. We’ve lowered lending standards. We’ve introduced teaser interest rates. We have zero-down financing and liar loans. And we believe a market correction is impossible. So how are we not “anything remotely like the U.S. model”? Toronto condos embody this danger. The worst real estate investment in the country. Well, east of Richmond [B.C.].

I don’t know Kelley Keehn, but I guess she’s on the move. TV show on W. Writes financial books for ladies and kids. Auditioned for HGTV. Gives talks. You know the drill. An achiever with a sultry self-image.

A few blog dogs mentioned a column in the Globe yesterday in which a husband and wife from troubled Calgary moaned at each other over owning real estate. They’d sold a townhouse for $150,000 to move closer to a school for their problem kid. She wanted to keep renting and not spend their nestegg on a house. He wanted to be Cowboy Big and buy s $400,000 place cuz real estate’s going to the moon.

To show how sophisticated they are, they asked for financial advice from a newspaper. And that’s where Kelley came in, as the ‘financial expert.’ Did I mention she’s smokin’? In a fiscal way?

This couple is aged 50. Mom’s an unemployed exec. Hubs is a 70K-a-year apprenticing plumber. Total assets amount to $200,000 in GICs and $40,000 in an RRSP. He has no pension. She has a tiny one payable in a decade. And they have two kids about to start university, but no RESP.

And what’s the advice? “You should get back into the market,” says expert Kelley. But buy a cheap house, like for $300,000. Use a hundred grand of your savings as a down.

Now, this might be the right thing to say to save a marriage and land a fat gig on House Hunters, but let’s think for a minute.  These people have scant net worth for a couple their age. They’ve saved nothing to help their kids through school – and university now can cost $100,000 for four years. They’ve virtually no pension income to look forward to. She’s been out of work for five years. They make 40% less than the average Calgary family. And they should buy a house?

Let’s figure it out.

The lady biz whiz’s logic is this couple can own a home for about what they pay in rent now ($1,600 monthly), so they should (no actual financial reason is given). We’ll talk about the merits of buying a house in Cowtown (or anywhere) in a minute.

Hubs says he’s tired of “throwing money away” on rent. Apparently he’d rather throw it away on other stuff. In fact, buying a house – even for $300,000 – could end up costing these guys a bundle simply in cash flow, let alone the potential of a capital loss.

For example, buying at three hundred with $100,000 down will mean about $6,000 in closing costs and a $206,000 mortgage. At 4.35% for three years (going VRM with rates about to rise is a gamble) and a 25-year am, the monthly is $1,123. Add in insurance, property tax and an annual pittance for repairs, and that rises to $1,523 – virtually identical to the $1,600 in rent.

So, the HGTV expert would tell you, of course it makes sense to own! And build equity instead of paying someone’s mortgage!

Actually, no.

At $1,523 a month, this couple will pay $54,828 in occupancy costs over three years. Of that, $14,400 goes for insurance, maintenance and property taxes they would not have faced as renters. And another $25,741 is interest to the bank. That totals $40,141 in cash flow sucked off for no capital benefit. So over three years, they spend $54,828 and add only $14,687 to their net worth in the form of equity (assuming the house maintains its value, and excluding selling costs, which would reduce this to zero).

Had they stayed renters, the $100,000 downpayment, if invested in a balanced portfolio of 40% fixed income and 60% growth (no individual stocks, no equity mutual funds) yielding 8% would throw off $25,971 in growth. Meanwhile they’d have the same occupancy costs for shelter, but end up with $11,000 more in net worth.

Therefore, renting beats owning – at least if the goal is building financial wealth. And as renters, this couple would have liquid assets of $265,000 after three years, while as owners that liquidity would be just $140,000. In this crazy world, nothing trumps being liquid. Finally, as I mentioned above, if they sold the house after three years and paid 5% to do so, assuming no loss in value, the whole exercise would result in a net loss.

So tell us again, expert Kelley, why is this a genius move? Especially for a couple that puts house horniness before educating their kids, or their own retirement? Grasshopper? Ant?

Of course, the house could go up in value. But I don’t know why. Or it could go down. Which is a helluva lot more likely.

By the way, did you catch the latest news from USA land? New home sales just plunged 17% – the worst number in 50 years. The median price of a new home fell another 14%, which means it’s the same price as in December, 2003.

Japan. Libya. Rates. Debt. Inflation. Delusion. It’s a world of risk.

Unless you’re ambitious hot.