No investor would scoop a stock, bond, ETF or option if no money was to be made. But every second of the day, some juiced-up buyer closes a real estate deal based on emotion alone. So is a house an investment or a consumer good?
People buy real estate with their hearts and loins, of course, then try to justify it all as a sound financial move. That’s how they get into trouble. And trouble’s coming.
There’s no justifiable economic case to be made for buying a house at this time. The value of the asset will go down and the carrying costs will go up. That rules out a capital gain and promises you’ll have less cash flow. Renting a similar property can be done with far less dough. And investing your money in assets that actually pay you to own them, like a nice balanced portfolio giving 8% or so, means renting and investing actually makes you wealthier.
So buying is 100% emotional. It’s not an investment plan. Not a strategy for financial security. The costs of getting in and getting out are huge, and prices today are too high to reasonably expect any more appreciation. If you want a nice house and are willing to bleed money to get it, dig in. But if you’re sane enough to believe you should get something in return for investing $50,000 or $500,000, wait a while. It could take years before residential properties become cheap enough again to promise a capital gain.
Or you can start thinking about income-producing real estate.
There’s a world of difference between residential and commercial properties. A home costs you a huge amount to own (including the lost earning power of your equity), with that expense offset only by the rent you don’t pay. This almost always results in a loss, especially when closing and selling costs are added. The only possible redemption is a capital gain. But, as I said, what fool would expect house prices to continue rising after an almost-continuous 7-year romp?
Commercial real estate, on the other hand, has cash flow. This is why you own it – so the user of it pays you regularly. Therefore it’s a simple thing to know exactly what your return on investment is – called the ‘cap rate.’
Some people think buying a condo or a SFH turns them into a commercial property investor. It doesn’t. Instead it makes them a humanitarian, since they end up subsidizing the tenant. Given current values, there’s a zero chance anyone buying a single residential housing unit will be in positive cash flow. So the best thing thousands of fools snapping up brand new condos in the GTA can hope for is a big surge in real estate values to recoup their sustained monthly losses.
And that ain’t gonna happen.
This brings us to multi-family structures, retail spaces, office buildings, industrial properties and even perceived money machines like car washes and laundromats. Now that we’ve reached a watershed moment for house values (crested, and in for a long descent), real estate investors too horny to wait for 2013 should turn their affections to the pleasures of ICI.
Natch, it goes without saying that any commercial vulture should circle where the carrion is. These days that includes southwestern Ontario (soon we will be adding the Okanagan). The region west of Toronto has more residents than all of Alberta, with a lousy manufacturing base, cascading house values and steady supply of renters.
So how about a 6-plex with an annual income of $24,000, on the market for $259,000? After expenses, that’s an 8% yield on your money – plus you get to own a Victorian-era mini mansion. And I’ve already told you about some nice little income-earners in Windsor, a city which unfairly caught the Detroit disease and now has some of the best property values in the country. There’s this 12-unit, three-storey apartment building for $539,000, this fully-rented 5-plex for $249,000, or this cutesy four-plex for the price of a porta-potty in Leslieville.
Here’s my point: If you want real estate that’s actually an investment, buy some. They exist. They work. They make money. They pay you to own them.
But if you crave emotional fulfillment, get a dog.
Well, fellow dogs, my work here may be done. Seems the lonely torch is being passed on from failing hands to meaty new fingers. As my heretical views go mainstream, this wizened contrarian is destined to start a new quest. More news on that in a minute.
For the past three years, this messed-up blog so gleefully dissected by realtors, ridiculed by media weenies and shunned in mixed company everywhere, has chronicled the horny ascent of house lust. I’ve told you repeatedly why the market was unhealthy, obsessed, hormonal and unsustainable. That prices continued to advance over this time only underscored the fact houses are unaffordable and therefore laced with danger.
Right up until last night, I was hammering the same theme, showing you this may soon join other corrections that were so inevitable nobody saw them. Well, ‘nobody’ in the Biblical sense. Or like finding someone who actually voted Conservative.
And I’ve told you with awesome repetition why we will have a correction, likely followed by a lengthy period of lousy sales, falling prices and imploding real estate companies. Higher rates are obvious. So is excessive debt. Boomernomics, for sure. Real estate saturation obviously. Add tighter credit, structural unemployment and government austerity. But mostly, it’s been the noobs buying houses at any price which catapulted values to a point where most people could never afford the homes they own.
So, down she goes.
But, like I said, I’m irrelevant now. The new Harley-humping rebel is apparently Robert Hogue, senior economist with RBC. Says he of a market like Vancouver: “We fear it’s becoming increasingly disconnected from local demand conditions and vulnerable to a painful correction, especially once interest rates resume their ascent.”
I mean, in 2009 – even six months ago – did you ever imagine the country’s biggest bank would be forecasting a “painful correction” in real estate? But this is just the latest in a chorus of voices being raised in an attempt to do what this blog has toiled at – but sadly with less cheap sex, underwear or pneumatic fat people.
Granted, the numbers now are beyond comprehension. No, I don’t mean real estate valuations – the fact the average SFH in 416 is $775,000, and $1 million in Vancouver – but rather what it takes for an average family to get one. Even RBC has a kitten when it does the math. To own a lousy little bung in Vancouver requires 72.1% of the average family’s pre-tax income.
What does that mean, exactly?
Well, the average household income in that city is $83,130 – that’s gross, or pre-tax. So, 72.1% of that is $59,917. This average family would have a federal and provincial income tax bill of $18,992, leaving an after-tax disposable income of $64,138. Yeah, that means for the average family to buy the average bung, they’d have $4,221 left to pay for food, clothes, gas, cable and ammo. Uh-huh. Three hundred and fifty bucks a month.
And to think that the Vancouver Real Estate Board says the local market is showing, “a typical, solid month of residential home sales.” Clearly there’s nothing typical when residents can no longer afford houses, or solid when there’s more danger here than a date with Charlie Sheen.
And Toronto’s hardly better. Owning a SFH there takes 47.5% of a family’s pre-tax income, which leaves the average household (making $96,040) just $24,740, or two grand a month, for everything else – in a city where nothing’s cheap.
Thank goodness, as I said, some people are finally giving voice, as we morph into America, circa 2005. Like Van realtor Andrew Hasman, who says: “Anytime you have extremes in markets, it’s never healthy. You end up with a bubble. If the local economic base can’t support these levels, then at some point you’re going to have a lot of people burned big time. It’s not sustainable.”
Absolutely. Unhealthy at best. Wanton and depraved, more accurately. Our social obsession with real estate has created a society in which families go without retirement nest eggs, simple savings, or even adequate nutrition, so they can quench their house lust. Our debt mountain is now likely permanent, meaning sustained substandard economic growth as consumer spending wilts.
That came back to me in recent hours as I sat with a 40-year-old who thought he and his wife were doing fine before he met me. House in trendy Toronto neighbourhood, new car, no kids, two cool jobs. But it turns out the place he bought in a bidding war for $450,000 with thirty thousand and a credit card is worth less than he forked out. If he sold today he’s have to take a cheque to closing – and he must sell, since the $400,000 mortgage, property taxes, insurance, remedial repairs and utilities are killing them. And they have no savings, almost $100,000 in LOC debt, and a negative net worth of half a million.
How many more are like that? Don’t ask. You’ll wanna move into my bunker.
So, here we are. Fear’s now banker mainstream. Boring.
And I just ordered a new set of vulture wings.
