Catherine says she reads this detestable blog daily. “Perhaps I have a new angle for your daily rant,” she says. Rant? Cathy, babe, Fox News, Sun TV and John Baird rant. This site, by comparison, is a virtually font of variegated opinion, where all the citizens and nutbars of this great land come to sip. And foment.
Anyway, here’s her idea. What’s the scenario today in which people actually should buy real estate?
“I’m suggesting this because I read a lot on your blog about how crazy today is, but I don’t have a good idea of what non-crazy could look like. It might be interesting to describe the kind of advice people would have been looking at if the last 10 years had not happened and HGTV never existed.”
Hmm. Pre-HGTV. That’s when Mike Holmes had hair and was caulking basements. When people got horny for each other instead of concrete countertops. There used to be ‘down payments’ back then, and people haggled over the price of a house before they bought it. Young couples rented. There were these weird little things called starter homes. Purchasers spent more than eight minutes going through a property. Most houses cost about three times what most folks made. There were even people who couldn’t afford them. But that was okay. Having a house back then was not a right.
Of course, all that’s changed in the last decade. Now seven in ten of us have a house, at the same time half of us have no savings while virtually all of us have debt. And there is, Cathy, a poker straight line between these realities. Hell, more economists are emerging from the ooze to actually agree with the drivel published here. Like my constant reminder that interest rates will rise simply because Brother Carney knows keeping them low will mean 100% home ownership and so much real estate porn that we’ll wallow in debt forever. Then the economy’s truly toast.
Here’s RBC Global Asset Management chief economist Eric Lascelles, for example, saying exactly thus: “There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later.”
This is one definition of sub-prime, Cath. And we have it bad. ‘Emergency rates’ are the same as those teaser rates applied to US mortgages. Cheap loans let people without savings buy houses, but when they ultimately reset, it all blew up. Oakies in McMansions – kinda like property virgins in Yaletown, or student debtors owning in Leslieville. We all know it can’t last.
So your question’s an interesting one, but there is no ‘normal’ anything at the moment. Interest rates will most assuredly rise. Mortgage rates – especially VRMs – will double. People who bought with nothing down in 2010 will be renewing in 2015 to the shock of their lives. The impact on the market will be substantial, especially since that’s when the pathetic, wrinkly, oxygen-suckers start to retire in droves and discover they need to sell. Right. Now.
Of course, it won’t take that long. Many markets are already in decline. Try selling a condo in Port Moody, an acreage outside Penticton or a McMansion in Caledon. The facts are simple. House prices have jumped on the back of higher debt, not higher incomes. Have you received a raise lately, Catherine? Have many new small businesses or factories opened in your hood this year? Or is the only real economic activity coming from guys building yet another condo tower, or turning another field into soulless boxes with garages grafted on the front?
About 20% of the economy is now real estate-related. Roughly the same mistake California made. The average family can’t begin to afford the average home, without accepting record debt. And still we’re being lied to.
Yesterday the shameless Vancouver Sun – published in the most unaffordable metropolis in North America – ran a piece saying there is no bubble.
“The prevailing wisdom that Vancouver has a housing bubble should perhaps be reconsidered. Certainly normal metrics, like the ratio of average price to income, are extraordinarily high and could well be in danger territory. But, existence of more affordable geographic pockets in the Lower Mainland where buyers’ conditions prevail, and softness among apartment and townhouse dwellings, suggest that some markets are much less inflated… Savvy shoppers can still do relatively well in Vancouver by searching for the right unit in the right location, which after all, is the whole mantra of real estate.”
The average SFH across the entire region is $800,000. The average in Van is $1.2 million. The median price for all properties (crack shacks and condos included) is $600,000. The average household income is $83,130. And the average Canadian family has less than $40,000 in liquid assets. Figure it out, Cath. In this world, does a scenario actually exist in which a house makes sense?
Sure it does. Buy a house if you can afford one.
That means keeping mortgage and property tax payments below 40% of your household income. It means being able to own a home and still diversify, ensuring your TFSA is brimming with ETFs, you have retirement savings and money for kids’ education. It means not confusing your house with a financial plan. It ain’t. It’s a costly possession. Remember my rule – take 90, deduct your age and that’s the percentage of your net worth a home should represent.
It means not being useless and naive. If you have $15,000 then you can’t afford a $300,000 property even if the numbnuts at the bank tell you so. Just being able to carry monthly payments means nothing. That’s called rent – but in this case it comes with a mountain of debt.
You should buy property if you understand this is not the end goal of life. Get a grip. It’s a house.
If you want a home, spend some love.
