Entries from August 2011 ↓

Some day kids in a business class may study this time. Economy stalling. Markets roiling. Jobs wanting. Debt swelling. America stumbling. Austerity spreading. Growth slowing. And despite that, never before have the people around you – family and colleagues at work – spent or consumed so much, saved so little or taken on such risk. It’s a case study in denial. Remember these times.

Jane will, because of her sister. She just wrote:

I’ve been following your blog for a couple of years now, but have never plucked up the courage to comment (still haven’t!). Today, however, your entry hit home in a big way, because not long after I read it, my sister contacted me to say they’d won a bidding war against a bunch of people for a 3 bedroom detached house in the 416. Granted, it’s in a good location, but it was listed for upwards of $700K and they won the ‘war’ by offering over $800K…

The crazy thing is that they currently own a 3 bedroom semi, on a much smaller mortgage, probably make less than my husband & I do (which is only somewhat above average income), plus they have young children which my sister is on mat leave for. I have absolutely no idea how they plan to cope with the increased mortgage payments, meanwhile they haven’t even put their current house on the market yet.

I realise you get a lot of emails every day and I honestly expect mine to end up in the junk mail folder along with the hate mail from the flippers, speckers and real estate agents, but I couldn’t help myself. I am absolutely stunned at how expensive a choice they’ve made, but the hardest part of it all? I have wished her well on getting this house, which they are deliriously happy at having secured. I am hoping against all the odds that this ends well, because as much as my sister often drives me crazy, I love her very much.

So please keep up the blog, sometimes it’s more than just financial advice, it’s a help line for dealing with all the fall-out from this madness.

I will, Janey. For I sense we’re entering a new phase in the lives of countless people.

This week the TD Bank’s economics guys issued a stunner. Their forecast for economic growth going forward: zero. In fact the odds of the US entering recession have increased (they say) to 40%, while Canada “can easily” follow suit. In fact, as I told you a few days ago, our economy actually contracted in the last quarter, which was a stunning reversal from 4% growth earlier in the year.

Stock markets have stabilized, but largely on the expectation the Fed will open its chequebook again and start a new round of stimulus. Good thing. US new home sales just dumped again, resale prices fell and manufacturing has cratered. This matters a whole lot because the best B&B establishments in Victoria are now for sale and the real estate market on Nova Scotia’s south shore is starved. With the renaissance of America delayed a few years, all kinds of people in Canada – from tourism operators to loggers and auto parts workers – have tough days ahead.

It’s just as impossible for the Canadian economy to grow without a healthy US as it is for house prices to keep rising without inflating incomes. Why people like Jane’s sister cannot see that is the mystery of our days. How can smart, educated, urbane people think that spending $100,000 more than the sellers of a $700,000 house want is cause for celebration?

How blind have we become? If it walks like a duck, and quacks like a duck… it’s no eagle.

At the same time sis was doing this deal a story appeared in the Wall Street Journal on the growing danger in Toronto real estate. Yeah, even the Yanks are bemused. ‘Toronto wary of condo correction,’ the story announced, then detailed the “ominous comparisons” to the condo boom in Miami, which ended with spectacular losses for investors and owners.

More mindlessness. There are 40,000 condos under construction in the GTA, including the 16,000 that will come to market in 2011. Last month alone almost 2,000 sold, with the lion’s share going to speculators and flippers. “Prices still are rising faster than rents, hurting buyers who lease their condos to renters rather than live in the units,” the WSJ reported. “If too many squeezed buyers decide to sell, even more supply would spill into the market.”

Worse, of course, is that Toronto’s not Vancouver. Family income is higher in the GTA and yet real estate prices are 40% less. According to RBC, it takes ‘only’ 53% of a family’s pre-tax income to afford a house in T.O., as opposed to an impossible 92% in Van. But I can’t help thinking anyone today devoting even half of their take-home cash to a house is assuming a surfeit of risk.

The economics of sustained real estate prices do not exist. Mortgage rates can hit zero, and it won’t matter – even though we all know the opposite will happen (as this week’s increase shows). It’s an impossibility that people like Janey’s little sister can pay $800,000 for a house, and have it all – young kids, one income, a cushion for higher rates, college funds, investments and a retirement cache.

This wretched blog is nothing if not tedious. But obviously the message hasn’t spread widely enough – even though it’s now repeated by mainstream economists, the Bank of Canada and foreign media waiting for the train wreck.

They’ll get it.

And Jane’s mom will think it’s so unfair.

Chris read here that the average price of a detached house in the Kingdom of 416 plopped last month by more than $123,000. So, he asks, “Is this the end for 416?  I sold my Leslieville home back in April and will look to rent for at least 18 months do you think I’ll be able to buy my old house for what I paid in 2004 by then?  Or do we fall back to 2000 prices?”

Another blog regular, a residential appraiser working for a smallish Brampton firm, read the same reference. “Month over month fluctuations are what morons and charlatans focus on,” he said. “Not only are you consistently wrong, you have now taken to spreading total bullcrap to back up your bogus thesis. It would be shameful, except for the obvious fact that you have none.”

See how much fun having a blog is?

Well, this got me thinking about the average SFH in the 416 area of the GTA. So I had a closer look at the last four months of stats published by the Toronto Real Estate Board, the world’s largest real estate cartel.

In May, TREB said: “The strong sales reported for the first half of May reflect the positive economic outlook for the GTA. With the number of jobs increasing and earnings growing, it makes sense that households remain confident in their ability to purchase and pay for a home over the long term.”

The SFH average price was $774,046.

In June, TREB said: “The spring has always been the busiest time in the resale market, but the results for May and the first two weeks of June represented a marked improvement over last year. Low mortgage rates have kept affordability in check and buyers have felt confident in paying for a home over the long term.”

The SFH average price was $744,747.

In July, TREB said: “Low mortgage rates, rising incomes and good news on the jobs front have kept consumers confident in purchasing a home in the Greater Toronto Area. In fact, home buyers are much more confident than they were this time last year when concerns around the HST, interest rate hikes and new mortgage lending rules had temporarily put a damper on home sales.”

The SFH average price was $720,808.

Last week TREB said: ““The unsettled situation in financial markets over the past few weeks did not appear to sap the confidence of GTA home buyers during the first half of August. Revised forecasts for future Bank of Canada interest rate decisions coupled with the recent announcement by the US Federal Reserve, suggest that interest rate hikes in Canada are on hold at least until sometime in 2012. This is a positive for affordability and should help sustain buyer confidence moving forward.”

The SFH average price was $597,963.

So, from its high in May until now, that average detached home in the middle of Canada’s biggest real estate market has lost $176,083, or 22.7% of its value. If this were the stock market, it would be called a crash. In fact, from its recent top to its bottom, equities declined just 16% (before rebounding yesterday) – a fact which earned screaming headlines and an influx of doomer zombies to this pathetic site.

As you can see, for the last four months the benchmark SFH has been on the decline, and recently took a precipitous dive. During that time, how did the real estate board report this to consumers? Ah, actually, it didn’t. Instead buyers and sellers (and the media) were subjected to an endless supply of sunshine as the realtors reported increased jobs and salaries, an improving market, rising confidence and now the certainty of sustained low interest rates. During this period the board also gave the impression of endlessly rising sales and prices. The MSM did what it does best. It repeated.

And that bit about no mortgage increases? Forget it.

The nation’s biggest mortgage lender (RBC, now followed by BMO) just plumped its variable-rate mortgages by a fifth of a point – a tough blow because borrowers have recently been stampeding back into VRMs. That comes amid the unfounded belief (promoted by organizations like TREB) that mortgage rates will remain rock-bottom in Canada for a very long time, in the wake of a decision to freeze US rates. So, the bankers are doing what bankers do – padding their bottom line. Anyone who thought mortgages would stay at 3% for the next two years needs some serious nookie.

So will Chris be able to buy back his Leslieville home at ancient prices? Beats me. But we’re going in that direction.

As for the real estate appraiser – a licensed professional who sets property values in his own community and upon whom people rely for fairness and impartiality – well, no wonder he thinks I’m a moron for telling you these things. He doesn’t want you to know. He’s a flipper.

‘Appraiser’ tried to post this comment here in March. So much for ethics.

Last house I flipped cost me $30,000 deposit which I took from my HELOC. It averaged out to 2.15% interest rate (annual) for the 18 months that the builder held it (most builders don’t pay interest on deposits).

Closed the deal and sold the house within one week to a GTA police sargeant and his wife for $55,000 more than I paid. Interest on the HELOC and all closing costs including RE commission were tax deductible. So while all you geniuses were listening to Garth and bragging about 18% investment returns, I didn’t need a calculator to figure out my ROI. Liked it so much I’m doing it again. Bought 16 months ago, closing in November – builder already selling same model for $75,000 more than I paid.

Wanna bet I win again Garth?

Yes I do.