Entries from October 2011 ↓

Yesterday Fred had enough. The 41-year-old Toronto businessman sat down and hammered out a two-fisted open letter to F.  “I have over $1 million in savings,” he said, “but almost every house I look at costs more than $1 million. What’s happened, that a person with a million dollars cannot afford a decent house? The reason for this housing bubbly is the artificially low interest rates, as well as the incredibly low standards for getting a mortgage.”

As it turned out, when Fred was firing off his note to F and this pathetic blog, the news just kept getting worse. Mark Carney gave a presser, looking like his Stanfields had shrunk. The economy will barely grow over the next year he sputtered, with mucho downside risks. And there was RBC, telling us 57% of all Canadians have no savings. Of those who do, a third dip into their reserves to pay daily expenses. Oh yeah, and 70% understand there’s no way they can retire at 65.

Add that to the news personal and mortgage debt are at record levels, and four in ten people can’t pay their monthly bills, and you see Fred’s point. Cheap money is crack. The people are now hooked, and wasted.

“They are buying houses they cannot afford, having them re-valued at higher levels, and spending the excess equity through HELOC’s. Savings are NOT being built up in this fashion, it is all going towards consumption. I have employees that are working multiple shifts and putting that extra income into pre-construction condos to flip. Banks will continue to lend because their shareholders are constantly looking for growth. It is an all-you-can-lend buffet right now, and unless the government steps in to end this orgy, this bubble is going to end very, very badly. “

Triple minimum downpayments to 15%, he tells F, and cap mortgages at 25 years. If people can’t afford houses, tough. “Owning a house is an investment, and those who cannot afford it, should not be able to buy it as it is socially irresponsible. It is not like owning 10,000 shares of RIM is a God-given right, so why should owning a house be one?”

Of course, Brother Carney said this week he’s not raising rates. Too scary. The borrowing would cease – and were the hell would we be if virgins stopped buying $400,000 townhouses?

In the Lower Mainland, Tanya was also writing me yesterday. “Every time the Bank of Canada holds its rates, it makes me think how much trouble we are really in! It’s hard not to eye that million dollar plus home, and think it could be worth a couple hundred more in a few years or sooner…. but I will now refrain. I keep thinking I should still invest in real estate…. it’s only natural here on the westcoast. It feels like a disease now. I’m cashing out.”

So think about this.

Seventy per cent of us have houses. Almost sixty per cent have no savings. Forty per cent can’t get through the month. Debt is rampant. Personal finances visibly crumbling. Can you imagine what the consequences would be if real estate – the salvation and religion of the masses – staggered?

A company called Pacifica Partners has. The BC-based group counsels high net worth investors on what to do to stay that way. Yesterday, while Fred flummoxed and Tanya tuned out, Pacifica was telling its clients Canadian real estate is the wrong game.

House values have risen sharply because of a decade-long run-up in commodity prices, it said, plus “a rapid increase in Canadian mortgage and household debt which served to inflate housing prices through financial leverage, which is …unsustainable for the long run.”

The warning: “Our outlook on Canadian real-estate is negative and we believe Canadian housing will begin an extended contraction phase resulting in a move of home prices back towards long term sustainable valuations.”

The trigger could be one of many. Falling commodity prices. European debt. Sorry US growth. Or it could simply be unaffordable houses, too much building, debt saturation or rising rates. Take your pick. Almost all of these threats are with us today.

Of course, Fred might as well save his breath, and put his million into liquid assets. The government of Canada – the same one which greased the bubble with 0% down and 40-year mortgages, plus tax gifts for first-time buyers and a goosing of the RSP home buyer’s plan – won’t be tightening up on downpayments or amortizations any time soon. Likewise pooch Carney  won’t do what he knows is right, and rein in the debt orgy with a few rate spikes. They have the power to change what’s coming, but won’t.

I noticed some chatter on this blog yesterday that I don’t write it for common folk, but rather the maligned 1% – those people who actually have some wealth. I guess my sermons about diversifying, preferreds, bonds, ETFs and the sins of house-horniness are turning off the flock.

Too bad. But the flock’s fleeced.

When the Huffington Post called me this week for an interview on the growing gap between wealthy and poor, I sensed they were rooting for the rich. The reporter sounded hot, so I could imagine her sitting there in pearls and heels, researching an amusing piece about the little people. Or walking to the window, suggestively parting her stole and taunting the sooty protestors below with, ‘Try occupying this, losers!’

Ah well. It was an interesting premise: the canyon between wealthy and struggling is exploding, and nowhere is this more evident than with real estate. That’s because the wealthy tend to buy properties they can afford, and usually do so with cash, while the rest of society now buys homes they can hardly afford, and do it with credit. This has turned the middle class into the sucker class. When real estate corrects, it’s the indebted who suffer.

What’s more, hot money (as opposed to hot reporters) has skewed values in places like Toronto and Vancouver. After all, it doesn’t take a lot of multi-million dollar purchases by HAM or European bond refugees to kick up the average price of a SFH. Real estate boards gleefully report prices, focus on year-over-year gains, and purposefully create the impression of a rising market. So everyone piles on – even those with no money.

The pattern repeats. We buy at the top. And when 95% of the money used is borrowed, risk goes off the chart.

But, I hear them chanting in the streets below, aren’t interest rates going to be low forever? Why shouldn’t we buy, mesiah?

Good questions, rabble. As we know, the Bank of Canada’s latest forecast is frosty. Weak growth in the US, dithering in Europe, and an economy here that’ll barely grow by 2% next year – less than inflation. That reasonably means no interest rate increase until well into 2012, unless Apple decides to buy some sovereign debt and flood the market with iGreeks.

However, cheap money alone is not enough to fuel ever-higher prices, even in 416 or the west side. Just because rates are low doesn’t mean borrowing and demand will jump. For real estate to appreciate, and hold its gains, we must have an expanding economy, more money sloshing around and higher household incomes. That’s exactly what Brother Carney said ain’t going to happen.

Also factor in current near-saturation levels of home ownership, lousy demographics (house-rich, cash-poor wrinkly Boomers) plus government austerity, and I stand fearlessly by my predictions of a real estate market on the edge. In fact, as this pathetic blog has previously pointed out, it’s already happening. When there are 116 properties for sale between $1 million and $2 million in a city of 330,000 where the average family earns just $76,650, you know we’re screwed. Well, at least Victoria is.

You can also see the magic of numbers in Toronto, where the average SFH in the 416 are now sells for $706,288, but 51% of all homes in this massive market changed hands last month for less than $399,000. Fully 70% were sold for less than $490,000. In other words the bulk of the buying is being done at lower end of the market, where tanker loads of new debt are being created.

In most markets sales are eroding and listings are rising. The lousy weather approaches, and the economy’s cooling. The fact rates will stay where they’ve been is hardly news, or even meaningful.

That most people will borrow too much to buy something destined to fall in value and cost them half their income to own is a given.

That other people will borrow at 3% to buy assets paying them 6% and write off the interest against their income is more interesting.

No wonder she has pearls.