Entries from November 2011 ↓

This week the Real Estate Institute of Australia came up with a great idea. Let young people raid what little retirement savings they have to buy a house at inflated values. That way they can shun diversification, take on a massive amount of debt, restrict their freedom and mobility and participate in the expected collapse of Aussie housing values.

Best of all, it’s a Canadian idea!

“With the number of first-home buyers participating in the housing market declining considerably over the past two years, it is crucial that we look at ways to assist this group to enter the market,” says REIA acting president Pamela Bennett. “There is proof that the scheme is working in Canada and we should be drawing on this success to assist first home buyers in Australia.”

And, Skippy, is it ever working. RRSP contributions are steadily declining, savings rates have plunged, personal debt has exploded, mortgages have hit $1.1 trillion, and house prices have squirted higher with a vengeance. In fact, Canadians have become so adroit at blowing air into the housing gasbag that the Brits are also aping us. As I told you days ago, PM David Cameron has just announced the government will allow 95% mortgages with taxpayers covering the risk (just like here). Enough of those stuffy Limey banks with the 20% down payment rules. Let’s get with the program.

But what’s this?

The influential Guardian newspaper has been reading this pathetic blog. How else to explain this editorial which craps all over the Rt. Hon. Mr. Cameron?

The government, by contrast, seems to have abandoned the idea of rebalancing the economy in favour of a policy designed to suck up to the baby-boomer generation by underpinning house prices, while throwing a bone to the housebuilding lobby. It is pandering to the blatantly erroneous belief that rising asset prices are a good thing for the economy while falling house prices are a national disaster.

Here’s the reality. Britain has had three bouts of rapid house-price inflation in the past 40 years, and all of them have been followed by painful busts. There has been no improvement in the country’s underlying economic performance since the journey into bubble land began in the early 1970s; on the contrary, growth rates are slower, the manufacturing base has shrivelled and the trade gap has ballooned.

The winners in this game have been the middle-aged and the elderly, who have seen the price of their assets rocket; the losers have been the young and the less well-off. There has been inter-generational larceny on a grand scale, and at the end of it Britain is a shrunken state pitifully dependent on the churning of real estate.

Of course, the editorialists have it right. The worst thing any government can do is make buying a house with no money easy. An entire generation of dewy young horny things has been seduced into thinking granite and stainless naturally follow training bras and skateboards. Our fixation with real estate is sucking the financial juice out of the young and transfusing it into the prunish, vaguely hideous hides of the Boomers. Worse, the kids are being set up for a crunch which could take until mid-life to get over.

But enough theory and hateful words that make you think. Let’s emote. Here’s Jeremy.

“Okay, I read your blog everyday, and it makes me want to sell my mid-town toronto house more and more.  I know one can’t “time the market”, but the “but it’s different” here in toronto seems to be holding true for some strange reason.

“I bought my house at $450K 6 years ago, and it is now appraised (I’ve been speaking with agents about selling) at circa $800k…  A bigger house up the street just listed at $1.45 and sold for $200K, yes $200,000 more than the asking price.  Is this the free market dictating the price of housing?  I think I’ll be a greater fool to NOT sell.  I’m thinking to listen to you and rent, it could never cost as much to rent as to own, but again, can this inflated bubble really stick and I lose further upside on my house? The government seems to keep blowing air into the balloon, and it’s gotta pop soon.  I’m in my 40s a recruiter, and I see what even high level executives make, it ain’t enough to sustain a 800k mortgage…  Is everyone making $500K a year in toronto, or am I just crazy?”

Jer, you’re absolutely right to question the psychology of the herd. The average 416 SFH now costs eight times the average income. Salaries are stagnant, so rising prices are financed with more debt. Not a sustainable situation. There will be economic revenge.

You’ve made a tax-free gain of $350,000, equivalent to earning and paying tax on $500,000 over the past five years. Why wouldn’t you harvest that profit? Investing the total funds that your house sale nets (even in stable, boring preferreds yielding 5%) would likely pay all your rent. You live for free. Have a pot of liquid wealth. No property tax. No insurance or maintenance. No mortgage. No worries about what’s coming. No revenge. No Nortel moment.

It’s not different in Toronto, or Vancouver. Or Melbourne or London.

Take the money. Ditch the risk. Pity the young.

Jay and Marie are flippers. (“Our friends are so jealous,” she says. “Two deals in three years and we made two hundred!”) They’re the kind of people other people with kids, obligations and less brass hate. After all, it’s not easy buying from plans, moving in for sixty days, then selling and splitting. But, hey, somebody’s got to do it.

Jay says they now have $250,000, “which is a great downpayment. The next place we find we want to stay in for a while because as much fun it is making money on houses, we’re tired of moving and would really like to settle.  No children now but we want to start a family.”

So, he poses this question: “We went for a drive in Georgetown and checked out a couple of open houses.  They were nice homes but nothing to scream and shout about, and yet all over $500k.  I make about $120k with my wife but don’t want to live off KD and only go on staycaytions. Do you believe there can be a good size price adjustment in the next 6-12 months in the 905′s?  I’m talking 15-30%?  I really find it hard to justify prices of over $500k in Georgetown, Acton and Milton.”

Well, kids, anyone who’s done that drive through the western flank of the GTA will be gobsmacked at recent developments. Places like Mississauga, Brampton, Oakville, Burlington, Caledon, Milton and Georgetown now lap over each other’s borders, forming the perfect senseless urban sprawl. A year ago in a remote Brampton field where Holsteins created perfect patties, McMansions now rise, ‘starting in the low 800’s’. The population of these communities has exploded – 1.64 million people – greater collectively than Calgary, Ottawa, Edmonton or Winnipeg. In fact, if this run-on mess of houses were one municipality, it would be the fourth largest in Canada, but (by far) the fastest growing.

Does this bode well for real estate values?

Not exactly. In fact, perhaps the opposite.

There is no effective public transit in any of these places – no subways, no light rail (other than tracks running to downtown T.O.), no express busways. As a consequence, the vast majority of households need at least one vehicle, usually two. It often takes a litre of gas to get a litre of milk – because idiot urban planners and local pols have concentrated retail stores into giant Big Box campuses surrounded by dozens of acres of parking lot. As for human scale, trying talking a walk around Square One, the region’s mega mall. You’ll need a GPS unit strapped to your shorts so they can find your remains.

All the houses (basically) are new, and so are the trees. Sticks, actually. In most neighbourhoods there’s nowhere to walk, except to the local engineered park (also full of sticks) to watch restless, bored-crazy youth. Lots are minuscule. Driveways short. Every street after 6 pm looks like Frank Fuccillo’s used minivan clearance centre. Cities like Brampton and Mississauga (and Milton, trying hard to catch up) routinely build four and six-lane arterial roads which are clogged with traffic and provide excellent venues for pedestrianicide.

As for the new homes, many have been slapped together on an assembly line by the region’s biggest builder. This is particle board and glue heaven. The ‘ironwork’ and ‘colonial pillars’ on most facades are plastic. Porches already sag in subdivisions now hitting the ripe old age of nine. New units are thrown up in a mass orgy of building and occupied by deliriously horny young couples within hours of being swept. It’s daunting to imagine what these streets, and homes, will look like in four or five decades.

And forget moving to the burbs for space, or to be five minutes from a cow. Towns and semis abound, with populations now denser than Rob Ford. Yes, all the inconvenience, lack of privacy, noise, congestion and smells of the city, yet lacking in the unnecessary crap, like entertainment, museums, diversity, dining and art.

Worse, if you are considering investing here, is the culture of new. The neo-burbs epitomize newness, where people line up all night outside sales trailers to buy virgin structures. Space and time are sacrificed for the latest touchless faucets and glass countertops, pre-wired media rooms, bamboo floors and shiny stuff with Bosch stickers. How will the resale market be in five or seven years when the hardwood’s no longer scratchless and the bathroom caulking cracks?

Jay, you can spend a half-million easily on a faux Georgian mansionette where heifers once peed. You can line up on Trafalgar or Mississauga for your place in the 40-km-long traffic jam on the 401. You can be a part of the greatest suburbanization now taking place on the continent. You can populate every bedroom with a kid. But don’t confuse this with investment. It’s not. This is consumption.

I’ve little love for flippers. You feed price excess. Shame on you.

May you burn in Milton.