Entries from February 2012 ↓

Bubblicide

Shopping for a mortgage? Get it before March 29th. Word has it that’s the day F commits bubblicide. The federal budget will also irritate civil servants (layoffs in all departments will flow), piss off seniors (OAS starting to look DOA) and give us a mythical balanced-budget date, just slightly past the next election. Machiavellian.

In fact, if you pat the little guy on the head (as I’ve done several times), you can actually feel the horns.

Beyond the GTA, the housing market is already deflating fast. In Vancouver, for example, listings are running 20% ahead of last year while sales sag by the same amount. Richmond’s sinking. Condos have turned turgid and illiquid. But the real news is what’s being heard on the street.

“People now think it’s a bubble,” our well-connected realtor source reports, “and so they are hesitant to buy. The main change now is that people actually think this is over and the only ones here buying are the few remaining Chinese and those who just can’t avoid a transaction (or whose fortunes do not depend on it). Looking forward to the month-end stats – they will be brutal with (again) only 2009 being worse in the past decade.”

It is impossible to underestimate the impact of a housing implosion in Van on the rest of the country, and especially all of Western Canada. As I have said often, this is ground zero, where the market’s been held together by vapours, myths and emotions. When it blows, the spray will be on everyone’s pants.

This is what happens when markets turn. Like gold yesterday, plunging $100 an ounce in minutes. With real estate, people want rising assets and flock to get them – engaging in bidding wars or standing in the cold all night in front of a sales trailer and peeing into a Pepsi can. But when the herd sniffs that prices may have peaked and could decline, buyers suddenly evaporate. After all, why spend money on a condo today which will cost less in July? Sales drop, inventory builds up, then prices wilt. It’s always the same pattern.

But back to F. He’s about to make it hurt more.

The buzz is the budget (or a prior announcement) will do a few things: Ban the 30-year mortgage, dropping the maximum insurable amortization period to 25. The result will be higher mortgage payments, and more disappointed virgins. He’s also rumoured about to end stated-income mortgages, those ‘liar loans’ the banks hand out to self-employed and commissioned people.

But of most significance could be guidelines telling the banks not to loan to anybody unless they have the income to support that mortgage. Right now a rich Chinese guy (just saying) can show up with a fat deposit and get a mortgage for 50% of the property value with the same effort as ordering a Happy Meal. Or an unemployed homeowner in Leaside can score a HELOC for $500,000 on an appraised value of $1 million, regardless of earned income.

But what if mortgages and HELOCs were only handed out to those with the proven ability to service that debt? No river of cash flow, no loan. No verifiable Canadian income? No financing. And an end to the banks’ ability to make such low-ratio loans, drizzle on some CHMC insurance, then securitize the suckers as covered bonds.

The result: A 7.3 magnitude quake in delusional VanCity, and an effective way to stick a cork in the credit gusher without raising interest rates.

On another topic, there was some talk here days ago of American real estate, particularly Texas. One of our regular blog dogs has been on the road, house-hunting in Houston. Here’s his report:

We have viewed about 20 houses so far, most of them not very good and a few we have put into our “maybe” pile. The issue in Houston (as we see it) isn’t the upfront cost of the home, in fact, it’s pretty cheap vs Canadian real estate, it’s the property tax, which for a $200k home can be $7000 a year, yes, it’s 5x property tax vs. Calgary! Although you can deduct mortgage interest and property tax off your total income and pay 0% state tax, the total US total income tax is still around 30ish% even with the 0% Texas discount, and the US taxes you on your Canadian RRSP earnings apparently too.

The homes down here are about 30 years behind Canada in building standards, in fact, it wasn’t until 2005 they started using double pane windows and insulation! It’s very, very common to find homes with single pane, aluminum frame windows, old kitchen cabinets adorned with new granite and old appliances with 19+ year old roofs… and this is in the nice areas of Houston! With electricity bills in to the $300+ a month just for AC, square footage really matters to keep costs down, but even a “starter home” here is a 1700sq/ft bungalow! We are looking in the 1958-1980′s areas.

Weather is pretty amazing, it’s 26°C today, clear and sunny. Roads are insane (like the I-10 which is 26 lanes wide!) and no public transit in the city to speak of.

According to our realtors, 55% of Houston RENT, only 45% own a home. Sales are increasing slowly and sellers are starting to list (as they newspapers said it was a good time to do that now).  They say prices have been very flat (2% yoy increase since 2000) but areas we have seen have gone down 20-25% so that’s most likely “select areas”. So far we have had a hard time finding the right cared for home at the right price. Even with house prices so low vs. Canada, no one wants to pay $32,000 in property tax a year

Finally, I need some advice. Sue this guy? Or hire him?

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The curse

If you’re a mother-in-law, don’t read this. You’re the enemy. Or a helicopter father. Buzz off. The last people who should be giving financial advice are Boomers.

This blog posting may be my last. I expect to be beaten to death with soggy Depends on the way to the Hummer outside my Toronto office Wednesday morning. Some will seek to finish me off with half-sucked oxygen canisters, while others aim the pointy ends of their walkers at my orifices. Fluids will flow.

But some things must be said. Most Boomers have seriously screwed up their financial lives, and seem determined to bring their adult children down with them into house-horny hell. Just in time for the official end of the Canadian real estate bubble – that giant gush from the throbbing property gasbag – rivers of bad advice are flowing through the lives of their offspring. Call it what it is. Child abuse.

Here’s Josef, in Etobicoke. After chaining his wife to an iPad cruelly bookmarked to this blog, she finally relented, and they listed the house two months ago.

“After about 4 weeks of random showings, open houses, constant questions about adding a separate entrance to the basement and zero offers, I finally got the call.  By dumb luck, I got two offers in one day, which sparked a bit of a sellers edge that got us a full listing price of $540k (bought for $330k just 8 years ago).  Our closing date is March 30th and we already found a rental house in Oakville.  My wife couldn’t be happier, as it is a much nicer area to raise our kids with endless parks and walking trails.”

Isn’t that beautiful? They get a nicer house, with the $525,000 cleared from the sale generating enough cash flow to pay the $2,250 monthly rent. Live for free. No property tax. No debt. No stuff to fix. No exposure to a wobbly market. Freedom, mobility – and half a million in the bank. All the stuff Boomer parents apparently hate.

“They practically disowned me for making such a `stupid` decision and `ruining the future of my kids`; can’t help to laugh at that.  Just to feed your twisted humour Garth, these are some of the quotes from my dad.  Feel free to use them, I’m sure he won’t mind.  “You will end up with no money and no house in few years”, “People line up all night to buy new houses (Mississauga) for over $700k”, “I’ll buy your house for $540k right now”, “Renting is like throwing money in the dirt”, and my favourite (can’t believe he actually used that), “Canada is different…”.  Needless to say, I stopped arguing with him.”

I wish these were the rantings of a single demented father. But it seems real estate DNA was somehow smuggled into the toke pipes and reefers of an entire generation.

Phil in Edmonton tells me that he and Barb were ecstatic when, after six months and 47 showings, they finally got an offer on their townhouse. “Then she mentioned to her mom (damn MIL’s), about about our plan to sit out of the housing market and invest our $250,000 for a few years until prices come back to earth.”

And what happened, Phil?

“Her mom lost it on her.”

And Janine in Calgary (with her new husband) just doesn’t want to buy a house, especially since she’s exiting med school with $234,000 in student debt. “Until I found your pathetic blog it seemed so wrong to be flying in the face of conventional wisdom by not buying a house, especially when all of our peers are buying and all my husband’s relatives were telling us to.

“But I need harder numbers to throw at my in-laws when they try to convince us that Calgary prices are reasonable (“…since we have oil here, we’re different!”) and bug us incessantly that if we don’t buy now, we’ll be shut out of the market. Regardless, we’re not going to buy until prices deflate somewhat and we have 20% down, but how do I prove them wrong and deal with it, Garth?”

Janine, babe, many ways. Lose their number. Move to a real city, like Toronto. Threaten never to do surgery on them. Change your email addy. But whatever you do, don’t argue. It’s pointless. Boomers are as open to change as Syria.

Like Oliver’s mom.

“She just purchased a 400k bungalow in Oakville,” he says. “She hasn’t sold her McMansion yet (and still owes about 250k on the mortgage).  Did I mention she’s 65 and retiring?

“She doesn’t seem to think there’s anything wrong with a) buying a new house before having sold the first one, or b) taking less time to decide on buying this house than she did deciding what plays she wanted to see for her yearly Mirvish Productions Theatre Package.

“Honestly, Garth, I’m frustrated.  I have been reading your blog, and spreading the word, but even my mother won’t believe me.”

Of course not. Especially mom. So stop trying. Just be thankful she has not infected you. And I sure hope she has a pile of money somewhere to finance the next two and a half decades of her life – because that $400,000 bung could languish for years, costing her while paying nothing. In fact, this is the Boomer curse – house lust. It’s been known to eclipse even the feelings cougars have for Bon Jovi.

I’m here to tell you there is no cure. It will be there until the last key is pried from their cold, dead fingers. Then, ye shall be free.