Two Thursdays ago Tom strode out of the yard for the last time, went home and mounted his off-white hard hat on the fireplace mantle. “My trophy,” he said. And there it sits.
That hat adorned his head most days for the 26 years he was with the power commission, as a lineman, then stationary engineer, then inspector. Tom knows he scored – he and a few buddies are among the last to walk away with a defined benefit pension which just made him rich.
The pension amount ended up being $1.4 million. Tom could have left it sitting in the plan and started drawing about seventy grand a year, or commute the value, rolling most into an RRSP and still getting a fat cheque. He did the latter, figuring he’d rather control his money than give it over to a bunch of goofs in suits. And that’s how we got one of our latest millionaires.
There are 422,000 people in Canada who have at least a million dollars in investable assets outside of their homes. That’s 1.2% of the population.
If you looked at real estate values across Canada, you’d think a whack of those people live in Vancouver or the Lower Mainland. After all, this week there are 4,500 houses for sale over $1 million, and virtually every home west of Main has been assessed at more than seven figures. This makes Vancouver the second most costly place on the planet to live.
But wait. When it comes to millionaires, Van doesn’t even make it onto the list. According to WealthInsight’s new report you have to get past Tokyo, NY, London, Paris, Frankfurt, Beijing, Osaka, HK, Shanghai, Singapore, Seoul, Munich, Rome and LA to even find a Canadian city. Which is, of course, the hockey choke capital, Toronto. In the GTA live 118,000 millionaires, and yet there are only 2,600 million-dollar homes on the market.
This may be an imprecise measure, but you can add it to every other metric showing the delusional people clustered in the bottom left-hand corner of this nation are certifiable. Real estate values are unsupportable by incomes or accumulated wealth, and certainly not by the current BC economy. Nor is immigration a market-mover, as anyone trying to sell a house in Richmond or the Westside these days will tell you.
And while BC prices in general have fallen 8%, with Van down about 6%, the serious blood-letting has not yet even started. There are years ahead of piteous sales, apoplectic realtors, remorseful ex-virgins and relentlessly weak prices. Don’t expect crash. Anticipate melt.
This brings us to Vijai Mohan, who started a small hedge fund five years ago in San Francisco. He’s been making news (at least here) since he announced he’s got a new fund you can buy into that will profit from Canada’s housing mess by shorting the banks. During an online chat with the unemployed people who frequent the Globe’s site yesterday, Vijai said:
“Canadian banks appear to be the most simple and one-sided way to take a position here. Yes, roughly 60% of the Canadian mortgage system is currently insured by CMHC. However, the way a downturn might play out is anything but simple. My research suggests that the underwriting process for insured mortgages has been anything but robust, and that there could be potential “put back” risks where CMHC nullifies its insurance on individual mortgage loans.”
To be accurate, every high-ratio mortgage in Canada made by one of the monster banks is insured by the feds. Not 60% of them. All of them. If a borrower defaults (and relatively few do, or will) then CMHC will pay up. But, of course, it need only cover the difference between the mortgage on a property and its sale price. Currently about 0.36% of mortgages are in default (no payments in three months), so do the math. Meanwhile the Royal Bank alone is making $2 billion in profits every 90 days, in a grinding economy and a slowing housing market.
Vijai’s blowing smoke. But he’s not alone. There are financial advisors around peddling a short-the-banks strategy which has so far cost their clients dearly, usually because they’re also flogging gold. Fear sells, but right now only fools are buying.
That Canadian residential real estate will devalue is a given. That most households will suffer a loss of wealth through eroding equity – that’s assured, too. This is not a quick or short event. And that means the years of becoming a millionaire through mindless increases in the value of your home are done.
What will be legacy of this house horniness? Mortgage debt up 150%, to $1.2 trillion. Record household borrowing as people live off LOCs and credit cards. A third of the wrinklies retiring with home loans outstanding. A negative savings rate in BC. Plunging construction in the GTA. And 98.8% of the population who hitched their wagons to the wrong star.
The moral: get a hard hat.