For two years Darren and his hot young wife prowled the shady streets of mid-town Toronto for a house in the $900,000 range.
Despite a combined income of over $200,000, plus $225,000 in savings and the threat of Lysistrata, he couldn’t quite pull the trigger. A few weeks ago he wrote me: “I couldn’t get by this sinking feeling that there was something fishy going on in the market. I spent hours with spreadsheets trying to justify a million dollar house, as that was what people I knew with similar incomes were doing. But I can’t get past the numbers.”
Buying a fixer-upper (what nine bills gets in that hood) would mean burning through 90% of their savings, tight cash flow and no saving for retirement (or anything else). Darren wrote me and asked if it made more sense to buy in a demand area like that, or rent and invest the cash. That was one easy question to answer – and I did.
Well Darren & the babe have finally made a choice. I’ll share that with you in a moment.
First, growing evidence the soft landing that F & the peckerettes were so hoping for is in a hard dive. Even in secondary markets, where things are supposed to be sleepy and stable, the air’s coming out of the housing gasbag in a deafening whoosh. Housing sales in Halifax in the months of February, March and April have declined by 31%, 35% and 29.2% respectively. In Sherbrooke the plop last month was 29.3%. In fact in 24 or 28 Canadian urban markets, sales were down substantially – spanning the country.
In the canyons of Toronto, where teeming hordes of hipster metrosexuals on Vespas live in forests of condos with de rigeur glass balconies and cement ceilings, all is not well. Realtors report sales during the first half of May were flaccid (661 units sold, a 13.6% drop), but in the last two weeks, they’ve collapsed. By this time next week we shall know.
And did you hear about CMHC?
The federal agency which ponies up insurance to cover high-ratio, high-risk mortgages a year ago was barely able to keep up with the demand from bankers and brokers, and perilously close to bumping up against its $600-billion limit. In the first three months of 2012 these guys wrote $19 billion in insurance on new loans. But a year later, crickets. A decline of 56.8%. And the number of properties insured fell 54%, from over 114,000 to just 52,000.
Now contrast this stark fact – a drop in housing demand by half – with what the realtors have been telling folks. For example, here’s Toronto Real Estate Board president Ann Hannah:
“Despite the headwinds we have experienced in the housing market this year, April sales came in quite strong in comparison to last year. As we move through the spring and into the second half of 2013, the demand for home ownership should continue to firm-up relative to last year. It has been almost a year since the federal government enacted stricter mortgage lending guidelines. It is realistic to surmise that some households, who originally put their decision to purchase on hold, are once again looking to buy.”
Nice manipulating, Ann, but it doesn’t seem to be working. When the feds, the bank regulator and CMHC all toughened up rules a year ago – which realtors said would have little market impact – the effect was dramatic, coming during a time of speculative excess. Some observers, like Scotiabank head egg Derek Holt, think the timing couldn’t have been worse. “Those markets likely would have cooled on their own through an exhaustion factor,” he says. “Now the consequences are only just emerging by way of the magnified risks of a hard landing.”
Yup. The smoky hole with the tailfin sticking out, as I’ve been telling you to look out for. And while that doesn’t mean a Phoenix-style, OMG-70%-crash, it’ll certainly be enough to wipe out the equity of new buyers and the retirement plans of many Boomers. Even having house prices flatline for a few years while mortgage rates tick higher and houses get illiquid will put countless families into a financial vise – and that’d be a best-case scenario.
So, why would smart people not choose diversification, balance, liquidity and freedom?
Darren did. And no sex strike.
I just wanted to send you a quick update to let you know that thanks to your blog my wife and I just signed a 1 year lease in a BEAUTIFUL townhouse in an ideal location! I used all the stories and principals from your blog to make a great case for renting, and you know what… it worked!!
Thanks again for reading and responding to my email, it made a world of difference to me.
I know you said ditch the spreadsheet… but alas I could never do that. I’ve attached the spreadsheet that I used to help bolster my argument. It is fairly simple, but I found it effective to help quantify my decision. Feel free to send this to anyone who, like me, likes to play with numbers.
Well, dude, it’s a nasty piece of work. To break even on that house over a decade, it shows, would take a 50% increase in value – and no mortgage rate increase. Like that’s gonna happen.