Chris owns a rental house in the Kingdom of 416, and asked me in an email this week if he should bail, because of the kid PM. “In one of your recent posts you discuss the impact of the Liberals budget that could be announced – if they move quickly. I have an investment property in a desirable neighbourhood that I’ve been thinking of selling next spring.
“In your mind, how quickly does real estate get affected by this? Obviously the Feds are really the ones holding the cards in terms of interest rates going up, but long story short in your mind is a housing crash coming as early as spring? I’m pretty green when it comes to this sort of thing so figured I would ask the expert.”
So I said to him, expect no crash. But with a smoky market and shortage of listings, why not sell now? And he said:
“Investment properties have made the smartest people in my life richer than investing in stocks. That in 1-2 years the property could bring in more and more positive cash flow. Suffice it to say that if I sell in ten years the building would be worth more even after weathering dare-I-say a huge recession, and the mortgage will be paid down. It’s been 8 years of real estate growth in a hot market and it’s given me a great return, anyway I have been back and forth like a chess player analyzing the outcome because it’s a big decision and a big house.”
My reply was what you’d expect from a pucker-lipped, calcified, emotionless curmudgeon who sees nothing but augmenting risk in a one-horse, house-lusty portfolio strategy in the age of interventionist politics. Smart investors harvest profits, I said. And you’ve made no ‘great returns’ until you sell. Greedy people, on the other hand, usually suffer. When things inevitably fall, they bail and get plucked.
This brings us to the latest house price forecast, from the pointy heads at CMHC. Given that the government agency is married to the real estate development and financing industries, you should always expect these guys to see unicorns, sunshine and ponies in the years ahead. So this forecast is telling. Almost dour.
Here are the conclusions: First, more people will be looking for “moderately-priced houses”, which is tough news for Vancouver and the Lower Mainland, detached sellers in 416 as well as all those oil execs trying to bail out of Calgary’s tony hoods. Second, housing starts will decline for the next three years, even without those inevitably higher mortgage rates. Third, MLS sales are also expected to drop modestly and, fourth, prices will rise 1.3% in 2016 and 1.4% in 2017.
If accurate (and CMHC traditionally errs on the side of unbridled endorphins) that means real estate appreciation over the next two years will be less than inflation. Meanwhile, does anyone really expect property tax increases to be under 1.5%? Or the cost of electricity to stay stable? Or insurance premiums? And yes, Trudeau II will also be raising taxes for many homeowners while running deficits that will likely increase mortgage rates and prevent the Bank of Canada from nipping theirs.
Meanwhile, after eight years of gains, why would you not want to crystallize the profits? Maybe our ambitious new leader will decide to eat the rich further in budgets to come, upping the capital gains tax by dropping the 50% exclusion rate to, say 40% or less. I’ve heard rumblings. After all, only the wealthy own investment properties, Chris. Rentiers = evil.
The point is simple: real estate as an investment involves a huge capital outlay, usually massive financing at variable rates, unknown future maintenance costs, recurring ownership charges, a poor ROI (especially when vacancies and renos are factored in), stiff purchase and exit fees and taxable returns. If you were lucky enough to own during a period of capital appreciation that overcomes these drags, why not grab the prize?
Because, says Chris, there may be more to come.
Let’s review what they say on The Street, where equity investors live and die. Bulls make money. Bears make money. Pigs get slaughtered.
If you think the second Monday night in October changed nothing, you had stars in your eyes. This is now selfie nation. And it’s not about you.
It’s over a year now that Carmen was pleading with us. “We are renting a two-bedroom apartment in Mississauga – 30-year-old apartment with no washer, dryer or dish washer :). Paying $1300 per month,” she wrote, in a story I hear every twenty minutes, but seldom with a laundry twist.
“We are having hard time staying in apartment with two kids and no washer dryer. It takes three hours of weekend time for using downstairs laundry. We thought of renting another place as my husband is following your advice. But when we started searching rental homes anywhere in GTA, house rent for three bedroom townhouse or condo is no less than $1,700, plus utilities.. which all together will come for $2,000 per month.”
So here’s the inevitable question seeded by a thousand realtors who prey on recent immigrants like Carmen and her hubby: “Would it not be ok to buy? We do not want high range home or want to put all savings in it. We want something around 420K with 5% down so that our monthly mortgage will come around $2,300 or so. Is it better to rent for $2,000 or buy anything with monthly mortgage as $2,300?”
Well, Carmen works for one of the Big Five banks in IT – “very stable job,” she told me. Husband, too. Combined income of $115,000, with liquid assets of just $29,000 and a car loan of $8,000. In other words, buying a $420,000 home with 5% down and closing costs would wipe them out, saddling them with monthly costs more than double their current rent. Carmen had no real concept of closing costs, CMHC insurance premium, condo fees, property tax, maintenance, utilities or the dismal state of a $400K property in most of the GTA. Moreover, with two kids, both parents have a higher responsibility than a new laundry room – saving and investing for the future.
Her case begged the question: should people with a net worth of less than a new Kia be able to buy a $420,000 house, with all its attendant costs, so damn easily? The real estate industry benefits, of course. The bankers and mortgage brokers profit. The government collects a pile of tax on closing. A realtor will pocket at least $20,000 in commission. But are we not leading people into elevated risk, given inflated house prices, variable-rate debt and a wonky economy? If it were not for the house porn we’re constantly fed by media and real estate boards, would rational people ever walk into this quagmire?
Well, I have two reports.
First, an update from Carmen. I heard from her yesterday. Guess what? Unemployed.
“It’s me Carmen from 2014. I am very happy that we listened to you and didn’t get into this housing crap (sorry). As I said, I work for second largest bank in information technology and yesterday they have given my lay off letter. No more job. I can’t imagine the amount of stress we would have gone through if we had bought that house. There are so many people who got their pink slips at the bank yesterday and many are worried because they bought a home. Now we at least can continue renting in our means and don’t have to worry about all those extra payments. Thank you again!!!”
Of course, being a caring guy, I did recommend Carmen get an all-in-one washer/dryer unit and squirrel it into her rental unit. No word on that. More evidence that this is a full-service blog, with 24-hour drain and snake capabilities.
Now, here’s something consequential if you happen to live in Ontario, the pinnacle of human achievement and gender-specific governance. Citizens pay a tax when they buy property. Lots of tax. On a $500,000 place the province collects $6,475. Seven years ago the city of Toronto, greedy little burg that it is, was granted the right to levy a second Land Transfer Tax. So buying that half-million-dollar place now requires that you pay $12,200 tax upon closing. (The average detached $1 million house has a tax bill of $32,200. Yikes.)
During the last Ontario election the Liberals made this commitment: “There is no plan to extend these powers (to levy the second tax) to municipalities. On behalf of home buyers, we want them to remain good on this election promise and that means Ontarians need to send a strong message that the government must rethink its plan to double the land transfer tax burden on home buyers.”
Well, screw that. Another example of saying one thing during an election, then doing the opposite when in power (especially with a majority). The Ontario Ministry of Municipal Affairs and Housing has caved to ongoing requests from cities like Mississauga, and will be granting every municipality the right to double the land transfer tax. As you might imagine, the realtors are apoplectic. They even have a poll showing 77% of people think this will hurt affordability (damn straight) or delay a house purchase.
So, imagine places like Brampton, Ottawa, London, Vaughan or K-W doubling this tax in a year or two, just as interest rates start to normalize and all that new debt and deficit-spending floods out of Ottawa. Buyers are stretched and stressed now. Prick, meet bubble.
You’re welcome, Carmen. And don’t forget the softener.