Entries Tagged 'Book Updates' ↓

Don’t do it

SOUP modified

For the past four years, says Jon, he’s been waiting for houses to cheapen. “Renting, saving and investing,” he tells me, “with bated breath.”

Finally it was all too much. “As we stand on the precipice of historic housing highs,” he says with a flourish, “alas, the idea was hatched that we moved back in with Mom – after putting on an addition and renovating the place.” Late thirties, two screamers – it seemed like a good idea. After all, the old gal lives in a good hood, and it “would show the kids that family sticks together.”

But, adds Jon, there was “a nagging feeling prompting us to assess our sanity. Hence talking to you.”

That is probably a mistake, but let’s push on. Turns out Mom has $300,000 left owing on a place worth five hundred, and Jon would personally foot the $150,000 addition. “But what happens when Mom’s pension runs dry in ten years, or when she croaks and the other three siblings want their cut,” he asks?  “Any equity we put in until then gets split?  What provisions could be made in advance to avoid squabbles down the road regarding the inheritance?  Or do we hold the course, forget the whole thing, and ship a case of depends and Purina anonymously? Can this end well?”

Jon needs to remember one of the GreaterFool cardinal rules: never invest in real estate with anyone you’re not sleeping with. That includes mothers. Your own, I mean.

The potential problems are legion. If Jon’s going to spend serious money renovating the house, he needs to be on title in order to protect that investment. But with Mom on a pension and a substantial mortgage outstanding, it looks like the house equity constitutes the bulk of her net worth. So, will the other three children come looking for their slice when she passes?

You bet they will, presuming Mom’s will divides her estate equally between the kids. So, Jon would not only inherit a $300,000 mortgage if he assumes title with her (and she lacks insurance), but he’d have to remortgage the place to suck out two-thirds of the remaining equity (including the addition he financed) in order to pay them off. Disaster.

How to avoid this? Don’t do it. In fact, Mom-with-the-$300,000-mortgage should sell and rent, since it would lower her overall living costs and give some cash to invest for an income stream she obviously needs. Hopefully she’ll live long enough to consume it all. However, if Jon truly loses his mind and goes into this unwise situation, he needs to ensure Mom’s will is rewritten to deal with the new reality. He should also pay the premiums on an insurance policy (on her life) large enough to handle the inheritances.

But the best strategy is to keep the baited breath, save, invest and rent. Because with every day that passes, we move closer to the event he has been waiting for. Most people don’t believe this, (which is why I have no friends) and a big report on debt in the last few days reinforced the popular meme.

Maybe you saw it. The Fraser Institute said there is no borrowing crisis. “Little evidence that Canadian households are being irresponsible in taking on new debt,” it said.

Really? With $1.3 trillion in mortgages and households owing more than at any point in history, with the IMF and the World Bank, all major ratings agencies and virtually every major economist – even the prime minister- warning about piggy borrowing habits, how can this be?

The think tankers make this argument: assets (mostly real estate) have risen 31% in the last five years, while debt (mostly mortgages) has increased “by just” 21%. So, whazza problem? Besides, the Fraser Institute says compared to other countries, like Norway, Switzerland and South Korea (seriously, I’m not making this up) our debt-to-income ratio don’t look so bad. (But compared to the country most like us, the US, it blows.)

Conclusion: “Canada doesn’t have that problem. Our banks have tighter lending standards and Canadians are clearly managing their debt levels responsibly with no evident strain to their incomes or balance sheets.”

Well, remember those people sitting in lawnchairs yesterday outside a sales centre in a GTA suburban field waiting to spend $2 million on a monster particle board house that increased in price $150,000 overnight? Those are the faces of debt. It is the intersection of greed and stupid. This is what risk is made of.

As Capital Economics points out, the think tankers took only mortgage interest into consideration (not debt repayment) when doing their report. They didn’t acknowledge the potential of a real estate correction, as is now gripping Alberta. And they reinforced the delusional belief interest rates can never rise.

The scariest part of this is believing that houses are more valuable because they cost more. In fact, real estate costs more because money costs less.

There is no intrinsic increase in shelter itself, just that cheap rates have allowed people to pile on epic debt and carry it for the same monthly fee. Say the economists: “While total net worth has risen by 141%, real estate has grown by 211%, contributing 55% to the overall gain in net worth. But with house prices now at record high levels relative to incomes, there’s obviously a greater than normal risk of a correction which, in turn, would hit net worth hard and, indirectly, negatively impact household spending. Since household spending represents more than half of the entire economy, these household balance sheet risks should be taken seriously.”

Jon should rent. His mom, too. Let the greater fools borrow. Just watch.

Through the roof

MOVINGUP modified

On Tuesday the second phase of “Aspen Ridge” McMansions in the distant GTA burb of Vaughan went on sale. People started lining up on Friday for the chance to buy a particle-board monster home with endless toys. A detached house on a 50-foot lot started at $1,641,990. With closing costs the premium model came in at over $2 million.

This was special pricing for the ‘VIP’ waiting list – people who still felt they had to sleep three nights in a lawn chair. There was another ‘VIP’ event for potential buyers on Wednesday, too. But this time there was an added surprise – a $150,000 increase. Now the basic fifty-footer was going for $1,791,990. By the way, that represented a half-million-dollar increase over the same house sold by the same developer in the same project one year earlier.

Guy lives not far away. “The houses are gorgeous,” he says, “but to go up $500,000 in a year is ridiculous.” By the way, these places are available to the general public this Saturday. If there are any left.


While obsessed people willing to swallow unbridled risk camp out and pee in jars for the chance to shell out two million on an unbuilt suburban pile, it’s a far different reality in others parts of the country. Like Alberta.

Matt check in from Fort Mac. “Don’t judge me Garth,” he says, “but hookers and blow have gone through the roof here!” Good thing, because real estate is peeling in the other direction.

“Well, one of my workmates bought a lovely little shack in the Mac for $765,000 in the spring of 2014 and then lost his job at Suncor a month before Christmas,” Matt tells us. “He and the wife and baby put said anchor up for sale in late January 2015 for $785,000, it is now listed for $760,000 along with all the other ones mushrooming up on his street. They also had an offer in on a detached home in Edmonton for $450,000 pending the sale of their Northern Albatross. That ship of limes has now sailed, leaving them with scurvy and bleeding gums.”

Actually, across Alberta, sales to the end of April were off 24% with listings up and the average sale price down 2%. That’s consistent with Calgary. As of yesterday sales for May are off 25% and the length of time it took the lucky people to sell is up 52%.

Ratings agency Fitch said this week it forecasts Cowtown prices are still too expensive by a whopping 17%. “With oil prices off more than 40 per cent from a year ago, there are broader worries of a contraction in the region … with employment prospects shakier in a region highly dependent on commodities pricing, uncertainly has begun to chip away at demand for housing.”

You bet. For the first time in half a decade, the number of Canadians collecting jobless payments has increased – and we are supposed to be in year six of a recovery fostered by government stimulus and the lowest interest rates since ever. Unemployment insurance claims have swollen by 9% in Alberta, leading the nation in claims for the third month running. EI ranks are also growing in Saskatchewan and the Martitimes.

Anyway, back to Matt: “Now let’s talk huge oil paycheques: they’ve shrunk. Contractors making $125hr last year are working for $85hr, and many staff hires are working for $65hr instead of $80hr…the pain continues. I (like all great authors) have resorted to selling my self-published novel out of the back of my pick-up truck to make ends meet…300 sales and counting. Jeez, I wish truck-nutz weren’t so damn expensive.”

David Madani is the chief egghead with Capital Economics. In his mind the Alberta misery is vastly overweighing the hormones in Vaughan. This week he upped the ante with a forecast saying things are bad enough the Bank of Canada will cut rates again. And again. “We expect the economy to struggle over the rest of the year, disappointing policymakers. In our central scenario, we have pencilled in another 25 basis point rate cut in July, and another again in October. Reflecting this, we expect the Canadian dollar to resume its downward trend, ending the year at US$0.75.”

So it’s almost like there are two Canadas. On one hand, moany Millennials with six-figure incomes say the system’s unfair and broken because they cannot afford detached houses the way their parents did four decades ago. In this Canada people sit in lawn chairs waiting to spend millions on an unbuilt house in a former field that even the cows thought was boring. On the other hand, economic growth for the nation disappoints, job creation is dry, exports are thinning, houses go unsold and we’re told money needs to get even cheaper to rescue things.

In between the extremes is the most indebted middle class in history, and Albertans voting in socialists.

Can you imagine a better time to be unencumbered and liquid?