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Big D

BURNING

For years it’s been one of the hottest markets in the country. There was a time when a word ad would appear in the morning, “NICE house, three beds, two baths”, and by dusk there were several offers, all above asking, no conditions.

But a lot’s changed in Fort McMurray, not the least of which is the price of crude oil, now crashed through a resistance line and sitting at ninety-four bucks. And it appears more hurt’s coming – for the economy, commodity prices, oil and a northern Alberta town where people have often shelled out the better part of half a million for a mobile home.

This week the influential Geneva Report warned of a “poisonous combination” of slow growth, low inflation and massive debts around the globe with the potential for “a vicious loop, putting the world at risk.” Some believe it’s already happening. Europe’s struggling, China’s production is down, Canada is a swamp, Russian finances are in reverse and Argentina defaulted. It’s what this pathetic blog has been yammering about for the last two years. The Big D.

Yeah, deflation. It’s what you need to worry about, now that we’ve all pickled ourselves in debt.

Here is how the Geneva eggheads put it: “Indeed, the ongoing vicious circle of leverage and policy attempts to deleverage, on the one hand, and slower nominal growth on the other, set the basis for either a slow, painful process of deleveraging or for another crisis, possibly this time originating in emerging economies (with China posing the highest risk). In our view, this makes the world still vulnerable to a further round in the sequence of financial crises that have occurred over the past two decades.”

These guys understand that debt’s okay (whether it’s a national deficit, or your brother buying a condo) so long as there’s growth (giving a country more tax revenues, and your sibling a higher income). The trouble is that six years of ridiculous interest rates have encouraged elephantine debt everywhere, and yet growth is fizzling in all but a few economies (we’re not one of them). This is very bad news for the indebted.

Deflation – even the simple lack of inflation – means stuff (like real estate or a barrel of oil) stops rising in value because demand wanes. So the capital value of an asset (like a house) stagnates, and often declines. When deflation picks up a little speed, not only do asset values erode, but also incomes – creating that vicious loop economists fear (because they can’t fix it). People who have less to spend, or figure they soon will, spend less. Demand falls. Assets values plop more.

Worst, lower incomes make debt harder to pay – so it’s the people with big mortgages and the countries with fat national debts – who take it in the gut.

But I digress. We were talking about Fort Mac. Boom town. The oil and truck nuts capital of Canada, and these days a fine little microcosm of global economics. Let’s have a few words from Leonard, who has a fresh dispatch for us from the tailing ponds:

“So for all those people that think that housing is still crazy in Fort McMurray, think again. I (as a completely ignorant 1st time home buyer) bought a house up there in 2008 just as the market started to soften. My very average home cost $660K. Tack on CMHC fees and I owed the bank $684k

“Gone are the days of house values climbing daily by thousands (if not tens of thousands of dollars). My house has been a rental property for 4 yrs now, and I just listed it for $649,900. 6 years later, and a net negative value (If I’m lucky and it sells for $649k. I have my doubts). I can barely believe it myself.

“Has it been worth all the stress? NOT A CHANCE! When I originally bought the place, my magic # on the house was when it was worth $ 1 million, I’d sell it, and buy a house outright whereever I lived (currently Edmonton). It was a nice dream, but a dream was all it’s going to be. I’m just happy almost all of the money paid to my mortgage company was paid for by my tenants, because If I had been shelling out upwards of $200k in interest in the first 5 year mortgage term (remember, I obviously did a $0 down, 40 year mortgage like all the other virgins back then), i’d probably be looking to jump off the high level bridge.

“Feel free to use me as a warning sign to my fellow Canadians.”

I will. But you’re also a symbol, Lenny. How many other people have borrowed massive amounts of money to buy real estate because (a) mortgages were cheap, (b) houses always go up and (c) it’s different here? These are the folks who’ve never experienced negative growth, think deflation means iPhones will cost less (and is therefore good) and believe property values will keep bloating so long as rates stay low. They sure have a surprise coming.

Oil could drop to eighty bucks in weeks or months and Len’s house might end up selling in the fives. Wouldn’t be a big shock. Most booms turn to busts because most people think with their pants. Especially in Alberta.

But the wider risk is out there. If the Big D arrives, even modestly, assets like real estate will be hit first, and hardest – since that’s where the debt lives. In contrast, money becomes more valuable, as its purchasing power rises. This is why you want the bulk of your net worth in financial assets. It’s also why renters will win.

Lust on the rocks

SIGN modified

A little over a year ago, when it was selling for more than 60% off, this blog told you about Villa Madrona, an orgiastic pile of house porn pulsating on the edge of the sea, heartbeats north of the love capital of Canada, Victoria.

When this opulence sold last summer it was heralded as the biggest deal in almost four years, even though it went for a fraction of the original asking price, and probably below replacement value. After all, the lux guest house itself is 3,200 square feet. The main digs contains eleven thousand feet of carved oak pilasters from a Vanderbilt mansion, Singaporean chandeliers, a Tuscan mural and a library built from the guts of an antique British abode. Of course, there are fountains, marble floors, sculptures, theatre and enough paucity of taste and refinement to befit a home worth of Britney Spears.

But Villa Madrona is more than a rising monument to a hormonal imbalance. It’s a symbol of our tortured relationship with real estate itself, the most emotional and deceiving of assets.

In the hedonist days of 2005, as the American housing market bloated to the extreme, the five-year-old Villa – built by juice king Ralph Bodine – hit the market for an eye-popping $18.5 million, which is heap of money for two acres of land with a walk score of 5. No takers, though. After the GFC decimated real estate and cheap mortgage rates revived it, Bodine relisted – this time for $19.25 million. Crickets.

Over time the price dropped into the nine mill range, then eight, then $6.998 million. Finally, in July of 2013, the love nest found buyers – a Chinese couple who’d taken up residence in Victoria, enjoy a large taste deficit, and plunked down $6.6 million. The deal closed just a year ago.

It all happened about the same time another off-the-wall property, the home of failed Bear Mountain resort developer Len Barrie, was sold by the courts. That 13,000-foot, five-year-old heap was originally listed for $13.9 million, reduced to just under $5 million and eventually sold for $4.4 million to people who need an 1,800-foot bedroom. It also has four dishwashers (apparently they’re all attractive), a putting green and the thing everyone craves – crystal doorknobs.

Anyway, here’s the update: if you missed snatching Villa Madrona last year, you can do so again now. It’s on the market. The new owners are asking $11 million.

What does this tell us?

Beats me. Maybe it says they made a huge mistake in Canadian real estate and are now seeking a greater fool. Maybe they actually believe they can make $4 million in 12 months on a flip. Perhaps they think nobody ever heard of comparables or sales histories. Maybe, inconceivably, they don’t read this blog, as most gazillionaires do. Could be their agent, James Liu of Royal LePage, is just an idiot. And then, perhaps values in Victoria have risen 80% in the past year – which is weird, since the local real estate board says sales prices have flatlined – up a scant 0.3% in the past year – less than the rate of inflation.

Or, simply, maybe’s it more evidence this is an asset whose valuation is so divorced from logic and completely dependent on non-financial factors (as opposed to price-to-income ratios, economic growth or demand) that you can just make it up. In any case, it took the last dude eight years to unload this Villa Dolorosa and I’m betting it will once again prove being rich and retarded are not mutually exclusive.

*    *    *

If you’re selling or buying real estate, here’s something to know. I told you months ago never to fill out or sign one of those property disclosure forms when you list your place. They’re legally toxic, asking you (in effect) to warranty and guarantee your place has no defects, legal encumbrances or unseen flaws. In fact, your signature essentially says there have never been problems, even if they’ve since been rectified or repaired.

You’re far better off to shift the burden of proof on to the purchaser, who should be doing his/her own due diligence anyway – with a home inspection, for example. Lots of the questions on the disclosure form ask for highly technical or legal responses, which most people are incapable of giving. So don’t try.

Hundreds of unfortunate sellers have not heeded this advice, and ended up in court as a result – often losing actions to buyers who walked away with large settlements for problems that cropped up after closing. Now an Ontario court has also ensnared a realtor in this kind of dispute – an agent who worked for both buyer and seller in a deal that went south over a botched disclosure form.

The court ruled the agent had an ethical responsibility to ensure the statements on the form were correct which, of course, is impossible. Clients lie. What realtor is going to risk legal action by standing behind a homeowner’s claim that the septic is pristine and the basement walls never sweat?

So, I expect this disclosure form’s now living on borrowed time. Like the infamous BRA, just don’t sign. Too much potential hurt.