Entries Tagged 'Book Updates' ↓

What could go wrong?

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Five years ago Ricky and Carmen came to Canada for a better life. That led to graduate studies, two so-so jobs, two kids, a new SUV and a two-bedroom apartment in Burlington. But it’s not enough. This is the land of entitlement, after all.

“So we are today renting a 30 yr old apartment, with no washer, dryer or dish washer,” Carmen writes me. “Paying $1300 per month. Our annual income together is $115000, but take home is $6k per month for both of us. We have a car loan for $8000 and no other debts. We have 20k in RRSP and 5K in TFSA and contribute $300 for our 2 sons (5 years, 8 months) towards RESP.”

Not a bad start on the new life, with debt under control and almost twenty grand in liquid assets. But Carmen’s house-horny.

“So now I am having hard time staying in apartment with 2 kids, and no washer/dryer means 3 hrs of  weekend time for using downstairs laundry. We thought of moving for rent as my husband is following your advise of not buying home now. But when we started searching rental homes anywhere in GTA, house rent for 3 BR townhouse or condo is no less than 1700, plus utilities..which all together will come for $2000 per month.

“So my question: would it not be ok to buy a semi home around 420K with 5% down so that our monthly mortgage will come around $2300 or so. Is it better to rent for 2000 or buy anything with monthly mortgage as $2300?”

Well, Carmen, do the math. A $420,000 house will take every last cent of your liquid assets to buy, and you still won’t have enough for the CMHC premium ($10,972) or the land transfer tax ($2,875, after the first-timer rebate). And even if you do manage to close the deal and add the insurance bill to the mortgage, your monthly (loan plus property tax and insurance) will be more than $2,500 – plus those utilities. In other words, almost a thousand-dollar premium over renting.

Is it affordable? Technically, yes. You qualify, because there’s nobody in the system – not the realtor, or the banker or the broker – tasked with looking out for your interests. We have lost our way, Carmen, when a young family with more equity in their vehicle than money in the bank can move into a $420,000 house, with a $410,000 mortgage. The moral compass around here is broken.

By the way, a portable, washer-dryer all-in-one appliance which is ventless and requires only a kitchen faucet to operate can be purchased for $900. There. I just saved you $432,937.

Of course Carmen is nuts to roll the dice and risk everything on a crummy suburban semi for larger reasons, too. Despite the assertions of the house-humpers, Re/Max, the real estate cartel and everyone in Calgary, the Canadian real estate market is not in good shape. Yesterday’s pathetic post showed even in mighty Toronto, home of hormonal hipsters and media-pleasing bidding wars, more houses are selling for below ask than above. Sales volumes have decreased steadily since 2012 and big segments of the market (like properties over a million) are languishing.

There are also places, like Halifax, where a two-year supply of houses is piling up weekly, with sales off 35% and prices starting to tank. A nation away, Victoria house sales are running way below the five-year average and prices are flatlining. In the middle, Ottawa’s condo market is in serious shape while overall sales and prices have hit a wall. Nationally, Teranet reports that March was the first such month in 15 years that housing values stalled.

Now, there’s Adrienne Warren.

The Scotiabank economist shared a stage with me a couple of years ago in a Toronto hotel as we debated the housing market. She said the fundamentals were good. I said we were headed down the wrong road. Today it sure sounds like she agrees with me.

The bank’s latest real estate report, released Wednesday, pulls few punches.

“Canada’s long housing cycle is turning,” says Adrienne. “Residential investment stalled last year as affordability constraints tempered home sales, and builders scaled back the number of new developments… The impact of a softening housing market will be felt broadly. The likelihood of smaller household wealth gains as house price growth slows — or adjusts lower — will reinforce a more cautious trend in consumer spending.”

The key points are simple. The housing boom’s ending and as it does, we all take a hit. For the last dozen years the real estate sector has expanded at twice the rate of the economy (I’ve shown you graphs comparing the FIRE sector here to that in the US). There are now almost 500,000 people employed in building, flogging or financing homes. Hell, there are 40,000 agents in the GTA alone, almost three-quarters of whom didn’t make a sale last month.

Adrienne says you can blame a combination of things, like inevitably rising mortgage rates, stricter mortgage regs and (above all) prices which have mushroomed past the ability of people to pay – and still have a life. Folks like Carmen and Ricardo. Just imagine if they threw everything they had into buying a place that cost them far more than rent, only to have it decline in value and wipe that meagre wealth away. What a personal tragedy.

With listings tight and money cheap, there are many who come here to celebrate rising prices, claiming everything’s cool. But a market with thinning volumes and ever-rising mortgages which sucks in the naïve and the vulnerable provides a classic definition of risk.

How is that not obvious?

Gen F

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The cheapest house for sale in Vancouver ($599,000 on half a lot in a crappy location) just sold for $40,000 over asking. To a kid, of course.

In Toronto, agents swear the moribund condo market is resuscitating, even as a gush of new units hits. Realtor David Fleming is described in the Globe: ‘He adds that he’s never had this many active condo buyers before. He also notices that twentysomethings are finishing school, working for a year and diligently saving their for a downpayment. “They’re saying: ‘I’ve got my 5 per cent – I’m ready. My condo buyers are getting younger and younger.”’

Back in Van, a one-bedroom apartment went to market Monday and by Tuesday at noon had three offers, all above asking. All from Millennials. The ‘winner’ added ten grand to get the prize, no conditions.

This kind of activity has led the mainstream media to slather over a real estate boom in which big demand meets thin supply for overwhelming price appreciation. Sellers in Toronto and Calgary “hold all the cards,” reads one daily’s headline this week.

Sexy story. If it were only true.

The real estate market today is all about hormonal young buyers and segmentation. The houses that Millennials and GenXers, hipsters and yuppies think are affordable, are being devoured – but only in the cities, and particular hoods. These are most often in the $600 to $900K range where mortgage insurance is available and kids need but 5% down.

Above $1 million, crickets. Price reductions. Long days-on-market. And this is not an insignificant segment. In the GTA there are about 2,700 properties currently listed above a million (of 16,000 for sale). In Vancouver, the number is an astonishing 4,500 (of 14,400 listings).

Now that we’ve had more than a year to assess things, it’s obvious that cutting seven-figure houses off from mortgage insurance has had a dramatic impact on the market. While somebody buying a $995,000 semi full of bugs need only cough up a down payment of $50,000, the purchaser of a house down the street going for $1,050,000 must have at least $210,000 in cash to close the deal. This sure separates the wheat from the chaff. And it could mean a mess of trouble down the road as rates rise and markets moderate. But you know that.

And here’s some interesting data mining and manipulation from a blog dog who calls himself Aggregator. Because he apparently has no life, he catalogued every house sold thus far in April in Toronto, and then graphed the selling price relative to the ask.

The summary table he posted yesterday in the comments section shows how many houses actually fetched far less than vendors originally wanted recently or in the past, and how this was utterly masked by realtors bringing out new listings at renewed pricing.

Below is his graphing of April sale prices relative to the ask. Note that fewer than one in three houses actually changed hands for more than the list price, and of those a number were total reno jobs requiring further big bucks.

Meanwhile, as I’ve shown in the past, sales volumes for SFHs are running substantially below levels of two and three years ago.

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So what?

So you should worry about the kids. The real estate market in the hot zones is running on hormones, not experience. Older, wealthier buyers are not storming the gates. There is no across-the-board price momentum. The average prices and Frankenumbers that real estate boards trot out are being skewed higher by a paucity of sales at the top end and a small riot in the middle, where values are being shoved up against the CMHC insurable limit.

Yesterday’s post was meant as a cautionary tale against buying without an expert inspection. I could make the same warning against jumping into a bidding war with 5% down, 95% leverage and no conditions.

But you can’t fix stupid. You just grow out of it. Sometimes.