Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 29 Aug 2014 22:17:47 +0000 en-US hourly 1 Throwing in the towel Fri, 29 Aug 2014 22:17:47 +0000 GIN modified

Jason makes a lot of money on Bay Street and has a spouse who can’t understand why he’s so cheap. “Just my background,” he says. Later he hints he has about two million in cash, works like a dog at his finance job, and just got notice his executive-style rented house has been sold.

“Now I’m committed. I have to buy, or get a new wife.” The target house (probably an offer this long weekend) is owned by people asking $1.7 million and has been on the market many months. Jason says he gave a verbal of $1.5, and was told the vendors were “highly insulted” by the paltry amount proffered. “Then I found out they’d already bought,” he says. “Not only that, but they bought a place for $1.8 million that was originally listed for $2.5 million. So they can be as insulted as they want.”

Of course, I told him to put the vendor in a vice and show him no mercy. The crumble in prices – even in affluent and snooty parts of the GTA like North Toronto – is now leading to some interesting dynamics. Anyone who believes the realtor hype about ever-increasing prices is missing the real news.

In the upper ranges over $1 million there are no more widespread bidding wars. Activity over the summer has shriveled like a dude in a lake. As I detailed here some days ago, the average price of a SFH in 416 dropped 17% between April and August. Of course there is always a seasonal dip (which is exactly why you should buy before Labour Day), but this year it’s been twice the norm.

That’s a big deal when it comes at the same time as a crash in mortgage rates. As you know, five-year fixed-rate home loans are now available for less than 3%. Variable mortgages are as cheap as a buck ninety-nine, which means carrying a bloated and morbidly obese mortgage is easier than ever.

In fact, that’s just what the Royal Bank had to say this week when it released the latest Affordability Report (love that name).

“Housing across Canada became more affordable in the second quarter of this year because mortgage rates dropped, according to a report from RBC,” says the incisive media coverage. “Even with prices moving higher, homes became more affordable in nearly every market across Canada, according to RBC’s Housing Trends and Affordability Report.”

Of course, this report is a disappointment on many fronts. First, its basic premise is that houses are bought with a 25% down payment, then financed with a five-year fixed mortgage at current rates. Because the average down in Canada is less than 10%, the full absurdity of current house prices is masked.

Second, the bank found that to afford the average two-storey house in Canada (even with that whopper of a down) takes 48% of a family’s pre-tax income. What does that mean? Well, here is the bank’s own explanation:

“An affordability measure of 50% (for example) means that home ownership costs, including mortgage payments, utilities, and property taxes take up 50% of a typical household’s pre-tax income. Qualifying income is the minimum annual income used by lenders to measure the ability of a borrower to make mortgage payments. Typically, no more than 32% of a borrower’s gross annual income should go to ‘mortgage expenses’—principal, interest, property taxes, and heating costs (plus maintenance fees for condos).”

In other words, the average detached house is already unaffordable – even with the lowest mortgage rates since ever. It also suggests banks are routinely exceeding gross debt servicing ratios. Or, where else are all these mortgages coming from?

Of course, Toronto and Vancouver are off the charts. To buy a two-story house in the GTA now takes 65% of the average family’s pre-tax income, and in the Mouldy City that number soars to 85% – which is a tad less than a few months ago when home loans were more expensive. Of course, 85% of gross income is more than 100% of take-home pay, which is why household debt is rising faster in BC than anywhere else.

Jason knows this. In his job he moves vast sums of money and is acutely aware of risk and return. For years he’s resisted buying because it made so much more sense to rent – and his ballooning bank account is evidence. He’s 100% convinced Canadian real estate will fall, the way he watched it happen back in California before coming here five years ago. After all, when most people are gutting their incomes and swallowing debt to buy something they could rent for less, how can the outcome be in doubt?

So here’s his plan: Vultch hard and get a low price. Use a home inspection report to hammer it down further (“There’s always something wrong”). Pay for the place with cash. Borrow 65% of it back on a home equity loan and invest. Write off 100% of the interest expense from his sizeable salary. Mitigate his real estate risk with a nice, balanced, diversified portfolio, financed with a loan costing him 1.5%. “If I make only 5% a year, I’m laughing,” he says, “and I can now sustain a $55,000 annual loss on the house.

“Sure hope it’ll be enough. No new wife, though.”

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More ambition Thu, 28 Aug 2014 23:08:24 +0000 BLIND modified

Time for some follows.

RECO is the housing cop in Ontario. It functions as a regulator of the industry, but without the cut-off-your-glands judiciary clout of the agency that oversees the financial advisory business. Still, RECO can fine agents, suspend licenses and make life reasonably miserable for those who break the rules. The trouble is, unlike the financial and bank cops, RECO doesn’t have a platoon of investigators, inspectors and auditors who make registrants live in fear of breaching the smallest rule.

Hence, the Wild West that now exists in our biggest province, with imitations across the country. In BC, for example, land of yellow helicopters ferrying fake Chinese agents, and condo showrooms with fake Chinese buyers, the Real Estate Council of British Columbia’s turned from watchdog into lapdog, or maybe more like a pet guppy in a plastic bag in your mom’s guest bathroom toilet tank. Egregious malfeasance on the part of professional housing marketers has escaped scot-free.

Well, back to Nancy Taza and her condo-thumping fictional math. Former career realtor and housing consultant Ross Kay says not only is the 31-year-old realtress in contravention of RECO guidelines with the email message posted here yesterday, but also with content posted on her web site and wild-‘n-crazy Facebook page.  (Note: after this post was published Ms. Taza’s FB page, replete with its bikini pictures, was taken offline.)

“While RECO can’t touch TREB or it’s non-registrant staff,” says Kay, “Taza is a different story.  This has been brought to RECO’s attention.”

TAZA modifiedIndeed. A developer, builder or marketing maven  can promise you a 160% return in three years on a two-bedroom condo that isn’t built yet, but it’s a different story entirely when a licensed agent/broker makes the same broad statements. As pointed out here yesterday, there are an astonishing number of people who actually believe it all. Especially when it comes from the lips of a Mercedes-driving, penthouse-dwelling, party-going Amazon.

And here’s another follow for you – the sad saga of Meerai Cho, the go-to lawyer for Toronto’s real estate-buying Korean crowd who mistakenly gave $12 million in condo deposits to a developer who promptly flew to Seoul. The cops figure she’ll eventually face 300 charges, while she’s already been thrown out of the legal profession, and declared bankruptcy. But the victims find themselves in a limbo – covered only marginally for lost deposits by the new home warranty people, and unable to sue a dink who fled the country.

So will they be able to go after Cho’s malpractice insurance policy – blanket coverage all lawyers must carry?

Not so fast.

CHO  One of the blog dogs is an insider, and provides this: “All the stories seem to be leaving out that as a practicing lawyer she’d have malpractice insurance coverage,” he says. “What it would hinge on though, among a million other things, is whether it was a genuine error (which is covered) or fraud (which is isn’t covered by the policy).

“It all depends entirely on what kinds of claims end up in our claims department, but my two cents is that those buyers would be a lot better off if she genuinely just screwed up.”

The Cho saga resumes on October 2, with her next court appearance. Unfortunately for the victims – at least one of whom plopped down $700,000 – the combined local cop/RCMP investigation could take well into 2015, and no insurance payouts are expected until the whole mess has been unpeeled.

There are lessons here, as I’ve pointed out. Despite the fact 70% of Canadians are heavily invested in this one asset, and have placed $1.1 trillion in financing on it, real estate remains basically unregulated. Agents can promise future returns on property that doesn’t exist. Real estate boards can secretly alter published numbers, without consequences. Consumers can be denied access to basic information, like days on market or sales histories. Developers can delay for years handing over product they’ve already sold. And 200 families can lose their life savings and look forward to diddly.

Meanwhile people worry about losing money on a bank stock. It might be different, of course, if there were a tank top involved.

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The manipulators Wed, 27 Aug 2014 23:43:08 +0000 MAN modified modified

Why do people make stupid investments? That’s easy. Greed. Add in sex and food and you’ve pretty much explained what manipulates human society. I’d say Nancy Taza knows that well. More of her in a moment.

This week’s arrest of the career, 63-year-old Toronto lawyer who accidently lost $12.1 million in condo deposits then went bankrupt and could face up to 300 charges of fraud and breach of trust got me to thinking. Buyers in that unbuilt edifice fronted deposits ranging from $40,000 to $700,000, when the new home warranty program would cover only $20,000. Obviously they took a giant risk – as do all pre-construction purchasers – given the fact they secured nothing but a futures contract. In this case not only did the developer take off, the sales staff disappear and construction never commence, but the lawyer collecting deposits was untrustworthy.

Beyond these risks – against which there is virtually no effective protection in law – pre-build buyers make a huge commitment to a structure they can’t see, touch or gauge the quality of. They have no idea of the building’s ultimate demographics and social mix, durability of construction (the windows factor) or future resale value.

In short, a stupid investment. So, cue the greed.

In Vancouver, Edmonton, Calgary, Toronto and Montreal, people who are afraid of predictable financial assets have routinely thrown money into rank real estate speculation, greased along by realtors sometimes as wanting in ethics as they are in math skills. The outcome could be a mess, and the spray could blot the entire housing market.

Let’s have an example. So here’s Nancy, a 31-year-old dynamo, who opened her own little condo-slogging boutique office a year ago. She’s a promoter, dog-lover (that part’s good) and an aggressive marketer. Here’s her Facebook photo, which will give you a little glimpse into the pizazz she’s bringing to Taza real estate.

TAZA FACEBOOK modified  All that’s cool and good. Selling condos is the ultimate in eat-what-you-kill, commission-driven salesmanship. Most people would crash and burn. But succeeding by fuelling the flames of avarice within novice and naïve investors, who you’re leading into massive purchases and heaping piles of debt, is definitely not cool.

This week, Taza real estate sent out an email blast that helps us understand why thousands of people too timid to buy a preferred share in a stable bank paying 5% and giving you a fat tax break would risk hundreds of thousands on an unbuilt concrete box in a market clogged with inventory. The offer is for a few two-bedroom condos in a development called Quartz which will be built sometime next year, sitting in the middle of a vast condo community called CityPlace.

Here’s the pitch:

“The prices I am offering you are significantly lower than today’s market value.  I assure you this is the best deal you will ever find in downtown Toronto, but you must act fast! I’m presenting you with a 2 Bedroom incredible investment opportunity. $20,000 Discount Directly Off the Top of the Builder’s Price + Additional 8% Credit Cash Back On Closing.”

So, a condo ‘worth’ $479,900 is being offered at $423,108 (which means that’s what it’s really worth. Maybe.) Ten per cent down now, another ten on closing. Here’s Nancy’s math, and where the greed juices really start to flow:

* Monthly Mortgage Payment: (Based on 20% Down Payment with a 2.99% 5 Year fixed mortgage rate) $1425
* Monthly Tax: (based on 0.9% 2015 property tax rate increase) $317
* Maintenance fee:  (.51cents /sf) $427
* Total Monthly Obligation: $2169
Rental Value: $2350
Monthly Rental Income: $181

Return on Investment after 3 years of possession:
Exclusive savings from the builder price:  $56,792
Value Appreciation:  (based on 4% year) $76,784
Rental Income:  ($181 per month x 3 years) $6,516
Mortgage principal paid by tenant:  ($600 x 3 years) $21,600

Total Return on Investment: $161,692

Wow. Spend $90,000 buying a two-banger in CondoLand and score a profit of $161,692 three years later? Sign me up, babe!

See what I mean? She’s good. Ignored was the opportunity cost of the $90,000 down payment, which invested at 7% would mean $525 a month should be added to the true cost of the unit. That alone bumps the monthly to $2,694. By the way, CondoLand is peppered with rental two-bedroom condos available for $1,900 or $2,000 (a larger unit than this), so a moist little landlord could expect to be losing about $800 a month.

But it gets worse. The difference between the sale price and the builder’s fictional price ($56,792) is lumped into ‘total return on investment’, then the whole shebang is goosed by 4% annually for the next three years, when most investors in the same hood shed tears of joy when they recoup their original purchase price after that period of time. The rental income is a cash flow loss, and adding the repayment of debt as ROI is nothing buy voodoo accounting.

This is deceptive and misleading. It guarantees future returns. It details no downside. It’s honey for the unsophisticated, nectar for the gullible. Sexy, riskless, urbane, alluring – and unregulated.

We’ll all pay for it.

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Breach of trust Tue, 26 Aug 2014 20:45:25 +0000 EVIL modified modified

This week Toronto cops arrested Meerai Cho and charged her with a slew of bad things, like defrauding dozens and dozens of families who trusted her. The 63-year-old was the ‘go-to’ solicitor for a large part of the city’s bustling Korean community, and now needs to explain her part in the loss of at least $12 million in condo deposits.

This blog took up the cause of these families some days ago, with the mainstream media piling on the next morning. Within three days there was a Law Society hearing to defrock Cho, and she was doing the perp walk into 32 Division. The Tarion home warranty people are besieged with claims, and you can bet there’ll be a class action suit coming out of this along with an RCMP investigation reaching all the way into Korea, where a fugitive developer is holed up.

At the heart of this is a condo/hotel complex in north Toronto that sold out in a blizzard of interest years ago. Since then the only shovel seen on the site was the one used to plant a sign. The Centrium development changed hands last year (at least once), left investors desperate for information and finally disintegrated in what looked more and more like a scam.

CHO  Cho was the lawyer of record for the Korean co-developer, and accepted millions in deposits from condo buyers. Once trouble started brewing she declared bankruptcy, with documents revealing she owed $13 million and had assets of less than $900,000. Cho also penned a statement saying, in error, she had released $12.1 million in deposits to the developer, who then absconded with them. Oops. Sorry.

Now the money’s gone, and Cho will be in court to face 75 charges on October the second for fraud, possession of property obtained through crime and breach of trust. Naturally, the Law Society has suspended the solicitor who, for years, has been a fixture in the Toronto condo scene.

The jilted condo buyers are largely SOL. The new home warranty program makes refunds of only $20,000 for a deal gone bad – restricted to when the developer is bankrupt or a contract is legally terminated. Not only did many buyers put down three times that amount, but the bankrupt here is the intermediary – the lawyer – and not the builder. So the buyers, 90% of whom are said to be Chinese-Canadian families, will have to push the Law Society for compensation, launch civil action, or learn something bitter about lusting after a pre-construction property.

Of course, there are lessons for every fool plopping down money for real estate that isn’t actually real. First, never buy a condo you can’t pee in. If it doesn’t exist, don’t do the deal. Developers have a myriad of ways (legal) to alter what you actually bought or grossly delay the delivery of it. You have no certainty over the level of finishings, the quality of construction, soundproofing between units or the durability of the window wall systems (please refer back to Misery Week for more). Worse, like Centrium, the whole project could collapse because financing dried up or the developer’s a weiner.

Does the Centrium-Cho disaster have anything to say about our real estate market in general?

Mais oui. At least 40% of all condo purchasers – according to the people who sell them – are first-time, amateur or naïve investors who plan on flipping the units or renting them out to lucky tenants. Often they’ve been reeled in by highly-misleading and largely-unregulated marketing promising them positive cash flow and guaranteed surges in the value of the unit. Or, as another recent blog post told you, by advertising materials masquerading as independent editorial opinion aimed squarely to suckering millennials.

There are over 105,000 new condo units in the Toronto pipeline at the moment, with ever-more streaming to market. At one point last year Toronto Hydro had 123 separate permits issued for electrifying condo tower-building cranes. In contrast, metro Miami (population 5.5 million) has 4,500 condo units under construction. In New York, with 9 million people, there are only 40 condo buildings currently rising. Either everyone in the world wants to live in the GTA, or we just drank all the bathwater.

I feel sorry for the families who blew up. However, I suspect none read this pathetic blog.

And what a recipe for heartache that is.

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Big Dog Mon, 25 Aug 2014 21:58:56 +0000 DOG FOUND modified

Everybody knows big city houses cost too much. The sane among us realize prices will correct. Thus, the smart action for those wish to own real estate is to wait. But talk like that sure ruins a realtor’s day. So the housing business keeps telling us values will increase. Probably forever.

This week Bank of Canada boss Stevie Poloz played into the bulls’ hands by saying interest rates in Canada will not follow those of the US in lockstep. So, does that mean 3% mortgages are here to stay, as Canada morphs into Japan?

Of course not.

Does it also mean real estate can continue to appreciate even though the economy’s too weak to breed inflation or higher rates?

Decidedly not.

In fact everybody who believes house lust is akin to good dental hygiene should be hoping for the cost of money to rise, because the last thing you’d want is for Toronto become Tokyo. Yikes.


Why does the chart look like this? Because Japan’s a country where the government would really, really, really like to have some inflation. The more the better, because higher prices mean higher demand and economic growth. Sadly, though, the Japanese have been fighting deflation for years – which is why variable rate mortgages are 0.8% and 10-year loans are less than 1.5%. What has this absurdly cheap money done for housing? Look at the chart. Crickets.

Canada is nowhere near this stage yet, of course. But things ain’t going in the right direction. Outside of July (which was not that hot), there have been precious few jobs created in 2014. Of those that came into existence, a whopping 75% are part-time positions. Yup. McJobs. The labour force participation rate is declining, wage growth is less than inflation, and every month household debt increases.

When asked about job growth a day ago, Poloz said: “It’s been pretty weak. It’s been almost all part time so therefore it’s not generating the kind of income you would get from a usual 1 percent employment growth. We know that’s significantly less than we would expect to see in a well-performing economy.”

Simply because consumers are tapped out, mortgage-laden, house-rich and savings-starved, the Big Dog knows it has to be a revival in exports and business activity which will rescue the economy. A cheap dollar helps, since it makes our stuff more competitive. And if Canadian interest rates are to stay lower than those in the US, our buck will decline.

Now do you know why he said rate hikes here would lag those to the south?

A report days ago from Desjardins Economics showed the pickle Poloz is in. Those guys believe economic growth here will languish between 1.5% and 2% until… get this… 2030. That’s in contrast with the 3.5% average growth that rocked the Sixties, Seventies, Eighties and Nineties. Just look at this chart and see the trend – if the Dejardins eggs are right, this could get ugly.

GDP modified

So, what should you expect?

The US central bank, the Fed, will be finished its stimulative bond-buying (“QE”) by Halloween. Then it will start to raise rates, slowly but steadily, about a year from now. Maybe sooner if the American job market continues to smoke. In any case, it’s coming. Bond markets will anticipate that, with yields rising – probably as QE tapers out. So, it’s reasonable to expect five-year fixed mortgages to cost more by Christmas.

Poloz will resist for a few months, hoping the dollar tanks a little more and exports revive. Ultimately the Bank of Canada will also increase its key rate – slowly, carefully, but methodically. The last thing we need in a moribund economy is an 80-cent currency that gooses the cost of imports and sucks off more consumer cash flow. Big Dog will be in a careful balancing act for several years to come.

What are the consequences?

Variable-rate mortgages will stay cheaper longer, but five-year fixed rates are probably the best bet for most people. As for real estate, I hope you absorbed the lesson of yesterday’s post: when money costs less, houses cost more. We are now at peak house levels, even as we turn into a growthless, part-time nation. The only reason values stay aloft is the blind willingness of your horny co-workers and idiot relatives to shoulder even more debt.

But if we’re looking at 15 years of stagnation and even modestly rising interest rates, the outcome should be obvious. Even to them. And certainly to you.

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History sucks Sun, 24 Aug 2014 22:10:18 +0000 DEAD modified

“Many millenials are getting frustrated by how long it now takes to ‘get started’ in life,” Kirsten writes me. “In WWII, a young man of 16 was considered an adult, and able to find work/help support the ginormous brood his mother had given birth to. Student debt was unheard of, a car cost less than one year’s wages, and a house would cost you all of your savings. Now, we are almost considered children until sometime after we graduate university, we are graduating with debt, and buying a house will likely cost us mortgage payments for 15+years.”

Without a doubt, there’s a meme today we’re in uncharted times. Maybe we are. After all, in the 1940s 16-year-olds were enlisting. By the mid-Forties 37,000 Canadians, most of them kids, had perished. So, life was a bitch then, too, Kirsten. And nobody could tweet about it.

But while the Millennials whine, lots of Boomers gloat. Like Paul Etherington, the current prez of the world’s biggest real estate board, in Toronto. He wrote a piece for the mainstream media this past weekend – as a trusted real estate leader – telling people like Kirsten the longer they dither over buying a condo, the more impoverished their lives will be.

Are houses now averaging $550,700 overvalued, he asks? Dig this response:

“It’s easy to see how much of a strong long-term investment real estate represents by taking a look back at our city’s history. Looking back 18 years, to July 1996, the average price was $199,856, reflecting an increase of 175%… it does illustrate an indisputable truth: a sensible investment in housing provides strong long-term returns.

“Reaching even farther back, 48 years, to 1966, the average price for a new home was $22,500.  Today, a parking space in a downtown condominium can easily sell for more than the cost of a home in 1966… A Toronto home purchased 78 years ago, in 1936, could have been snapped up for approximately $8,000.”

See what I mean? The young feel bitter and disenfranchised they can’t have what they think their parents had at their age. Meanwhile the old farts just want everyone to be like them. So, buy the damn house, kid.

Let’s give some context to Mr. Etherington’s blatherings.

In 1936 there was a depression. The jobless rate hit 30% in 1933, there was no unemployment insurance and the feds operated relief camps for idle men. The average annual wage for a two-income household (which was rare) was $1,473, and the average Toronto house cost $8,000. In other words, it took 5.4 times annual income to buy – which by all measures was extremely unaffordable. The prime rate was 5.21% (almost double that of today), and mortgages were in the 7% range. And Paul Etherington says Toronto houses could be ‘snapped up.’

In 1966 the average income for men was $5,483 and for women $3,016. So a working couple making $8,499 was considered middle class and could buy a house priced at $22,500 with just 2.6 times annual income. In other words, affordability had soared with wages rising as the economy boomed. Real estate price increases were kept down, in part, by the average mortgage rate of 7.6%.

Thirty years later, in 1996, male incomes averaged $32,588 and for women it was $21,735. So with two incomes a couple pulled in $54,323, which made it fairly easy to buy a house costing $199,856. The multiple then sat at a reasonable 3.6 times family earnings. Mortgage rates were pretty consistent as well – pegged at 7.2% that year.

Today the typical Toronto family brings home $98,116, while average house prices in the Toronto area have soared to $538,530, in large part because 3% mortgages make debt easy to carry. But compared to incomes, real estate is just as unaffordable as it was in 1936 – at 5.5 times household income.

So what are the lessons?

  • History tells us houses are seriously too expensive. Most Boomers have no idea how much easier it was to score real estate three or four decades ago, or how low rates today are masking the idiocy of buying at these levels.
  • Clearly there’s a negative correlation between rates and prices. Low rates bring high prices. Ironically, interest rates are down today because the economy’s weak, keeping wages suppressed. The worst of two economic realities.
  • Today’s rates are probably an anomaly, the work of massively interventionist central banks. They will eventually revert to historic levels. In 1936, 1966 and 1996, that was 7% for a five-year loan – more than double current levels. Imagine what that will bring.
  • Therefore worry more about debt levels than ever-rising house values. They will be falling in the future. Wait.
  • Realtors like Paul Etherington, placed in a position of public trust and influence, are an embarrassment. Worse, they lead people into bad decisions with crayon economics and McFacts. To be kind, it results from ignorance. More likely, it’s greed. Unknown to this industry is the concept of duty of care. Leaders care for those who depend upon them for advice and knowledge. Predators do not.

My advice to Kirsten. Stay cynical, kid.

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Who can you trust? Fri, 22 Aug 2014 21:10:28 +0000 BABY DOG modified

Push-back? You bet. A bunch of realtors and condo-floggers were unhappy with me days ago when I pointed out the average SFH detached house in 416, the hotbed of Canadian real estate lust, has declined in value by 16.7% over the last five months.

But it’s true. At least as far as the official real estate board stats are concerned (yup, the ones they inflate monthly). What was just over $1 million in April was $843,138 last week. That’s a reduction of about $169,000, or darn near 17%. And while prices normally decline seasonally (making August a great time to buy), this year the plop’s been more than double the average.

Why? Simple. Ever since the feds punted CMHC insurance on houses over $1 million, sales have been quietly and steadily eroding, with prices now in the follow. Gone are the days when a high-income, cash-poor ditsy lawyer could waltz into Leaside and buy a boring $1.4 million faux baronial anorexic house with $70,0000 grand down on his gold card, adding the $48,200 in land transfer tax to the mortgage. Now that house takes $300,000 in cash.

In fact we have a million-dollar line in the sand, as far as most markets are concerned. On one side are the riff-raff, hipsters, minivan, kid-popping middle-class climbers, and on the other those who wonder where the buyers went, sitting on massive gobs of uncomfortably-illiquid net worth.

In the middle is the real estate cartel, deceiving as usual with no useful market analysis, plus broad statements like this: “Sales were up strongly for all major home types across the GTA through the first two weeks of August. During the first 14 days of August, the number of home sales grew at a faster pace year-over-year compared to the number of homes listed for sale. This means that competition between buyers increased relative to the same period last year, which explains the continuation of very strong average price growth in the GTA.”

See what I mean? Strong sales “for all major house types” and “competition between buyers” – it suggests anyone not jumping in immediately will be paying more. But the facts are buyers now, at least in a category where there are 2,800 listings in this one region, will be paying less. A helluva lot less.

Nor is this just a Toronto thing. Former realtor and housing watchdog Ross Kay has also seen this trend forming for some time. As of the middle of this month, he says, there was “a clear and measured change” in the market for houses which remain CMHC-insurable (below a mill) and those no longer eligible.

“While those sellers under $1,000,000 have increased their selling prices 4.91% since July,” he says, “when the homes over $1,000,000 are included in the average we recorded a 6.87% decrease.” Kay also claims that 75% of all houses listed on the MLS system nation-wide will end up selling for less than their listed prices.

So there ya go. A 17% drop in the average 416 detached house since April. And almost a 7% decline in national prices in the last 45 days. Seasonality plays a role, without a doubt, but if this trend continues unabated into the key autumn selling season, it is simply more evidence that peak house is behind us.

Now to Australia, where houses are sold by auction, and this anguished young man.

More than a week ago, as I dreamt of goats, I wrote about independent Aussi senator Nick Xenophon and his showboating campaign to create a Canadian-style Home Buyer’s Place down under. Here we call state-assisted retirement savings “RRSPs”, and (as you know), lusty young first-time virginal homebuyers can pluck up to $50,000 from their plans for a real estate down payment, on the condition they eventually pay it back. Sadly, a huge number do not – likely because they bought so much house with such bloated debt they have no money.

In Australia, such savings are called “superannuation” and Senator Nicky wants kids to be able to raid it the same way, because that country is also plagued with seminal horniness and houses people can’t afford. But, as I explained here, the HBP doesn’t work. All we have done is transfer $30 billion from savings and investments into real estate, allowing 2.5 million more sales, and helping jack prices to the point where we are the second-most-unaffordable country on the planet.

Suddenly (since my blog post) a movement of sane, mostly young people in the land of the billabong has erupted to stop Nicko, because they fear the plan would (as here) simply goose values more. They also suggest the senator, who owns eight investment properties may be working in his own naked self-interest. Imagine. Shocking, I tell you.

Well, here’s the petition, and I didn’t see anywhere that northern hosers are excluded from adding their voices. By the way, the young ‘roo warriors credit me with creating the HBP here in Canada. I did not. Too busy inventing trouble.

HBP CHART modified

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Legally sad Thu, 21 Aug 2014 21:03:09 +0000 BUTT modified modified

Here’s a cautionary tale for you. Sadly, you won’t read about this in the mainstream media (at least not until after this blog post), even though it involves alleged deception, disappointment, bankruptcy, flight and fraud. Over 90% of the victims are Chinese-Canadian families. Draw your own conclusions.

Four years ago it was just another Toronto condo mega-project that buyers were willing to lap up in the heavily Asian district around Yonge Street north of the 401. This one had two towers, a 150-suite hotel and 258 condos in the heart of a district now bristling with spires and clogged with traffic. Centrium was a joint project of a local firm and a Korean builder. The units sold in a cloud of pre-construction frenzy.

Now there’s $12.1 million in deposit money missing, an apparently bankrupted and disgraced lawyer, two hundred devastated buyers and allegations all those dollars are sitting in a Korean bank. The cops are involved. The law society is being bombarded. The jilted buyers are organizing and have been trying for weeks to get the attention of CTV, or CityTV, the Toronto Star – anyone.

Last year rumours swirled the site had been sold at least once and a new developer become involved. By this March it became apparent to many this puppy was in serious trouble. Construction was cancelled, along with communications. Worried buyers started looking to get their deposits back – from the developer, from lawyers and the new home warranty agency, Tarion.

At the centre of this was one Meerai Cho, a lawyer acting for the developer, into whose trust account a mess of depositors’ money flowed. By last month dozens of Centrium buyers had found each other through chat rooms and were barraging Cho’s office. By all accounts, she refused to respond. Frustration was building. As one buyer posted: “At the moment all I care about is that my money is safe. Can anyone at least confirm that our money is safe and that it hasn’t been stolen by these f*cking builders?”

Said another: “Meerai Cho had given away our money to the developer Joseph Lee, who had already fled to Korea. Meerai Cho as a trustee should not have done this, and this is considered illegal. This money, which is more than 15 million (possibly twice of this amount) dollar, should be paid to Joseph Lee after the construction completed. Meerai Cho shouldn’t have done this.”

Last week came the bad news, as online forums and the local Chinese media reported that lawyer Meerai Cho had gone bankrupt. This statement was attributed to her: “I was retained to act as the solicitor for a builder/developer (“Developer”) of a condominium project in Toronto. In that capacity I received, in trust, deposit monies for commercial, hotel and condominium units totaling approximately $12.1 million. In error I released these funds to the Developer who absconded with the funds.”


Worse, Cho’s bankruptcy and the inability of buyers to track down Centrium’s current owner/developer meant getting deposit money back was turning into a nightmare. According to Robert Charles, trustee in bankruptcy, Cho’s total debt on the day of collapse was $13.2 million, with only $863,000 of that secured. My calls to Cho’s office, by the way, have gone unanswered so I cannot independently verify these numbers. But, if true, they’re staggering.

Toronto fraud cops are investigating. In the matter of Cho’s missing trust account millions, there is a court hearing scheduled for September 2nd, but unlikely to be little more than procedural. The Law Society of Upper Canada has been fielding complaints, and the jilted, confused and abandoned buyers are trying this week to get attention. They got mine.

By the way, it’s not at all clear if these folks will get their money back, how much, or when. The Tarion warranty program does not necessarily cover a lawyer going bust. Instead the conditions for refund are (a) the bankruptcy of the builder, (b) a breach of the agreement by the builder or (c) the buyer proving they have the statutory right to treat the deal as terminated – which is a lengthy legal process. In any case, the maximum deposit covered is just $20,000, a fraction of what many in this instance handed over.


I will say it again. If you buy a condo in a pre-construction attack of hormonal delirium, you’re taking a big chance. It’s a futures contract, laden with risk. Centrium was supposed to be built a year ago, and is still a pile of dirt. Realtors flogging the project, collecting their commissions when agreements were signed, apparently felt no obligation to tell clients when material changes occurred. Lawyers obfuscated and dragged. Ultimately, as far as anyone knows, the unknown and unproven principal developer just took off.

Buyers were screwed, without a doubt. These buildings will never rise. A lot families will suffer. And there’s so much blame to go around.

Update Aug 22 9 am: CTV and CITYtv are now pursuing this story. Many jilted owners are planning to meet this Sunday afternoon to organize, and Tarion is telling folks to start processing their claim documents. No word from Korea.

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The ride Wed, 20 Aug 2014 21:44:59 +0000 OLDIES modified

This week a survey found 80% of renters want to be owners. There are 2.4 million people under the age of 50 who lease their accommodations. If Altus Group is right, eight in ten lust to have a home of their own.

Of course, three in ten also want a pony. And seventy-three per cent would take a new Mercedes. Plus, taller and slimmer would be great, while you’re at it. Thanks.

Owning real estate is a societal obsession, and were it not for the lowest interest rates since Noah (I actually had to watch that flick, yuck) the people who could truly afford houses would buy them. But these times aren’t normal. People routinely buy stuff they shouldn’t, in ways that are destructive

Like cars.

The average car loan in Canada, says JD Power, is 69 months in duration, down a little from the record 72 months recorded late last year. As you know, a number of car companies advertise loans of 96 months, which is a year or so longer than the average marriage and the lifespan of most cheap rides. Dennis Desrosiers, the car guru guy, says it takes 80 months of payments on such loans before a consumer is back in the money. In other words, by the time you pay most of the loan down, your car is worth a few dollars more. If it still goes.

Why would folks be so dumb as to incur years of financing charges on an asset destined to deteriorate in value – ultimately to zero? Easy. They want cars but can’t actually afford them. Demand for car credit is rising now by almost 10% a year, with loans of six to eight years being the reason. Kinda like 5% down houses with cash-back mortgages, except that cars always devalue.

Cheap cars loans, long terms and low payments have a predictable result: people borrow more and buy bigger. So they get into trouble. The credit bureau guys say up to 15% of all their cases involve vehicle financing. The advice: if you can’t cough up 20% of the car’s price, you’re not ready to buy.

Hmm. So back to houses, where the average down payment is way less than 20%, loans are 25 years long and bankers will lend to poodles. What does the Altus survey tell us when 80% have house lust?

That’s easy. We have problems. If those renters tried to buy with 5% down, a 25-year amortization and at the posted rate for a five–year mortgage (which is the baseline requirement), then only 250,000 would actually qualify to acquire real estate. Yup, 80% want to buy. Only 10% can – with the skinniest of deposits, and rates at an all-time low.

This goes to the bleak facts this pathetic blog keeps on yapping about. Savings rates are miniscule. Most TFSAs are in cash. Growing numbers of people admit they have little or nothing put away for retirement. Most gains in net worth have come real estate froth, not because families earned more and spent less. Meanwhile debt – for cars, house and LOCs – keeps on growing, and the real estate ownership level is 70%. Just imagine what happens when rates start to inch higher.

RBC warned this week that’s bound to happen, with a ‘substantial impact’ on real estate.

Said chief economist Robert Hogue: “The higher home prices get relative to income by the time rising interest rates really start to bite, the more prices will have to adjust downward over time to keep longer-term affordability from reaching intolerable levels. This means that any price increases exceeding the rate of household income gains in the near term (2014 and 2015) likely would result in steeper price declines down the road.”

And on Wednesday the latest release from the Fed showed a growing bias toward raising US rates sooner than anticipated, now that 200,000 jobs a month are being churned out with regularity. For the record, this is how the central bank put it: “Many participants (at the Fed policy meeting) noted that if convergence toward the committee’s objectives occurred more quickly than expected, it might become appropriate to begin removing monetary policy accommodation sooner than they currently anticipated.”

By the way, “monetary accommodation” means cheapo lending rates, whether achieved through its stimulative bond-buying program (known affectionately as ‘QE’) or by keeping the Fed rate low. Either way, 2015 will be the year when the cost of money starts going up. Get ready.

It all begs the question – if people are so inept when it comes to cars, with finance-laden terms because they lack the cash, then isn’t it scary half of all real estate sales are to newbies who can’t actually afford what they’re buying? And that 80% of renters think they can be buyers? It would scare me. The last place I’d want the bulk of my net worth would be in property. Or, shudder, a Kia.

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The smell test Tue, 19 Aug 2014 23:17:46 +0000 SNIFF modified

Let’s start in Toronto, where this moist mid-August has been punctuated with the cry of realtors trumpeting another few weeks of boffo sales and romping prices. Of course, the media parroted it all. And, as usual, the housing guys got away with it.

Poor Jason Mercer, the real estate board’s sacrificial spokesguy, said this: “During the first 14 days of August, the number of home sales grew at a faster pace year-over-year compared to the number of homes listed for sale. This means that competition between buyers increased relative to the same period last year, which explains the continuation of very strong average price growth in the GTA.”

Sigh. The cartel claims sales were up 7.6% over the same time last year, when the increase was actually 4.3% over reported sales in 2013. So what? It goes to the credibility of an agency which routinely announces numbers which are later revised in secret, with the methodology never made public. You should believe this stuff at your peril.

As for prices, it’s hard to get excited if you’re trying to sell a detached house in the GTA for north of a million. Which sucks, since there are about 2,800 of them currently listed. And when you look at the bellwether SFH in 416 – the centre of all art, history, culture and human achievement – you’ll wonder what the realtors are smoking.

What was over $1 million in April has dropped to $843,138 today. That’s a reduction in average price of $169,000, or a fat 16.7% – in a mere five months. Incroyable, as they say in Leaside. Yeah, yeah, it’s summer. I get that. Things slow and prices moderate. But look at the chart below, painstaking prepared by the quants we keep locked in the GreaterFool fruit cellar, with the fruits. Average prices have declined steadily month-over-month, even as mortgage rates bottomed. As I’ve told you before, there is trouble at the top.

Says someone who knows: “Clearly, TREB’s mandate is to greedily keep the incredible price growth going as long as possible, even by misleading to this extent – People will keep buying all in to their absolute max if they believe there are still more buyers than there are properties available for sale, and that this alone is resulting in eye-popping price growth.  The story never changes… you better get in NOW. Like you say, if this came from a publicly traded company, there would be firings, de-listings, legal actions taken, and yes, jail time.”

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Now let’s go to Japan. It’s an interesting place, since all those people who believe interest rates can never go up again in Canada point to Japan as a role model. Following its fantastic property bubble of the 1980s, things basically went to crap and have never recovered. Deflation has stalked the economy, and real estate seems largely to blame.

However, you might be interested to know that 10-year mortgage money is 1.3%. You can get 30-year money (no rate increases for three decades) for 1.79%. And floating-rate mortgages are a little under 0.8%.

So how do people borrow? Increasingly, it’s variable. While 80% of Canadians lock in for five years, 40% of Japanese would rather float – which means if rates ever do rise to even Canadian levels that the housing market would implode once again.

By the way, aggregate mortgage debt in Japan is about $1.3 trillion, and there are 128 million people living there. Our total mortgage debt is $1.2 trillion, and we have 34 million souls. Noodle that. I’d say the Japanese learned something.

Well, a final few words about Britain, where our former blog dog Mark Carney rules at the Bank of England. Poor bloke. He might want to edit his LinkedIn profile if the trending continues. The UK media’s been full of stories lately about ‘panic selling’ in London and ‘panic buying’ in the boonies as lots of folks come to believe big-city real estate has topped out amid insane, unsustainable prices.

In fact the widely-followed Halifax Housing Market Confidence Tracker recently asked people if they felt they “must sell” their house now before prices drop. Those saying yes: 60%.

Property values already took a big dump in July, falling about 6% in London after a huge run-up fueled by cheap money (thanks, Mark). The house price-to-earnings ratio has jumped again, so that the British average is now above five. The last time that happened (at 5.8) was just before the credit and property crash of 2007.

Says Hometrack: “All the signs are suggesting that prices are now so high no one can afford to actually buy houses in London any more, and that’s fueling a stampede for the exits among those sitting in Britain’s most expensive real estate.”

By the way, in terms of affordability (according to Demographia) London is the 10th most unaffordable city in the world, based on local incomes.

Guess who’s Number Two?

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