Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 01 Aug 2014 20:57:12 +0000 en-US hourly 1 Hater House Fri, 01 Aug 2014 20:00:43 +0000 HATER modified

The tale of another condo. In a very different city. And a confused one.

Two weeks ago an article appeared in the local Singapore newspaper heralding a 52-storey condo tower which, in four long years from now, may be grafted to one end of the iconic Granville Street bridge in Mouldy City. Called ‘Vancouver House’, the developers are hoping about 40% of the 388 units (priced from $316,000 to several million) will be sold abroad, and the rest to locals. A total of 30 condos, less than 8% of the building, were ‘set aside’ for Singaporean investors.

Cue the outrage.

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Courtesy, the GreaterFool Singapore Bureau

“In the face of your continuing denial about the “yellow peril” I open my morning paper,” writes Jamie, “and see in the Vancouver newspaper: “Sales of Units in Proposed Vancouver House Tower will Target Asian Markets”. Of course it does no one any good to focus on racial profiling in the Vancouver housing market, but to vehemently deny that it exists (like you do) is asinine.”

Meanwhile the jingoistic local media were busy piling on. The Province reported there was an ‘overwhelming response’ to the Singapore sales effort, ‘far more than expected.’ Meanwhile the meme spread that Asians were getting the first chance to snap up units while Vancouverites were left shivering in their hovels.

Said the newspaper, in the finest tradition of yellow journalism: “Locals may question where buyers are expected to come from, and whether they will live here. “It’s shocking that this building, which has been marketed to us as the iconic Vancouver House, gets sold two months in advance to Asia,” a reader told The Province, in reaction to reports from Singapore. “I wouldn’t call that iconic, I’d call it insulting.” “

Radio piled on, too. On CKNW, Van’s first choice for traffic, weather and rednecks every 10 minutes, commentator Bruce Allen said the condo’s developers, “flew off to Asia to give foreigners the first crack…already news is filtering back that 30-plus units have been sold to offshore buyers before the locals could even buy a one-bedroom. It’s a disgrace. The first thing they should change is the name, to Hong Kong House, or Singapore Sands, or just China House.”

But all this paled to the comments the Van papers published from all the haters.

“Do think it’s finally time to talk about the elephant in the room?: We have been colonized. In five years a staggering percentage of native Vancouverites will be homeless (that’s you and me) and our city will resemble the polluted streets of Hong Kong. The BC Government has sold us out at every turn, flinging the door wide open to foreign investment and the criminal element. Governments at all levels have a fiduciary duty to protect and uphold the interests and welfare of its citizens – not sell us out to the highest bidder. It’s time we grew a backbone and spoke up for our city, our province and our country and reclaim it all,” Lauren Willes wrote.

“Thanks government for once again f##!!!!!! Vancouver up the ass,” said Dave Bawden.

“In Europe and other countries around the world this wouldn’t be tolerated and would no doubt result in riots in their streets. Why is it so hard for life-long Canadians to stand up and fight against this? Residents on the west coast and across Canada are pathetically apathetic and can’t seem to get up off their iPad at Starbucks to protest . Fighting against the wealthy immigrants disintegrating the middle class in the lower mainland is not a hate crime, but rather a fight for the right to continue to live a fair, normal and beautiful lifestyle that is truly Canadian. This is it folks, the time has come. Either you continue to sip on your double macha green tea latte while face-booking your comments and watch our incredible Canadian culture fade away, or you get up and start organizing rallies and protect you and your children’s future,” said Cliff Bremner.

There were dozens and dozens more.

Of course lost in this whipping-up of angst and frenzy over people from away buying condos in an unbuilt tower was the fact the local sales centre opened a month before the first little, hyped-up sales story (above) appeared in Singapore. In addition, anyone can walk into the sales centre at 1140 Howe this weekend and snap up a unit on the 37th floor or above, starting at $1.5 million. The nice young turk, Allan, who tried to sell me an upgraded two-bedroom unit yesterday ($2.278 million, “but the walls are corian, not paint”) said sales are going great.

“Huge interest,” he gushed. “And the buyers are an extraordinarily good cross-section of people. Half the units are being sold here to local buyers, and the rest are coming from the US, international and across Canada.” In fact, VanHouse has sales agents in Toronto, New York, London, Beverly Hills, as well as Tokyo, Shanghai, Taipei and Singapore. Then Allan moved on to probe my interest in a three-bedroom ‘estate home’ on the 53rd floor for $3.8 million.

And what a deal. Only 10% down on signing (that would be $380,000 on the three-banger), with another $570,000 over the next year or so – then the balance when the place goes up, “which will be July of 2018, at the earliest.”

All the units for poor people, selling below $1.5 million, will be available after next week. (Please form a line to the left, and abide by the rules. Queue quietly. Dogs outside. No pee jars in the lobby.)

Seriously, Vancouver House is okay. It’s Vancouver we should worry about. If this thing were going up in Toronto, Montreal or Calgary it’d be seen as prestigious icon of world class residency, aimed at a global market of rich people who then need $140,000 cars for tooling around in and hand bags worth five grand. You can resent people with more than you, or go and get some of it. And the locals are always welcome to buy, today, on the 53rd floor.

The xenophobia and hating rampant in Van these days is the ugly weed growing from the fetid ooze of economic stress caused by an out-of-control real estate market. But as I’ve shown in the past statistically, foreigners didn’t do this. They account for a small fraction of overall sales, as in Toronto and Montreal. When over 90% of transactions are done by locals in a city where average SFD homes trade for over $1 million, guess who’s to blame?

Van incomes are 30% less than in Toronto, where properties are cheaper, yet six times as many people live. No wonder personal savings rates are lower, debt is higher and prejudice is mainstream. Locals are real estate obsessed. Housing risk is off the chart.

Someone should warn Singapore.

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Too big to bail Thu, 31 Jul 2014 21:16:47 +0000 BIG 1 modified

“I have this question,” says Dave. “With the current landscape as it stands, regardless of how we got ourselves into this mess, are we in a “too big to fail” type scenario with regards to housing?

“In other words, if interest rates start climbing, and housing starts correcting, and people start having problems maintaining these mortgages, do you think the government will have to step in with stimulus programs that ultimately reward the home owners who leveraged beyond their means?”

A fair query. After all, while US home ownership levels fade and American Millennials embrace the freedom of renting, we have seven in ten families yoked to a house. Our kids get horny over bamboo flooring and polished concrete backsplashes. This week we’ve already probed Erinomics and learned why there are 105,000 new condos being built in Toronto alone. People have $1.2 trillion in mortgages and home equity lines of credit, plus another five hundred billion in debt amassed buying crap. Job creation sucks and wages are stuck. If rates rise, we’re pooched.

So, too big to fail?

It’s a political question, not an economic one. But let’s remember the Obama administration spent more than $2 trillion trying to stem the slide of the American housing market, and failed. In the end, people lost faith in real estate, sold it off, walked away, took the hurt. It declined in value 32% nationally. Today, more than seven years later, prices are still 20% below their peak, despite a big bounce-back in major cities. Collectively, the American middle class lost $6 trillion in housing equity, and government was unable to staunch it.

This forms the foundation of what the doomers were moaning about here yesterday. They decry the structural unemployment, the widening gulf between the 1% and the rest, the food stamp numbers, the 77 million citizens with debts in collection and the fact middle-class incomes have declined by a third since the GFC. This is overwhelmingly attributable to real estate.

The Yanks made a big mistake when they let building, selling and fluffing houses account for such a big chunk of the economy. Just like we’re doing now. The recovery period’s been long and uneven. That much is obvious.

Only now are jobs coming back to the US (another 209,000 were announced this morning), with the economy kicking out robust GDP numbers and corporate profits. Consumer confidence is up and the federal deficit in decline. This is why the Fed can finally throttle back on its stimulus spending, turning off the tap that flowed $85 billion a month, seriously enhancing the wealth of those smart enough to load up on financial assets.

The fact this spigot is closing was one reason investors punted stocks and headed for the exits on Thursday. The Dow cratered more than 300 points since it’s clear the economy is ramping up, with inflation and higher interest rates to follow. Of course a default in Argentina, pesky Ruskies and dead civilians in Gaza just made things more acute. But crises flare and fade. Economies move like glaciers.

The bottom line is that real estate destroyed a good portion of the biggest middle class in the world. The US economy is clawing its way back, but for millions of families the future will never approximate the past. They’re done like dinner. The average 50-year-old American has saved only $43,000, while almost 40% of everyone has saved nothing. Eighty per cent of people over the age of 30 believe they don’t have enough to get by in the future. And they’re probably correct.

Now interest rates will go up as the government bond-buying stops because the economy as a whole is growing again. Stock investors will take money off the table and put it into fixed income, where prices are dropping and yields rising. When equities look cheap again, they’ll pile in and make another bundle, as corporations with global sales keep stacking profits.

This is the new reality for Americans. The gulf between rich and poor will spread, but it’s the gap between the wealthy and the middle that’s really opening up. Millions of families gambled their whole wad on housing going up forever, and lost. Thus, an ownership rate of almost 70% has plunged to levels unseen for two decades. Rich people, meanwhile, watch from afar. They’ve always understood diversification is salvation.

Is real estate in Canada too big to fail?

You really want to wait and find out?

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The change Wed, 30 Jul 2014 21:02:19 +0000 401-KEELE modified

Location: Keele Street & 401, Toronto

Jennie asked me how she should borrow, now that her mortgage has come up for renewal. “They’re offering 2.4% for a variable-rate,” she said, “over three years. Or I can get a fixed one for 2.96%, for five years? Whaddya think I should do?”

That was easy. Lock in, Jen, I said. In 2019 you’ll look like a flipping genius.

How defeated all those people must feel who drag their sorry, doomer bottoms here day after day to tell us Canada is just like Japan, that rates can’t go up or the country will collapse, that the US economy’s in tatters or real estate in 416 or YVR will go up forever. Nothing’s been going their way lately, and things fell apart completely on Wednesday.

For months this pathetic blog’s been telling you the American economy’s in renaissance, that rates have but one direction in which to travel, and the peak for housing prices is already in the rear view mirror. The evidence is everywhere, so you might as well get ready.

Jobs are sprouting at the rate of more than 50,000 per week in the US – a pace in place now for six months. Over a million new positions have been created in that time (while Canada added a few new drywallers and condo marketers), dropping the unemployment seriously below ours. No wonder consumer confidence has jumped. This week it hit the highest level in seven years.

House prices are still rising – 9.3% annually across the States right now – down from the torrid 13% rate of a few months ago, thanks to higher mortgage rates. But that’s a good thing, as the recovery was so rapid bidding wars have erupted in most major cities, raising bubble fears.

Corporate profits are vastly exceeding projections. They’re up about 11% so far in 2014, and to date 77% of all big S&P companies reporting quarterly earnings have trumped analysts’ expectations. More importantly, sales are also up and, as you know, it’s all kept stock market values in record territory for the entire year. The market has not had a 10% correction since 2011.

And this week came word the American economy grew by 4% in the second quarter. That’s elephantine. It blew past the most optimist economists. It proved the 2.1% decline in the first three months of the year was directly attributable to the Winter from Hell. And it made idiots of those who looked at an aberrant number and concluded the US was sliding into a depression rivaling theirs.

Of course, economic growth, rising profits, more jobs and surging consumer confidence pretty much guarantee inflation. And that means higher rates.

But don’t stop there. Let’s bring in Janet. As the most powerful woman in the world, Mrs. Yellen just about guarantees that Jennie’s decision to lock in her mortgage (she listened to me) is brilliant. Janet Yellen is the boss of the Fed, the US central bank, which has just decided for the sixth time to reduce its stimulus spending, which we affectionately know as QE.

Your will recall the doomers coming here last year to say that America could never reduce its government bond-buying program because it was hooked on printing money and would crater without it. Pshaw. Too much bullion-licking. The Fed has relentlessly and predictably trashed the stimulus program by tapering back since last December. Where they bought $85 billion a month in bonds a year ago (to lubricate the economy and keep rates low) it will now be $25 billion. By Thanksgiving it will be zero.

What does that mean? Well, this, for starters:

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Bond yields rose on the news, and will likely continue. The five-year Canada bond popped its weasely little head back above the 1.5% level, and I’d say will be about a full percentage point higher by this time next year. On the Fed news, US Treasuries reacted, with the price falling and yields rising. That makes sense. After all, demand for bonds in the US has now fallen by $65 billion a month, so why wouldn’t prices fade? And there’s more slack to come.

So here’s the deal. The US economy has been powering ahead even as government support is scaled back. Jobs are erupting, as are profits and attitudes. The Fed knows this will lead to inflationary pressures, which means there’s a 100% chance its stimulus spending will soon end entirely. The bond market smells it, and is already reacting.

Higher rates will likely throw some water on equity markets, while higher yields will knock back the prices of fixed income assets like bonds, preferreds and (by association) REITs. Finally. For a few months now, almost all financial assets have been looking expensive, so any dip would be a welcome reprieve for those with cash.

Then, in 2015, the Fed will raise its own key rate. I’ll leave you to imagine what that will bring.

Just be happy you didn’t buy a pre-construction condo.

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Erinomics Tue, 29 Jul 2014 19:37:46 +0000 BEWARE OF DOG modified

“Thought you might like this,” George wrote me. “Kind of unbelievable – a 19% return on investment? Actually, it IS unbelievable.”

Yawn. Another Toronto condo developer trying to move product to virgin landlords by claiming it’s a fabulous investment. This time the project is Garrison Point, a five-tower mass wedged between two sets of railway tracks overlooking the scenic Gardiner Expressway on the western flank of godless Toronto. Thirty-storey Tower One is now being flogged, with 300 boxes selling from $275,000 (496 square feet with a fabulous view of train wheels) to $1 million.

Just another few hundred condos added to the 105,000 currently being built or sold in the GTA, where cranes blot out the sun. Just another developer luring the young and the innocent, this time with a year’s free condo fees and guaranteed rent for newbie investors. The marketing is clearly aimed at Gen Yers and Millennials, like so many. But this development is special. It has Erin.

ERIN  Erin Bury, says the Garrison Point blog she contributes to, “is a first-time home buyer and the Managing Director at 88 Creative. Find her at @erinbury on Twitter.” She’s also young and attractive. And smart. Erin writes a monthly column for the Financial Post and comments on techy stuff for CTV. She’s appeared (says her bio) in the New York Times, Forbes, CNN and Canadian Business. She was named one of Marketing Mag’s top 30 Under 30 whizkids. And she’s the team leader at this leading edge marketing company, housed in a loft full of beams and Apples.

In short, one helluva endorser – a generational leader and role model to all those pathetic Millennials still living in their mom’s basement. And Erin, amazingly enough, has just bought a unit in Garrison Point! So it must be cool.

“As a Gen Y first-time purchaser,” Erin writes, “I want to take you through my journey from perennial renter to new condo owner, and show you why it’s easier than you think to own a home, and why pre-construction is an affordable way to own.

“I’ve lived in downtown Toronto since I graduated from university in 2007 and have been a renter ever since, first with a roommate and now with my boyfriend. I’ve always wanted to buy a home, and for years I’ve considered buying a resale condo, but without a full 20% down payment I was always hesitant to incur CMHC penalties, and putting only 5% down would make my monthly bills too expensive. I know I could move to the suburbs to get a cheaper place, but I love the downtown lifestyle, and have no plans to move to the suburbs (or even north of Bloor) anytime soon.

“The best alternative to moving to the boonies? Buying a pre-construction condo. I just purchased my first condo at Garrison Point, and here are the reasons I think pre-construction is the way to go.”

Well, says Erin, buying a condo that doesn’t exist yet gives you more time to save money you don’t yet have to make a down payment, and means you can secure a unit with just 5% down. “Who has $100,000 laying around in their 20’s? Not me.” Plus you can save money for new furniture, moving, and pesky closing costs. Second, buying this way means “you don’t have to worry about market fluctuations,” which is kind of an intriguing thought. “As a first-time buyer you don’t know what to believe, and after years of watching people speculate I’ve learned that no one knows for sure,” Erin says of those who warn that maybe – just, maybe – having 105,000 condos go up at the same time might skew the demand/supply metric. But she’s not worried.

She also tells her readers this is a great investment. “You’re buying a unit at today’s market price, and moving in 2-3 years down the road when the price per square foot will have inevitably gone up. And when people say it’s only a great investment if the market is doing well… I tell them that if the time isn’t right to sell, I can always rent it out.” Wow. Where do I start?

Of course, a normal market correction would wipe out Erin’s equity and leave her with a mortgage potentially bigger than the value of the condo. Interest rate increases (which are coming, of course) will make each mortgage renewal more difficult and wound the market. Owners like Erin will always pay more to live in the same unit than it costs to rent – which means she’ll be in negative cash flow if she does bail, can’t sell, and gets a tenant. And, of course, buying an unbuilt condo is like taking out a futures contract. You risk cash today, gambling that three years from now you won’t be crushed.

But, wait. “Down the road …the price per square foot will have inevitably gone up.” This is Erinomics. Pay attention, kids.

Finally, why did Erin buy here? She says:

“So why did I purchase at Garrison Point over the other pre-construction projects in Toronto? Well there are a million reasons I chose this specific development. First is the location – King & Strachan, which is on the streetcar line and also close to Liberty Village. Second is my unit – I purchased a two bedroom-plus-den unit with two balconies and a lot of space, so I can have a family there. Third is the planned community – when completed the project will be five buildings, retail stores, a 4.5-acre park, a planned community pool, and unobstructed views of the lake and downtown thanks to the rail lines on either side. I feel it’s not only a great home for a young family, it’s a great investment.”

There may be a fourth reason. She’s paid to.

Erin Bury’s employer, 88 Creative, is owned by BuzzBuzzHome, one of Canada’s most successful condo marketing companies and sites. And Garrison Point is a client of 88 Creative, where Erin is in charge of things as managing director. In fact, her company created the Garrison Point blog that Erin writes, under pretense.

At least, that’s what 88 Creative claims on its corporate site: “We’ve built the online community using Twitter, Facebook, Instagram, and a Garrison Point blog, directly impacting project registrations and raising the profile of the brand.”

And here I thought this was the generation of transparency. How naïve of me.

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Bad news Mon, 28 Jul 2014 21:27:15 +0000 BAD NEWS

So, does it never make sense to buy a house? Some people would have you think that I hate real estate. Like the Globe, which called me the “king of housing bears”. This is ironic, since I’ve written almost as many books on how to buy property, as how to avoid it. At least I now get to wear little crowns on my boxers.

Actually I love real estate, and have owned lots of it. But I also recognize it’s turned from a necessity to a leveraged investment asset, into a cultish obsession. With so many people owning, housing’s now viewed as riskless. Those without it feel disenfranchised. Kids buy condos before they get cars. Weird.

(I recall my parents asked my rebellious older brother when he was 17 what he wanted as a graduation gift. A car, he said. So they did. He got in and drove away. Forever. Made perfect sense to me at the time.)

Anyway, a house since provides shelter and emotional security. Astutely bought, and wisely financed, it can make you long-term money. Gains are tax-free. You can borrow against it, rent it or expand it. Your mom will be proud. But against all these positives are a growing stack of negatives, chief among them the massive debt involved in buying an asset at historic-high levels. This means as prices rise, so does the risk of paying too much – especially when interest rates inevitably creep up and the debt gets ugly.

So, buy if you can truly afford it, and if the real estate represents a reasonable amount of your net worth. That does not mean 5% down with a 3% cash-back mortgage if you’re a burger-slinger at Wendy’s.

But here are two other examples of when being an owner beats being a renter. Or, rather, when renting sucks. First, here’s Mark in West Van:

“My wife and I just rented a house in West Vancouver.  2 year lease for $4000 per month.  Our landlord and agency said they wouldn’t list the house before I’d agree to sign the lease.  Two months after we moved in she listed the house for almost $500,000 over assessed value, which has almost no chance of actually selling.

“So we could easily be harassed by potential buyers for the whole lease, just in case of the off chance that someone wants to severely overpay for the house. $1.81 million assessed, $2.3 million price.  What would you do if this happened to you?”

First, Mark, I’d pay my lawyer two hundred bucks to send the LL a letter alleging breach of contract, since verbal assurances given to you formed a critical part of your decision to lease the home. It’s worth a shot. Lots of landlords want nothing to do with legal action, since it’s costly and protracted. And I hope your lease was properly papered.

But according to BC tenancy legislation if the owner sells the property and the new owner (or a family member) wants to move in, you have to move out (after two months), unless you have a fixed-term lease. But it has to be done properly – your existing landlord must receive a written request from the new owner prior to serving you notice. Ask to see it. The request must say the new owner requires vacant possession in order to move in. If this request does not exist, or the new owner wants to do something else with the property, you can stay

By the way, if you are kicked out after the house sells, after the vacant possession request is made, after you receive notice, and after two more months, then you must receive a month’s rent as compensation.

In Ontario the Landlord & Tenant Act says you can be evicted if the LL sells to someone who will move in (or his family), “however, a tenant can only be evicted at the end of their tenancy and only if the Board issues an eviction order.”

Now, here’s another problem, from Mike who apparently dissed me in the past (before he required free advice):

“My name is Mike and I read your weblog everyday and post comments.  I apologize for anything I have posted that was in-appropriate.  I have a problem and some questions I am hoping you can help with. The condo I am renting has been foreclosed on.  I was served with a notice this morning.  I mostly have questions about my rights.  I think the foreclosure happened July 4th, 2014.  How long do I have before I am told to leave?  Do I keep paying rent? I sent post dated cheques, should I put stop payment on them?

“I really don’t know where to start or what to do. “

When a LL goes paws up, the bank’s right to collect on the mortgage debt takes precedence over your right to live there. This is a pain, but I sure expect to see a lot more of it in the future since so many amateur landlords own properties that are cash-flow negative.

You should have received a court document called a Petition, Mike, delivered to you. It spells out how long the owner has to pay outstanding arrears before being forced to sell (usually six months). You should go to the court house and file a Response to the Petition which will then entitle you to receive copies of all documents, so you know what’s going on. You have 21 days to do so.

Do you keep on paying rent? Yes, you must until you get a court document naming a new owner. The court might inform you that the property can be shown to prospective buyers, and you must accommodate that. Finally, if the court tells you there’s been a sale, or a change in title, you’ll be given a possession date by which you must split. That is, unless you contact the new owner and work out a new lease.

In general, renters are subsidized by owners. Often massively. In every major city (even Calgary), it costs less to rent a condo or a home than to own it, once all the costs are factored in. And yet scores of silly people have purchased properties thinking they can lease them out, and get on the path to real estate riches. Many are learning otherwise. And this is why sales and foreclosures happen.

So, you can accept the reality, move and enjoy subsidized rent again. Or you can buy, and roll the dice.

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Toxic Sun, 27 Jul 2014 19:58:30 +0000 ADVICE modified

They finally sold their house. Rejoice.

In doing so, the real estate agent had asked them to fill out one of those property disclosure forms, full of inane questions that Bill and Joyce hardly thought about. After all, the house was in great shape. When they came to the question, “Are there any water or moisture issues with the basement,” they answered ‘no.’ And why not? A past leak had been repaired and remedial actions taken.

Before firming up the deal, the buyer conducted, and paid for, a thorough home inspection. The guy found nothing of concern in the basement, including no signs of water damage.

Months after the deal was done and the house had changed hands it rained bejesus hard and the basement flooded. Upon inspection is became apparent this had happened because the gutters were clogged and the downspouts had been moved. The new owner sued the sellers, alleging that they lied when they filled out the disclosure form – even though the statement that there had been no water issues was correct.

But the buyer won. The court ruled the sellers made a false statement because they should have known the question on the disclosure form not only referred to the current condition of the house, but to the property’s entire history. And, in the past, there had been water damage. Furthermore, the sellers should have known that improper gutter or drain maintenance would cause flooding, and disclosed that, too.

Bill and Joyce had to write a cheque for $34,000, plus court costs, and hand it over for the reconditioning of the basement.

This is a true story. There are many more.

In fact, a lawyerly column in the Toronto Star a day or two ago made a similar point. In Thunder Bay (where the real estate cartel has made it mandatory that sellers sign a property disclosure form) Vance and Dorothy Overacker sold their house for $392,000 after answering ‘no’ to the same question as above.

Because of a high water table they’d always relied on the sump pump, and three years before selling had experienced a flood. The received $35,000 from the insurance company to fix the problem, and thereafter considered the issue solved. So, the realtor said, just answer that question in the negative. They did.

After closing, the buyers had problems with the sump pump and found water had saturated the septic bed. They sued the sellers for misrepresentation, arguing that had they known there were problems, they’d never have done the deal. The courts agreed. Vance and Dorothy were found guilty of wilful misrepresentation and making statements (on the disclosure form) that were untrue, inaccurate, incomplete or misleading.

The buyers walked away with a cheque for 30% of the house sale price – almost $118,000 – plus the sellers had to pay heavy legal bills. They sued their realtor for bad advice. They won $42, 500.

The property disclosure form, pushed by almost all real estate boards across the country, has resulted in more than 240 lawsuits, and millions of dollars in awarded damages to buyers – even those who had detailed home inspections done, and even when problems occurred years after closing.

These things are toxic. The questions are ambiguous and answers can be wide open to legal interpretations. In many cases, vendors don’t even know what the question means or what the correct answer might be (“Are there any encroachments, registered easements or rights of way?”, “Are there any restrictive covenants?”, “Is there any galvanized metal or lead plumbing?”). The forms also ask far more than the law demands of a seller, and yet once you answer any question and your agent hands the thing over, it becomes a consequential legal document.

So why do the realtors pump property disclosure forms (along with those horrible Buyers Representation Agreements)? Simple. The industry believes any liability arising out of a real estate transaction will then be dumped squarely on the seller, not the agent. In fact if you look carefully at this form, you will see that spelled out. Realtors, in other words, are running away from their duty of care, leaving clients to fend on their own.

So what are we to conclude? Simple. Two things.

If you are a seller. Never, ever fill out one of these despicable, intrusive and potentially explosive documents. If you live in a jurisdiction in which nobody will list your home without it, just write “As is” across each page, and sign.

If you are a buyer, always insist on a fully completed property disclosure form.

Now you know why.

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Knowledge Fri, 25 Jul 2014 22:35:42 +0000 GRAD modified

“They’ll never get that much,” he said, kicking a few pebbles with an artful flip of his Birkenstock. “I mean, did you see what they paid for it two years ago? Looks greedy.”

We were standing on the side of a road in a town on the south shore of Nova Scotia, outside my house. Because in January I decided to turn my leg into a Home Depot project and now wear enough screws to build the average deck, it was the first time in seven months I’d made it here.

The local real estate market is slow. Halifax is slow. So is the province and everywhere east of Montreal, which is also in poor shape. In beautiful Nova Scotia, though, house prices have been kept in check not only by a sleepy economy and traditional lack of jobs, but also because of empowered consumers. With a click or two, everybody can see what a house is worth, what it sold for last time, how many price reductions it’s suffered, how many days it’s been on the market now, and how long before previous sales. In addition, there’s a history of yearly property taxes, along with the realtor’s usual glowing prose and a fistful of glossies.

Here’s an example – an historic home in iconic Mahone Bay listed for $450,000. As in Toronto, local buyers can compare that with other properties currently on the market. But they can also compare it with its own history. This house has been for sale for about four years, and started at $965,000. If you were in a vultchy mood, wouldn’t you want to know that?

LISTING modified

Well, the relevance of Nova Scotia real estate to Toronto, Calgary, Vancouver or almost anywhere else in the country is that all MLS data – even the saucy stuff realtors like to hide – is open and public (check out That means sellers have to be reasonable because buyers are informed. This kind of transparency in a marketplace cannot help but create fairer transactions.

But in Toronto, realtors are fighting to the legal death to prevent the wide dissemination of basic info like how long a property has been listed, previous asking prices or historic sales data. For them, an ill-informed consumer is more likely to jump into a bidding war, overpay and establish ever-higher price points.

Days ago the Toronto Real Estate Board lost a key battle, when the Supreme Court ruled against it. Now the issue of disclosure goes back to a tribunal hearing under federal competition law. The feds are (surprise!) fighting this battle on behalf of consumers, arguing that realtors have formed a cartel designed to restrict competition, curtail choice and probably elevate prices.

Said the Competition Bureau on hearing the court’s ruling: “We continue to believe that prohibiting TREB’s anti-competitive practices and allowing real estate agents to provide the services of their choice is the only way to ensure that consumers and real estate agents alike can benefit from increased competition for residential real estate brokerage services in the Greater Toronto Area. Today’s decision brings us one step closer to that goal.”

You betcha. TREB – and similar local realtor cartels across the country – routinely prohibit members from telling the public what properties sold for in the past, or how long they have been listed or relisted. You can get this data on a property-by-property basis from an agent working for you, but you can’t go online and intelligently shop any market – except maybe, poor little Nova Scotia.

So here’s a prediction for you: TREB will lose. The realtor cartel will soon be broken. Data will flood over the marketplace as new online brokerages (like Viewpoint) sprout like magic mushrooms. And prices will reflect a new empowerment. Finally.

*  *  *

Well, if you need another reason why Canadians are delusional when it comes to real estate, just look at the latest new housing stats. Sales of newly-constructed homes and unbuilt condos in the GTA, for example, have shot back to 2012 levels – which means almost a doubling since last year. But are we building our way into a morass?

Probably. While 5,992 new condos sold in Toronto in the last three months (for an average of $554 a square foot), there are now 105,027 more new units in pre-construction or being built.

In fact in all of Canada, we continue to erect this condo economy even as we shed manufacturing and retail jobs. Housing starts in June equaled 198,195 (annualized). By comparison in all of the US last month there were 406,000 new home sales (also annualized). Since they have ten times the population, our equivalent number would be 1.9 million new homes. In other words, we are building 480% more units here than are selling in a country with similar mortgage rates, more job creation and a better economy.

Yes, it’s different here.

*  *  *

And here’s more proof.

Mass builder Mattamy Homes is releasing lots this Saturday morning – 100 of them – in a new Oakville subdivision which will turn fields into a mass of towns, semis, laneway homes and detached houses. As I write this, more than 400 people are in the line, ready with their photo IDs and deposits cheques.

Homes with a double-car garage (and you’ll need a few cars to get anywhere) start at $765,000, and require a deposit of $70,000. But mostly, they aren’t built yet. No trees. No amenities. No idea of the community makeup. And all a fun-filled 90-minute commute to downtown Toronto on some of the most hellish highways in North America. Or, you can sardine it on the train.

“Honestly,” says a blog dog who stared at the weaving queue of desperate humanity replete with sleeping bags and pee jars, “this is obscene! What is wrong with people?”

They worship the wrong god.

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#Debtshaming Thu, 24 Jul 2014 20:59:02 +0000 GENIUS modified

In the National Gallery in Ottawa hangs a sprawling painting called “Mortgaging the Homestead”. The dude who created it (G.A.C. Reid) was modest enough to think it was a national treasure, so he donated it to the federal government. While documents are being signed at a kitchen table, it depicts family members hanging their heads in shame. Despair. Failure.

That was 1882. People hated debt. Mortgages were 3%.

Recently we got the results of a new survey on Millennials and borrowing. When asked if they worried about taking on big loans, most said no. In fact, a whopping 86% replied they “do not consider mortgages to be debt.” A majority also seem to think mortgages somehow disappear when you sell your property – which, of course, always ends up in a profit.

It’s 2014. Debt fear is gone. Mortgages are 3%.

So far we have amassed $1.2 trillion in mortgages in Canada, and another $250 billion in lines of credit secured by residential real estate. There is also $507 billion in consumer credit outstanding. By the way, a trillion is one thousand times a billion. Mortgage debt in Canada is now growing by $2.4 billion per month, which is actually a slower pace than last year.

Obviously you can tell how much families have gambled on houses, by taking on unheard-of levels of debt. This explains two things. First, with a 70% home ownership rate, everyone has convinced everyone else that real estate will rise in value forever. Second, that mortgage rates can never go back up, because if they did we’d be screwed. So, it’s all good.

This kind of thinking’s everywhere. It shows up in data showing an increasing number of people are comfortable going into retirement with unpaid mortgage balances. A CIBC poll last week found homeowners in BC, for example, don’t plan on being free of home loan debt until age 66 (which is probably wildly optimistic).

So, the wrinklies – many of whom grew up with mortgages at 14% or higher – no longer fear being in hock. And they sure have passed that on to their kids, whose primary goal in life is to be copies of their parents, getting mortgaged as soon as their hormones rustle.

Where does this leave us as a society?

If you think like the herd, believing houses will go up and rates stay low, you sleep well at night. If you know better, it’s plain scary. And wise folks are working on their personal Plan B.

Mortgage debt is unlike any other kind because it is amortized over long periods of time, typically a quarter century. That means only a portion of monthly payments go to debt retirement, and that is the smallest in the early years of the mortgage. It takes a couple of days to get into a mortgage of $500,000 (or, very typically in Toronto and Vancouver, $1 million), and yet decades to get out.

Second, mortgages reset. Rates are adjustable. Unlike the Yanks, we can’t take out a mortgage at 3.2% and still be paying the same rate in 2044. Logic tells us that today rates are at historic lows as we struggle with the residue of the 2008, and things will change. As economic growth and inflation rekindle, central banks will move to increase the cost of borrowing and bond markets will adjust. Mortgage rates will rise, gradually and relentlessly. This process will start with the US Fed, its central bank, in the second half of 2015. About a year from now.

Third, mortgages are granted as a percentage of the value of a house. As interest rates slowly rise, real estate values slowly fall – because affordability is impacted. People can buy less house when the cost of borrowing swells (the converse is exactly why houses cost so much today). But mortgage debt is intractable. It does not fall along with equity. And it’s that simple economic fact which kicked the crap out of the US middle class when their correction tanked prices by a third.

Fourth, if rates rise a little (say by 2%) and houses drop a little (like 15%) then a lot of those condo-snorfling hipsters who think mortgages aren’t actually debt, and bought with 5% down, will learn fast. After all, if markets go south and properties turn illiquid, you’re stuck.

I don’t think Canadian housing will crash, and say so often. But it doesn’t need to, in order for naïve owners to be shocked and dismayed at how real estate debt can destroy their net worth. Only a fool would believe real estate will continue to bloat when incomes are not, or that central bankers would prevent the cost of money from rising.

But, alas, fools abound.

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The bomb Wed, 23 Jul 2014 20:59:37 +0000 RISK 1 modified

“We’ve always lived below our means and have no children,” says Louise, “so it’s been easier for us to save than it is for many people.  Neither of us ever had well-paying work (my husband never hit $75,000) but we’ve never had big needs or wants – we spend about $50,000 per year.”

That seems to be enough when you’re in a small Ontario city like Guelph. At least for her and Paul. So on their combined incomes of $150,000 (but no pensions), they’ve saved up a storm despite paying off their home years ago.

Both are in the middle-fifties. They read the post here a few days ago about net worth, and seem a little shocked that the average Canadian (says StatsCan) clocks in at $243,800. As you may recall, a third of that number comes from pension benefits that may or may not be received in the future, and another 30% is in residential real estate, reflecting our bubblicious market and historic values.

“So our net worth number (including a conservative house value estimate) is: $2.45 million.  Of that, the house is worth about $350,000, and our after-tax accounts are more than half of the rest.

“Garth – since I like to feel secure, I feel I need to keep earning for a few more years (three perhaps? Do you think that’s long enough?) but my question is:  What the heck are “average” Canadians and Americans going to do to make it through their retirement years?  I don’t feel wealthy at all, given how many expenses will come our way during the next (possibly) 30-40+ years.  But when I see what the typical pre-retiree has saved, I just don’t understand how they’re going to make it.  What do you think?”

Indeed. The numbers are sad. At present 72% of Canadians do not have a corporate pension with any defined or pre-determined benefits. Most folks are lucky today if the employer matches them for contributions to a group RRSP, which is then managed by a company flogging mutual funds. Meanwhile real estate values are at record levels, suggesting this will change because nothing goes up forever. Those two items (pension, house) make up two-thirds of average family net worth, which would leave about $80,000 in actual liquid assets.

But as I mentioned, the wealth gap is growing, and the top 20% have net worth of $1.4 million or greater (like Louise, and a lot of people who come here), which suggests mucho middle-class people have far less liquidity and far more real estate equity than the median.

Now, what about retirement?

First, it’s long. Count on twenty years. That could take a lot of dough. Second, you’re largely on your own. The average Canada Pension Plan monthly payment is $611. Big deal. That’s $7,300 a year. Even if you worked your whole life and contributed the maximum (which relatively few do), the biggest monthly is $1,038. Once you hit 65, the Old Age Supplement adds $537 (but clawed back for many). So the average government pension package is a piteous $13,800 a year.

Worse, of course, you might not even get the OAS in the future until you’re well and truly wrinkled and dried up – like age 70. Already the qualifying age has been moved to 67 (for those born after 1963), and you can be sure it will move again.

By the way, the average American social security payment for retirees is $1,294 a month, or more than our CPP and OAS combined. Houses there cost 50% less and retirees have universal health care. Mortgages are fixed (no rate increases) for 30 years, plus people who retire with one can deduct both the loan interest and property taxes from their taxable income.

This may be why US stats look even worse than ours. The average Yank spends 18 years retired, and yet by age 50 has saved just $43,797. The number of people aged 30 to 54 who currently think they are screwed in terms of income after they stop working is 80%. Actually 36% save zero before retirement, and rely totally on government pogey.

So, in summary, Louise is right to worry. Yes, with her $2.45 million and the $150,000 a year in income it will throw off (forever, if invested nicely), she and her squeeze are okay. But society is unlikely to let millions of other middle class people – who foolishly saved too little, bought too much house and will be caught in the downturn – end up on KD and kibble. Given the wealth disparity and current demographics, it’s pretty much assured personal tax rates will rise and benefits like CPP and OAS disappear for all but the needy.

If you know that now, max out your TFSA and invest it aggressively. Think twice about loading up on RRSPs for retirement, which will be sitting ducks for any increase in general tax rate as all proceeds must be taken as taxable income. Stop putting money into assets which pay interest with no potential for capital gains, since rates will stay relatively low for years and the yield is 100% taxed. Focus on returns which come as capital gains and dividends, on which the tax hit is reduced by about 50%. Income split with vigour, most effectively through spousal RRSPs that can be collapsed during years of low income. Sell your house, invest and downsize at the most auspicious time. That could well be now. And understand, above all, that the greatest risk we face is running out of money. Not losing it.

As you know, the people who read this pathetic blog are not normal. Incomes and net worth are far above the herd. Meanwhile there are 85 million Boomers in the US and Canada. Their collective stagger into years of non-work and higher needs will sure be an economic bomb.

Have you heard what’s already being said about ‘eat the rich’? Yikes.

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The correction Tue, 22 Jul 2014 20:50:54 +0000 correction modifiedcorrection modified

If I’d known the people reading this pathetic blog were so damn well off, I’d have dressed better. At least changed my leather Harley-Davidson briefs. It’s one thing to make a lot of money (we already know you do that), but quite another to accumulate wealth. So after reading yesterday’s comments on net worth, new respect. What a rapacious horde of capitalist swine we are. I am so proud.

Of course, we also want to keep it that way. So let’s talk about markets, and risk.

On Tuesday the Globe asked its readers (a collection of druggie, infested homeless people compared to you) whether they were concerned or not about a stock market correction. Just 14% said they were very anxious. Half were somewhat worried. A third were confident.

Let’s compare that with a Bloomberg survey done a few days ago among institutional investors, analysts and traders. They see it this way: 47% say the market is close to unsustainable levels, while 14% concede it is already in a bubble.

In other words, 86% of retail investors (the little guys) are cool with things the way they are while 63% of financial pros (the insiders) are worried. So, should you fret?

Let’s recap. The S&P is up almost 17% from this week a year ago. In 2013 it increased 30%. In fact, the market is now fully a third higher than it was back in the pre-crash days of 2007. More than $15 trillion has been added to US equities, and the gain since the low point in March of 2009 is a staggering 193%. And while the TSX was relatively lackluster last year (up just under 10%), so far in 2014 it’s ahead 14%, with the 12-month gain now running over 26%.

This all means US markets (which set the tone for most others) have not had a correction of 10% for almost three full years – since the American debt ceiling crisis of 2011 (when gold peaked). This is abnormal, to say the least. On average, corrections have gripped markets every 18 months since way back in 1946. That would suggest we’re way overdue.

But these are not normal days. By any stretch. Interest rates have been at emergency levels now for almost five years. In fact, Europe is battling deflation and rates may go negative. The US Fed has been spending billions a month buying bonds with wealth it created, to keep money costs down and the system flush with cash. Corporations have amassed record levels of capital, and been using it for an orgy or mergers and acquisitions – $1 trillion in new deals this year alone.

US unemployment has plunged from over 10% to barely over 6%, with more than 200,000 new jobs every month for the last half-year. House prices, decimated 32% in the American crash, have risen on average 1% a month for more than a year. Inflation’s been tame, while markets soared. Investors have been able to borrow at 3% and earn 14% – which explains a record surge in margin debt. Demand for bonds, thanks to government stimulus, has pushed yields down and prices up. Suddenly everything looks expensive, but how can you walk away from gains like these? To invest in a 2% GIC? Pshaw.

But are markets overvalued?

Yup, stock indices are at record highs, however expressed as a multiple of corporate profits, things look a lot less scary (with one exception). The S&P is now at just over 18 times earnings, which is the highest in four years, but still miles below the 30 level reached during the height of the dot-com nonsense back in heady 2000. That was a prelude to the market losing half its value over the next couple of years.

It seems investors never learn some stuff – like speculating in companies which are cool, but don’t make money. Internet stocks as a group, for example, are at 72 times earnings on the Dow. (Facebook, Amazon and Netflix are all above 90 in price/earnings ratios. Yikes.). Besides social media companies, which are obviously in a hipster bubble, biotechnology stocks have been trading at more than 500 times earnings – which is why this part of the market (and the tech-heavy Nasdaq) have been whipsawing around most of the year, falling 20% in the spring before recovering.

So, let’s hope you haven’t built your entire portfolio on Twitter.

But apart from trendy, flaky companies, how much fear should you feel?

Probably not that much, if you stick to buying the indices and achieve lots of diversification with US and Canadian large cap ETFs, for example. The American economy holds out opportunity for lots more growth over the next few years, plus major corporations have paid down costly debt, become more efficient (that’s why unemployment shot up) and expanded their markets. In short, they learned what people buying houses in East Van did not.

Of course markets will correct, but when is unknown. By historic valuations, the S&P is about 12% too expensive. But then (as I said) these are not normal times. Inflation is tame. Rates are extreme. Companies are making money. Central banks are vigilant. Even events like MH17 and Gaza don’t seem to matter much. So expecting a badass move down may be unreasonable.

If you have a balanced (40% safe stuff, 60% growth assets) and diversified (ETFs in Canada, US and abroad, large and small cap) portfolio, a 10% or 15% dive for stocks will be a piffle. If you’ve been sitting on dead cash, then it’s a time to buy.

Of course, most people won’t. They’ll sell. But then, they read the Globe. Losers.

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