Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Mon, 21 Jul 2014 20:57:34 +0000 en-US hourly 1 What are you worth? Mon, 21 Jul 2014 20:57:34 +0000 FOOD modified

Rick just read “Personal Finance for Canadians for Dummies,” and actually admits to it. “I found it interesting that it suggests not including your personal residence as an asset when calculating your net worth,” he says, ”unless you plan to live off the money you have tied up in it. It seems to me that is not how most homeowners would see it.”

Now Rick knows why the book is called that. If you don’t think your personal real estate is part of your personal finances, you probably live in a double-wide next door to a ‘76 Monte Carlo on cement blocks.

In fact I ‘ve noticed a number of blog dogs stumbling over this concept of net worth, especially when I talk about my Rule of 90. So let’s take a brief minute now (it’s July, what else do you have to do?) and address this basic action.

First, don’t believe what the pointy heads in Ottawa tell you. Recently StatsCan earned fat headlines saying the median net worth of Canadian families hit $243,800 in the latest period (2012), which is an increase of 45% since 2005. Realtors rejoiced upon hearing the news. Proof, they cried, that people are not overextended! Hosiah!

But that’s a bogus number. First, 30% of the net worth is made up of pension assets, which are not only years away from being received in most cases, but which may never be there since pension plans are under assault. More meaningful is the chasm now opening up between the wealthy and the rest. The richest 20% of Canadian families had a median net worth of $1.4 million, while the bottom 20% clocked in at just $1,100.

Overall, houses equal 30% of our collective worth. But since the bottom fifth rarely own a home, and the top fifth usually have diversified wealth, it’s the middle 60% who have overwhelmingly hitched their futures to residential real estate.

Well, how do you stack up? I’d be interested in knowing.

Net worth is the number that’s left after you subtract all liabilities from your total assets. It’s a key metric not only for talking the bank into lending you $175,000 for a sailboat, but also for charting a path to financial security. And yes, Rick, whatever your house is worth, and what it’s mortgaged for, are key elements in this discovery.

First, list what you own. That includes real assets: The house (use a conservative estimate of current market value, not what you paid for it). The Kia. The Elvis-on-velvet art collection. Then add in financial assets: cash on hand or in the orange guy’s shorts. RRSPs and tax-free savings accounts, per your current statements. Pathetic GICs and dead-end cash in your chequing account.

There is some debate about including the current balance in your company-sponsored pension plan, since most people have a defined-contribution plan and its ultimate value is completely unknown (and taxable). Ditto for your RRSPs, because this money is also pre-tax – in other words, a third or more of your retirement savings is actually owned by the government. Even teachers and civil servants with defined benefit pensions may think twice about adding in future benefits – unless you plan on commuting your pension (highly recommended) and taking over management of it upon retirement. It’s certain there will be an assault on government pensions over the next decade or two, as it already happening with some teachers, for example.

Now, deduct from this total what you owe. The mortgage is a biggie. Then the car loan, an outstanding line of credit or HELOC. Any investment loans. Credit card balances. Student debt. RRSP home buyer pay-back. Money the CRA is up your butt about. Unpaid bills.

The difference is your net worth. If it’s $283,400 then you are (according to a really flawed yardstick) a median person. Above $1.4 million, you’re elite. Below $1,100 and we’ll assume you wandered into this blog looking for a bathroom.

So tell us where you stand. And when your net worth is calculated, figure out how much your real estate equity (current value minus the mortgage) comprises of it. Tell us that, too.

For example, a $700,000 slanty semi in Leslieville with a $575,000 mortgage has equity of $125,000. If the hipsters owning it have $75,000 in other stuff (TFSAs, cash etc.), then of their $200,000 in net worth the house equals 64%. Is that too much? Not if they’re 26 years old. And what are the odds of that?

Well, over to you.

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Venus & Mars Sun, 20 Jul 2014 17:39:56 +0000 MOWER modified

Women hate debt. Men crave stuff. No wonder the divorce rate is half.

Books and sites on debt elimination are catnip to many females, while the testo crowd is drawn to the ‘hot tip’ junior mining stock destined to rise 600% in a week. Women seem happy in little houses with no mortgages. Men like vast spaces, status, and consider massive debt the bank’s problem.

In normal times, she wins. But these days are anything but. Cheap money has spawned elephantine debt, made house prices insane, created a wealth effect as real estate bloats, and convinced everyone this is the new normal. So, what’s the best course of action? Load up on loans to buy stuff you’d otherwise never afford, or take advantage of this historic rate break to pay off indebtedness fast?

Well, depends how much you’ve gambled on your house. For example, if you ignored my Rule of 90 (ninety minus your age determines how much net worth should be in a home), and put all your money into a down payment then took on a fat mortgage, you need to recover.

There are effective ways to do that. Making annual lump sum payments, or adding 10% extra to each monthly cheque, for example. You can chop down on the amortization period every time you renew. You can switch to weekly payments and trash the mortgage years sooner. (Ensure you get the right kind of weekly – installments equal to 25% of the monthly.) Or, invest your new savings for growth, then dump a bigger amount against the principal at the end of the term.

The goal should be not only to pay down the mortgage faster, if a house is your only asset, but to ultimately reduce debt servicing costs so you can diversify. That’s what wealthy people do. They don’t have all of their eggs in one basket, at one address, in one city. With real estate values at historic highs and household debt extreme, the odds of a reversal are great. Besides, a one-asset strategy is just gambling in a world where nutbars shoot down airliners and the climate’s screwed.

Diversification means having financial assets as well as real ones. They should first go into your TFSA, then a non-registered account and some RRSPs (best used for income-splitting). I’ve written at length on what to buy, and in what proportion – including bonds, preferreds, trusts and equity ETFs. For most people: no gold, no individual stocks, no GICs.

And once you do build up a reasonable amount of liquidity, the strategy of busting your mortgage is far less compelling. Sorry, girls. But in a world where real estate debt is cheap, and often tax-deductible, you might actually want more of it.

A survey published a few days ago shows lots of people get this. Done by Investor’s Group (yes, those guys with the 1.99% three-year home loan deal) it asked Canadians with at least $500,000 in investible assets (besides their house) about mortgages. The poll found almost 70% of these high net worth folks could pay off their mortgages with cash if they wanted to, but many chose not to.

Huh? Isn’t it the holy grail of people like Gail Alphabet and almost everyone with estrogen and a Bichon Frisé to get that home loan trashed, above all?

Nope. Not the wealthy ones. And there are two big reasons.

First, investors with financial assets have done extremely well over the last five years. Stock markets are up over 150% and balanced portfolios have been delivering roughly twice the annual returns seen in real estate. Even those with conservative portfolios half in fixed income have seen 10% or better gains, and sailed right through the 2008 fugliness.Why would they cash in all of it, triggering capital gains taxes, just to pay down a mortgage at less than 3%?

Remember the latest inflation number? It’s now about 2.5%. So isn’t a mortgage at anything less than prime pretty much free money?

Secondly, wealthy people know about diversification. They like to own lots of assets, instead of shouldering debt on just one. So if you have a $400,000 mortgage costing you 2.4% (TD’s new two-year rate) and your $400,000 balanced portfolio is making 13% (the YTD 2014 return, annualized on a 60-40), why pay debt off? That would simply consolidate all of your net worth into one asset – a mistake the kids make – and exacerbate risk.

Says an IG guy: “Mortgages provide access to lower-cost funds than many other lending facilities because they are seen by the lender as being fully secured, and have a built-in cushion (equity portion) in the event that the value changes over time.” And he’s right. In our house-horny culture even the bankers have been smitten by the false security of real estate.

Of course, lots of wealthy people also happily incur mortgage debt when the interest can be deducted from taxable income. So, the minute some folks pay off their mortgage they take a new one for up to 65% of the equity, invest the money in financial stuff, and create a fat tax break.

In short, a house and a mortgage are part of an overall financial plan. They are not a plan on their own.

He wins. Ouch.

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Debt train Fri, 18 Jul 2014 22:18:24 +0000 BINGO modified

“I’m an accountant,” Elaine says. She reads this blog. And she worries a lot, mostly about her clients.

“So many clients drowning in debt. Even people who had previously paid off their homes have used their home equity lines of credit to do crazy things like invest in failing businesses, invest in schemes to earn high interest rates with no guarantees and just generally take money out to buy frivolous things like vacations and do home renovations.”

No surprise there, Elaine. Lines of credit, especially those backed by a house, have been the fastest-growing pile of debt for several years now. How much? Currently the banks hold almost $250 billion in HELOC (home equity line of credit) loans. That’s equal to a big 12% of the Canadian economy – compared to just a third as much in the US.

So, just like the Yanks did when their housing market bloated and everyone bragged how much their inflated properties were worth, Canadians are sucking off their equity gains and doing stupid things with it. Like renovating. Or buying a cottage. Or an investment condo. Yup, more real estate exposure. And more debt.

Back to Elaine:

“I had lunch with a fellow accountant the other day and I asked her if she’s seeing this as well in her clients. I was floored with her answer: “Me too! I’m drowning in debt too! I bought my house thirteen years ago for $180,000 and now the mortgage is well over $300,000!” Her house is worth about $400k, so any correction in the market would wipe them out (she’s in her late forties). Hate to say it, but I still have a feeling that the Canadian economy is doomed. Everyone has jumped onto the debt train and there’s no going back now.”

As you know, HELOCs are easy to get. The banks push them hard with rates around 3.5%, and are happy to hand over 65% of your equity. The payments can be interest only, making them cheap to carry. And if you use the money to invest in something paying taxable income, then 100% of the interest-only payments are deductible from your income.

In other words, if you’re sitting on a $1,000,000 paid-for shack in Vancouver, you could borrow $600,000 to invest in a balanced portfolio making 7% (just an example), giving you $42,000 in tax-efficient income, while the annual cost was $21,000, or about $15,000 after the tax break. Of course, there’s risk here. Nothing goes up forever, including stock markets or your house.

Or, you can borrow against your inflated home equity, run up a bunch of debt, and piss it away on a vacation, a boat, or a rental condo on which you’ll have a negative tax flow. This was the American experience – people using houses like ATMs to drain off their boom-market equity gains, figuring real estate values would never dive. They did. You know the rest.

HELOC loans are all variable, and the rate of interest is tied to the bank prime. That, in turn, reflects the Bank of Canada’s overnight rate, which hasn’t budged in a few years. So it’s safe to assume the line of credit cost will remain static for another year or so, as the economy remains somewhat diddled.

But there’s a negative correlation between rates and houses. So when rates rise again (they will, like the sun), real estate prices will fall. This is not a happy thing if you happened to take a lot of equity from your house, for two possible reasons: (a) the bank can call your HELOC because you’ve exceeded the loan-to-value threshold of 65%, meaning you have to cough up all the money you just spent on a Porsche for your mistress or (b) you have to refinance at a higher rate, increasing your debt costs at the same time your house declines.

I’ll bet a lot of the 20% of Canadians who have a HELOC today don’t quite understand the rate isn’t fixed, that higher payments can be demanded arbitrarily, or the credit yanked if your house value falls. And while interest-only payments are sexy, you might end up after years of payments with a debt as big as when you started. Or worse.

Now, a word about GICs. They’re the favourite investment in Canada, and one big reason why most people are going nowhere financially, and have gambled so much on a capricious housing market. Not smart.

To earn 2% at RBC, for example, you must hand over your GIC money for five long years, where it is non-redeemable. If this isn’t inside an RRSP or TFSA, the interest is added to your taxable income and fully whacked at your marginal rate. For most people, this turns the yield into less than 1.5%.

This week we heard the latest inflation news, with the cost of living now rising by 2.4% annually. Hence, GICs suck. Even sheltered inside an RRSP you’re losing money. So why not put the cash into the preferred shares of your bank instead of the bank itself? They are far more stable than common shares, pay about 5%, and do it in the form of dividends – which are taxed at half the normal rate. That boosts the average pre-tax yield to more than 6% – or three times that offered by a pathetic GIC.

Wait! TNL@TB didn’t tell you about preferred shares when you went in to ask about conservative investing? She just put you into a GIC? I’m shocked.

By the way, where do you think the bank gets the money to fund those HELOCs? Uh-huh.

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Truth Thu, 17 Jul 2014 21:57:49 +0000 LABS modified

It didn’t take long after some whackjobs shot down the Malaysian Airlines jet, obliterating three hundred people, for the Internet to light up. Then the Israelis rolled into Gaza. Gold and bond prices jumped. Stocks slumped. Armageddon was on.

The doomers compare July of 2014 with the summer of 1914, when a nationalist nutjob shot Austrian heir and archduke Franz Ferdinan and his wife, Sophie. That cascaded into World War I, and 37 million casualties. Then, as now, radicals were scrapping over territory in a tribal frenzy, with imperial powers entwined in the conflict.

It could all repeat, they say. Sell paper. Buy gold. Expect the worst.

Well, nobody knows what comes next. A 1% drop in equity markets and a jump in the VIX (it measures volatility) are enough to prove investors hate uncertainty and took money off the table. But it’s hardly a surprise with markets bouncing around record highs for a few months now. The worry is the 777 tragedy will inflame things more. Markets have been looking for a reason to correct. This could eventually  be it.

But the apocalypse? Highly doubtful. It’s not 1914, and I wouldn’t be stampeded into selling good assets that pay you income to buy pieces of rock. And the last place you should get investment advice is some pathetic blog. (Hey…)

On that note, let’s talk about your bank account.

A few months ago our little nest here was swarmed with people claiming the federal government was hatching a ‘bail-in’ plan like the one that scooped up private savings in Cyprus. Untold numbers of suckers bought it, after reading crap like this on buy-gold web sites:

“I can’t even begin to describe how serious all of this is. From now on, when major banks fail they are going to bail them out by grabbing the money that is in your bank accounts. This is going to absolutely shatter faith in the banking system and it is actually going to make it far more likely that we will see major bank failures all over the western world.

“What you are about to see absolutely amazed me when I first saw it. The Canadian government is actually proposing that what just happened in Cyprus should be used as a blueprint for future bank failures up in Canada. In other words, the banks will just be allowed to grab money directly out of your bank accounts to recapitalize themselves. That may sound completely and utterly insane to us, but this is how things will now be done all over the western world.”

Of course not. As I explained at the time, the feds were proposing new investment vehicles be created which could be used to reflate any Canadian bank that failed, so taxpayers wouldn’t have to bail it out. It never had anything to do with private bank accounts, even ones with more than the $100,000 deposit insurance limit placed in them.

Just to make it painfully clear, this was what the Department of Finance said: “The ‘bail-in’ scenario described in the budget has nothing to do with consumer deposits and they are not part of the ‘bail-in’ regime.”

I told you at the time some special bail-in bonds or bond-type securities would soon be hatched, and investors would lunge to get them and their higher yield. And why not? One of the fat Canadian banks will never fail, which would make a bail-in bond as safe as your momma’s arms. But I also said you wouldn’t be able to buy such a bond, as they’d be reserved for the big players – at least until a derivative product’s created.

Well, it just happened.

Days ago the Royal issued $1 billion in bail-in subordinated notes. The volume of these kind of securities is expected to swell to about $25 billion in the next few years, and they will be hot items for institutional investors. In fact, an association representing about a third of all the big bond-buyers in Canada is protesting to Ottawa that its members didn’t get enough advance notice of the RBC issue, which was snorfled up immediately.

“It was improper to have a deal of this magnitude and importance rushed through the system, and a number of our members believe it was an abuse of the new-issue process,” the Canadian Bond Investors Association said. “We ask that the Canadian securities regulators look at the new-issue process for this security and whether it was appropriate in the circumstances.”

So there ya go. A little lesson in truth. The web sites with rocks and scary newsletters to sell, who claim your bank accounts will be stolen? They made that up. Meanwhile the first bail-in bond was massively oversubscribed by people who understand they’re taking virtually no risk.

Remember this in the days ahead. Some people will seek to turn tragedy and conflict into personal gain, even on this blog. I will be tempted to delete their sorry butts into oblivion.

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The gullible Wed, 16 Jul 2014 20:24:58 +0000 CHINA

Trust me. I’d rather break my other leg than revisit this topic. Alas, we must.

Two days ago this pathetic blog was overrun with people who love to blame rich immigrants for jacking prices and erasing their dream of living in midtown Toronto or (especially) Vancouver in a house they can afford. It’s a short trip from that to racism, intolerance, xenophobia and simple hating. As we saw. And a load of folks obviously do not distinguish between Chinese people (from China) who buy up properties here and other Chinese people (from Richmond or Unionville) who were raised locally and just want a house. Of course the latter are not Chinese. They’re Canadian. Get over it.

The perceived injustice is exacerbated by the fact there are no reliable stats on where buyers in a specific market actually come from. Now municipal Van politicos want to collect those numbers (somehow), presumably so they can enrage the masses and impose ownership restrictions.

But what if all of this angst is embarrassingly misplaced? What if cash-drenched foreign buyers represent a small portion of area sales, and affect values only in narrowly-defined hoods and price ranges? What if foolish average house prices in, say, Vancouver were simply the result of fools buying them? Then wouldn’t the real estate industry have a big stake in making sure you were pushed into a purchase by the perceived Yellow Peril? Buy now, or buy never.

Actually we do have some numbers. No, they are not for Vancouver but instead the city of Victoria, which is a few puddles away. Turns out the Victoria Real Estate Board does keep track of who’s buying what where, and isn’t shy about sharing the results.

So here you go. In all of 2013, 5,862 properties changed hands (about a quarter of metro Vancouver’s volume).

Buyers who lived locally already: 74.92%
Buyers from elsewhere in BC: 13.77%
Buyers from elsewhere in Canada: 9.67%
Total buyers who live in Canada: 98.36%

Total buyers from outside Canada: 1.64%

Hmm. Okay, this is not a set of data for Vancouver. But a reasonable person has to wonder how much greater the number of foreign buyers would be in Van. Twice? Four times? Even if it were ten times, that would mean almost 90% of total sales were made to people living locally, or from somewhere else in the province or the nation.

So I’ll say it again: while there’s a vast and growing population of Asian heritage in the Lower Mainland and pockets of metro Van especially, the influence of HAM (hot Asian money – from Asia, not Burnaby) is grossly overstated. Houses cost a stupid amount of money because buyers capitulate and pay it – then hobble their lives with tenants living in the basement or the garage. Restricting property ownership won’t bring down real estate values, but it sure will dump all over Vancouver’s efforts to be a hub of Pacific commerce. And HAM will move to Seattle. Lose-lose.

(BTW, if the hicks in Victoria who count on their fingers and toes can cough up stats like this, why can’t the metrosexual realtor rock stars in Vancouver do the same? Would it blow this marketing fraud wide open? Just asking.)


In 1975 the CN tower was erected and the beaver made Canada’s national rodent. Trudeau was prime minister and the top song (briefly, thank God) was ‘Rhinestone Cowboy’. If you worked in a dead-end job, you made the minimum wage – about $2.70. Expressed in today’s dollars, that was $10.13 an hour.

Actually, Stats Canada says the average minimum wage across Canada today is almost the same – $10.14. Meanwhile the average Toronto house in 1975 cost $57,581. Expressed in today’s dollars, that equals $216,248. However, the average property is now selling for more than twice that – $549,174, with detached 416 houses averaging $870,000.

So what? So, more evidence real estate values bear absolutely no relation to the ability of people to afford them. A minimum-wage earner might never afford a city house, but incomes in general have also fallen far behind the property curve.

Don’t worry. Things will revert.

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The condo economy Tue, 15 Jul 2014 23:03:04 +0000 ECONOMY modified

The guy across the street was home for, I guess, three months. As Bandit irrigated his bush the other night, he mentioned he was working again. Doing what, I asked? “Commercial wiring,” he said, “big new condo. Like fifty floors.”

I said I was happy for him. I was. Been out of work a few times, too.

So, last month 32,000 more construction jobs like his popped up. Even as the economy as a whole shed almost ten thousand positions, a new army of roofers, drywallers, formers, carpenters and electricians suited up. The unemployment rate swelled, Ontario’s manufacturing base shrank, but the cranes and condos kept rising.

CREA’s numbers this week prove we have a real estate economy. Getting more intense, actually. Resale home transactions are up 11% from last year, and prices are ahead 6.9%. Every week households take on greater debt to buy housing, at mortgage rates which cannot go lower. Prices are high because rates are low, which is worth remembering when the formula reverses.

Today a little more than 26% of the economy is directly related to building, selling or financing real estate. That compares with 11% for actually manufacturing things to sell to the rest of the world, and 8.5% for all the stuff we dig up, including minerals and oil. This is a greater dependency on housing than was ever the case in pre-crash America, or house-horny jurisdictions like California.

So, is it any wonder the average Canadian house is 60% more expensive than the average American one? Or mortgage debt is now $1.1 trillion? Or that our personal savings rate is in the ditch?

There are good reasons to worry about this, from a macroeconomic and investment point of view. Because while in-laws trade their financial assets for inflated houses, a lot of people are gobsmacked we’d accept this level of risk. One of them is California-based analyst, financier and author Wolf Richter. He just wrote this about us:

“Housing bubbles – that is, construction bubbles – give economies a terrific boost as they reach a crescendo because hiring and purchasing are so local and cannot be outsourced. They’re job-intensive, non-automated activities requiring manual labor by skilled, well-paid people. And they impact numerous facets of the economy. Materials and supplies need to be purchased. Dealers sell more pickups. Restaurants sell more lunches. Lumberyards are busy. Tools need to be replaced. Equipment dealers and rental companies hit homeruns…. But when construction slows, that terrific boost turns into an even more terrific bust. Jobs evaporate overnight. Purchasing slows or stops. And very quickly, the overall economy gets hit.”

Now, here’s some proof (from OtterWood Capital Management) that a condo economy can create lots of short-term construction jobs, but seems to suck at building anything of duration – since home buyers eventually run out of cash or credit. The graph below plots hours worked in Canada (blue) and economic growth (brown). This is not a happy chart, with our employment situation falling sharply.


Now, is Wolf just another lame, know-it-all American blowhard amused by the little people who live where cold fronts come from? Probably. But he’s sure not alone. Last week I told you about the credible Morningstar dude who thinks we’re setting ourselves up for a 30% house price implosion. And now along comes US rating agency, Fitch, which has just given us a special designation: Screwed ++.

Expect real estate values to plop by as much as 20%, Fitch says, because the efforts Ottawa has taken to curb house lust simply have not worked.

“We believe high household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases. Fitch believes the Canadian government has taken several proactive steps in recent years to mitigate some of the risks to the housing market. However, the long-term impacts remain unclear, and policy-makers may be required to take additional steps over the short term to engineer a soft landing.”

And tell your mom this: Fitch says interest rates will rise, not fall. Adds Capital Economics’ David Madani: “We still expect the housing market is headed for a major correction.” And recall that the OECD says real estate here costs 30% too much based on incomes and 60% based on rents. Which means owners have paid too much, and renters are subsidized. Duh.

If you have any doubt, look below. Might be a real good time to up the foreign content in your portfolio.

HOME PRICES modified

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Lost dog Mon, 14 Jul 2014 22:10:03 +0000 COFFEE modified

Days ago a blog dog and occasional poster from Kitsilano made a conditional offer in his Vancouver hood. Then he sat and wrote a long note about why he regrets me.

“It’s been a long journey,” he started, “but I am saying good bye. I have read this blog consistently almost from the beginning. I have no doubt it has helped many people throughout Canada make informed decisions about finance and real estate. Unfortunately, you did not help me one bit other than provide occasional entertainment.”

For you heathens, Kits is one of Van’s it neighbourhoods. About 40,000 people live in this piece of the Westside between the Art Deco Burrard Street bridge and tony West Point Grey. It’s young. Over 60% of the residents are below the age of 40, and they earn about the average for the city – sixty thousand. And yet, thanks to low mortgage rates, basement suites, the Bank of Mom, house lust and (as noted below) foreign buyers, the average detached house costs almost $1.6 million.

(By contrast, the centrally-located, Toronto demand neighborhood of Leaside also has an average house price of $1.5 million. The average household income there is $330,000.)

So why would people making that kind of income over-extend to buy a house that comes with a lifetime of debt?

Silly. This is Vancouver. The only point of existence here is to own a house. And to hate those you perceive are preventing it.

“Your advice about Vancouver was dead wrong,” says the Kits dog. “Man up and admit it. The market should not have been measured relative to the rents and income of residents. It is truthfully driven by foreign investment. I live here and know – you do not.

“We contacted the nice Asian couple who has been subsidizing our rent for 18 months. We asked if they wanted to sell and if so how much they wanted. They wanted $1m more than they paid in 2010. Virtually every house in our neighbourhood is now owned by mainland Chinese. The house next door to the one that we are purchasing just sold. It is now being advertised on craigslist rentals properties. Clearly, an “investor” purchased the property.

“There are 60 schools in Vancouver with more than 50% ESL students. Some schools have more than 70% ESL. Did that happen by accident? Does Pickering have schools with 70% ESL?

“The real estate prices in this city may or may not end badly. As long as a significant number of mainland Chinese want to park money in Vancouver there will be less and less opportunity for local tax paying residents to buy a single family home. Go ahead, call me a racist and tell me there are no stats to support my assertions. My response – good bye.

“Your arguments made good sense and we decided not to buy. Who could have predicted that our city would be purchased a little bit at a time by foreigners until they dominated the market and started competing against each other for property? Clearly, you and we did not. Do everybody a service, and stop implying this market is like every other market. It has unique aspects, and one of them is material foreign money.

“It no longer matters anyway. The average family in Vancouver can no longer afford a single family home. Foreigners will continue to buy and they will play musical chairs with each other until the music stops. Most people you guided against buying a single family home in Vancouver likely never will be able to now. I honestly believed that with our family income and the length of time we have earned that income that we would have a very nice home by now. The market simply continued to move against us. Oh well, the good news is that we capitulated and I never have to visit this site again.”

See what real estate in Vancouver does to your brain? Bitter, resentful, angry. And after all that useful common sense and resistance has been worn down to the bone – capitulation. Now we have another young family gone from liquidity and mobility to debt and materialism. You can bet our departed colleague will come to defend and justify those prices that households like his cannot, and should not, afford.

Good luck to him. Hopefully, it works. But renewing a million-dollar mortgage in five years might be a life-altering experience. Is he counting on more Chinese coming along, making his place worth $3 million? How does this ever end well?

But let’s put perception aside for a moment. Instead, here are some facts.

The median sales price for a detached house in Kits is currently $1.6 million. Prices peaked at $2.3 million in the winter of 2013. We are now back down to where values were in early 2011. Take a look at the chart below and you can see there is a volatile, erratic – and emotional – component to this. No surprise there.

KITS PRICES modified

And what of foreign money? Is it solely responsible for the locals not being able to buy single-family homes within an easy bike ride of DT Vancouver? Well, we don’t know. No stats exist on purchases by people who used cash coming from offshore – which means perception runs amok. But we do have a demographic profile, thanks to Stats Canada.

Here is the population breakdown by language on one of the more upscale streets in Kitsilano. It’s typical.

LANGUAGE modified

Of course, this doesn’t mean houses can’t be owned by shadowy Chinese investors who have parked their money in Vancouver and, as a result, are treating the locals to subsidized rents (as our lost dog admits). But this is hardly a ghetto. Except in some minds.

About 28,500 properties change hands each year in Vancouver. This is the story of one.

Makes you wonder. Why?

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Regrets Sun, 13 Jul 2014 18:28:36 +0000 REGRETS modified

My door swung open About a dozen of them entered.

Twenty-two years ago the realtors were in a funk. A boom housing market had turned to bust. The economy was slumped toward recession. Many people who’d bought in a frenzy three or four years earlier, when everyone thought houses were going up forever, now owed more than the properties were worth. Toronto and Vancouver values were down by 30%. Nobody had seen it coming.

Walking into my Parliament Hill office were the presidents of the national real estate association and the homebuilders organization, plus their in-house economists and hangers-on. The lobbying effort was intense for a shiny new idea to rescue the plunging market. ‘We want first-time buyers to be able to use RRSP money for a down payment,” they told me. “This is an emergency situation and we must stabilize things before millions of families lose everything.”

But, I said, retirement savings are for retirement. Why would we corrupt the system by letting people divert this money into a house? If they don’t have enough for a down payment, why should they be able to buy real estate? Won’t we regret this later?

Because, they said, plunging equity could make a recession worse – combined with the negative numbers of the day. We need to encourage new buyers. (At the time both inflation and mortgage rates were in double digits.)

So, I bought it. The rest of the government did, too. We brought in the Home Buyers Plan, but only on a temporary and urgent basis. Once middle class equity was stabilized, the program would end.

The deal: virgins could withdraw money from RRSPs for a down payment and pay no tax, on the condition they repaid it starting in two years and finishing 15 years later. Any missed payments would be added to their income in that year, and taxed at their marginal rate. The immediate goal was to rescue a free-falling housing market. The ultimate goal was to encourage people to save and invest for retirement.

In a few years it all changed. Housing prices plateaued and started to climb. Rates came down. But politicians who came after me made the HBP permanent, then dramatically increased the amount a couple could withdraw – to $50,000.

Well, now the Home Buyers Plan has been used about 2,500,000 times and roughly $30 billion has been removed from financial assets inside RRSPs and dumped into the real estate market. Combined with cheap mortgage rates and lenient bankers, this helped push average detached home prices over $1 million in two major markets and made houses so expensive it takes over 70% of gross income to own one in Vancouver.

While real estate values have moderated, declined or tanked in most western countries since the financial crisis, here they’ve bloated into gasbag territory, while home ownership has become a cult. The HBP has done its bit in swelling house lust and persuading an entire nation you won’t need to save money when you can sink it all into a house instead.

But, now we have troubles, as the raid-your-RRSP scheme is telling us.

A University of Guelph thesis points out at least a third of all the first-timers who snatched down payment money this way between 1995 and 2007 didn’t actually pay it back, even when the annual repayment was less than 7% of the amount taken. Since then, things appear to be getting worse.

By 2011, says the Canada Revenue Agency, almost half (47%) of all the people who sucked their RRSPs dry to buy a home had not started returning the money. As a result, all of those missed payments were added to taxable incomes, and borrowers were forced to pay more as a result. Why would they let this happen, increasing their income tax burden rather than putting the small annual sum back inside their RRSPs?

Probably because they didn’t have the money. The HBP plan plus historically low rates, in addition to society’s overwhelming house horniness, just encouraged the virgins to buy as much real estate as possible with maximum debt. After all, who wants a starter home anymore? Everybody thinks their first house has to be better than their parent’s final one.

And last week, as I reported, Morningstar equity analyst Dan Werner has this stunning news for us: while all these new homeowners have been unable to repay their RRSP withdrawals, our mortgage debt profile has come to mirror that of the US just before its devastating real estate plop. Today 23% of Canadians have financing of 80% or more on their houses. At the height of the American housing bubble, it was only 22%.

Now that we have low inflation, low mortgage rates and free RRSP money for houses, what will the realtors propose next when real estate topples under its own excess? And how long will it take to recover? A generation?

A lot of folks may wish they’d never touched those savings.

In case I depressed you, watch this:

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The formula Fri, 11 Jul 2014 22:26:05 +0000 OVERPAYD modified

“Ok,” says Joe, “so I was a bit curious about how this whole bidding war process works, so I decided to dip my toe in any see how far in the process I could go with a low-ball offer on a slanted semi.”

And he did. The prey was 105 Millicent Street, an unrenovated, somewhat scary semi on a 20-foot lot in the dodgy Davenport-Dupont area of Toronto, with laneway parking and ‘as is’ appliances. Asking: $599,000.

Of course, this is the sole hot zone. Despite what you read in the MSM, the Toronto market is not on fire. Sales are muted overall, with scant action in the high end and a growing inventory. But when it comes to semis costing under $1 million, it’s hipster heaven. For some reason, they love these half-houses where the person on the other side of the wall might be raising genetically-modified rats, collecting body parts or is simply an Abba fan.

Anyway, there were eight offers.

“I expected the usual agent tactics such as, “put your best offer forward, you might not get a second chance” or aggressive recommendations to remove any conditions on the offer,” says Joe, “but I never expected that my agent would pull out “the formula”. “The formula” is a highly scientific algorithm mastered by agents, which determines the final sale price based on the number of bids. In my case, this wizardry was used to recommend to me to adjust my offer to 16% over asking.”

The formula? I was hungry to know more. So Joe forwarded his agent’s instruction:

“The listing agent has strongly suggested that everyone come in with their best offer and they are not guaranteeing a second chance. If you have anymore money that you are willing to offer, don’t keep it in your back pocket,” she said. “Every agent knows they are competing against 7 other parties. There is a formula that we typically use for calculating what dollar amount to offer based on how many offers there are, this is typically 1% – 2.5% of the purchase price per offer. 2% per offer for 8 offers is $695,840.”

Silly, silly, naïve little Joe. He also wanted his offer conditional upon financing and a home inspection. So when the agent recovered from uncontrollable spasms of laughter, she replied:

“I know you really want to do an inspection as well but please be aware that this condition could also be a deal breaker. Entirely your choice, I just want to be honest and realistic with you. Another suggestion would be to up your deposit amount since you have two conditions. A stronger deposit shows more seriousness.”

So, there ya go. This is how virginal first-time buyers are talked up. It’s how a $599,000 house turns into one worth $695,840 before you’ve even put pen to paper. It’s a lesson in how the vulnerable are pushed into buying geriatric pieces of residential flotsam like this without a shred of protection against defects, or shielded from the real possibility of a low appraisal and a financing crisis following a nutso bidding war.

By the way, here’s the house:

MILLICENT modified

Joe’s story, unfortunately, is typical. Thousands of properties have been purchased recently by people who paid too much, absorbed excessive debt and have been left exposed to years of repairs on junker houses. It’s hard to believe the kids can be talked into spending $600,000 or $800,000 without even a working knowledge of the structure they’re taking on, or devoid of a financial parachute – and do it all in a competitive, pressure-cooker environment, egged on by greedy agents and a voracious vendor they’ll never see again. But it’s common. And it’ll end in tears.

Dan Werner is a well-known equity analyst for the Chicago-based investment firm Morningstar. A smart dude, actually. He thinks people like the eventual buyer of 105 Millicent are toast.

“Many investors believe that financial crises are things that happen to other people in other countries at other times; crises do not happen to us, here and now,” he says in a report predicting our housing market will crash by 30% over five years. “History has shown, time and again, that ‘this time’ is not different. We believe the same is true for the future of Canadian residential real estate.”

He carefully explains why.  It’s worth reading about. Especially if you believe what your mom told you about buying a house.

For example, the argument is made on this pathetic blog by house-humpers that real estate’s safe because Canadians have tons of equity in their homes. Well, turns out we have exactly the same equity Americans had in 2005, before their market collapsed. In fact, at the height of the bubble there 22% of mortgages were for 80% or more of the value of the homes financed. In Canada the number is now 23%. Oops.

And Werner points out that of the 2.5 million hipsters who have cashed in RRSPs to buy houses, a quarter can’t pay the money back – even with the ridiculously lenient 15-year period given them. The conclusion: they’re drowning in debt. So just imagine what any kind of mortgage rate hike will do. As loan costs return to historic norms over five years, says the analyst, housing costs could consume 75% of the average person’s take-home pay.

Finally, what about the way CMHC backstops the banks, and therefore the entire housing market? Well, a 20% plop in house prices, the report claims, would trigger $12 billion in default insurance claims and wipe out three-quarters of the federal agency’s cash reserves.

Isn’t it weird how every external expert – Morningstar, The Economist, Robert Shiller, the OECD – says Canada’s at risk, while we all know we’re special?

What’s wrong with them?

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The tree police Thu, 10 Jul 2014 21:39:49 +0000 SHRUB modified

Cindy thought it would be a cool idea to carpet her lawn. So she did. Astroturf. Synthetic grass. Always green, forever clipped, no lawnmower, no trimmer, never a squirrel hole and no watering. Just green, crisp and neat.

Besides, on her Toronto street the green space in front of most homes is barely 15 feet across, once the parking pad is factored in. The urban soil is dodgy, and sunshine rarely gets through the canopy of boulevard trees. Growing healthy grass is almost a lost cause.

“So screw it,” she said. “We went for the plastic.”

A year later Cindy and Toby had another kid and decided to add to the back of the house. Fine. Drawings, permits, committee of adjustment approval – it all got done, but the project would mean the removal of a tree. Not that great a tree, either. And a private one – owned by them, in their back yard.

Enter the tree police.

The city sent a couple of guys to look at it, and determine if the slaughter could occur. In the course of that visit, every piece of vegetation on the lot became subject to inspection. Including the rubber lawn. And while it passed, the small amount of synthetic grass Cindy had installed around the boulevard tree on city property in front of their home did not.

As a condition of securing their building permit, she was ordered to remove the carpet, replace the dirt beneath and sod it, at her own expense. “I can live with that,” she says, “but not the tree tax.” Cindy and Toby were required to write a cheque for $4,000 as a ‘security deposit’ on the boulevard tree which sits on land they don’t own. If it croaks, they lose the money. If it lives for a few years, they get it back.

“This is disgusting,” she says. “Worse, it’s extortion. Where am I supposed to get an extra four thousand?”

People without houses lament the fact they can’t paint the walls chartreuse, plant a medical marijuana garden or ‘make the place my own.’ They often have absolutely no idea of the financial burden of home ownership, or the straitjacket most urban owners live inside of. On Cindy’s street, for example, old mutual driveways are too narrow to pilot the SUV down, but the city controls who can turn a lawn into parking. You can’t move an interior wall or finish your basement, let alone plant a single support for a new back deck, without a permit and a fee.

Wood-burning fireplaces are essentially banned. Fences must be three metres in height, and no shrubs can poke above them. If a garage falls down, it cannot be replaced. Of course, any city employee can come and spray paint instructions on your grass, along with the gas and hydro guys. In a country where citizens have no constitutional right to own property,  you can even have your whole house seized for an on-ramp or a park.

By the way, the people on Cindy’s street (where unremarkable houses on 30-foot lots cost a million) pay about $500 a month in property tax. They pay the city a garbage tax, as well, plus a water bill. Electricity charges are slated to rise by about 40% over the next few years, and if anyone decides to move, there’s double land transfer tax in Toronto. The average moving tax on this street is about $35,000.

Homeowners pay considerably more for insurance than renters, which is to be expected. New policies routinely come with a home inspection these days, and that normally results in a list of defects. No repairs, no insurance. No insurance, no mortgage.

Of course, houses have to be heated and cooled, which requires a furnace and air conditioning unit, which need regular maintenance, filters and duct-cleaning, lest your kids like inhaling carpet fibres and tasty dust mites. By the way, if the furnace is over four years of age, it’s probably an energy pig – which is consequential, given the increases in oil and gas prices. Outside, the garden needs attention, because the city can order you to remove any noxious weeds. Fail, and they’ll send some guys in brown shorts to do that job, and send you a bill. Don’t pay, and it goes on your property tax.

Same with the sidewalk out front. If you don’t clear the ice and snow within twelve hours of a storm, the fine is $100, plus a $25 surtax. Each time. And bugs. Watch the little suckers. Whole swaths of trendy, in-demand areas of Toronto, for example, packed with those slanty semis that hipsters love to bid for, are laced with termites. Getting rid of them can easily cost a few thousand bucks when trenching is involved. And there’s no point even starting if your infested neighbour refuses to spend the dough.

Did I mention the bed bugs? Or the white grubs in the lawn that are caviar to raccoons? The cute little guys have sharp snouts and can turn your turf into a miniature version of France during World War One in a single night. Of course, you can always come home one evening to see the bungalow next door has been demolished and a giant, smelly yellow machine is sitting on top of the bricks. Then you have a pleasant year ahead of listening to construction workers talk about boobs.

For this you hand over all your money, then shoulder gobs of debt. And pity the renters.

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