Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Wed, 03 Sep 2014 03:01:33 +0000 en-US hourly 1 Too much Tue, 02 Sep 2014 22:16:05 +0000 CAT modified

For a few terrifying moments, it looked like Ted would have a cow. “This is freaking outrageous,” he yelled at me through the phone, without actually saying ‘freaking.’ “How can these pirates get away with it?”

Because you agreed to it, I said, unhelpfully. He moaned.

Ted just got an email from his financial advisor, a nice lady in Burnaby with lots of crispy letters after her name, telling him if he wanted to change investment companies, he’d have to cough up $8,600 in additional fees, or about 4% of his entire portfolio. This, of course, was in addition to the 2% he’s been shelling out regularly for the past few years to own mutual funds in this company which shall, mercifully, remain nameless (Investors Group).

This is what happens when you buy mutual funds which are DSC. Those deadly consonants mean ‘deferred sales charge’ and they describe a mutual fund prison, complete with emotional chains and rats. Because the ‘advisor’ (a.k.a. salesperson) gets a commission upfront from the company (instead of you) when you buy these assets, the fund tries to ensure you stick around paying ongoing management fees for seven years so the investment can be recouped. If you try to escape early, you’re whacked.

Getting financial help is a wise thing to do. Stumbling into a morass of fees and charges is not. Here are a few more things to be aware of.

MERs. More evil letters, this time meaning ‘management expense ratio,’ which translates into (of course) fees. This is how mutual funds get paid for putting your money in a giant pool with other people’s cash and then having a manager you’ll never meet moosh it around. Fees for more passive funds, such as those investing in bonds, are fairly low but for equity funds they can be 2-3%. For segregated funds (insurance products which guarantee certain payouts, almost always unnecessary) the fees can top 5%. Yikes. And most fund MERs aren’t deductible from taxable income.

Imbedded fees. This is how ETFs (exchange-traded funds) get the revenues they need to operate. They’re typically a fraction of what mutual funds charge because no manager is trying to add alpha (that’s the special sauce giving you greater than market returns). So an ETF may have an embedded fee of far less than a half of one percent. For example, XIU – the exchange-traded fund which offers ownership of the biggest 60 companies on the Toronto stock market – has a fee of 0.18%. Way better, but still not deductible.

Trading fees. Lots of people who think they are little Warren Buffetts buy and sell stocks or funds through online brokerage accounts, many because they don’t want to pay others for the service. Fair enough. If you know what you’re doing, plus have the time and stomach for it, this can work out well. But it’s not free. In addition to embedded fees for various assets there are also trading charges – like $5 a pop at places like Scotia iTrade, or $1 per $1,000 face value for bonds. But to get the low rate, you have to trade at least 150 times every three months! So, who’s got time to go to work?

Transactional fees. Some big advisory companies, like the brokerages owned by the banks, offer transactional fees – so you only pay for things actually done on your behalf, like buying or selling securities. That’s cool because you also get advice on what the smart moves might be. But the fee isn’t small – often about $100 a trade. And while it is deductible from taxable income, it sure makes it expensive when you want to rebalance a portfolio, which could include a dozen or two moves. Figure that out.

Fee-for-service. There are advisors – not many, but some – you can hire by the hour like, er, a power post-hole digger, to tell you what to do. They look at your assets, ask a bunch of questions, then provide a suggested portfolio. Not cheap – about $300 an hour, or $5,000 or more for a financial plan. Then, of course, you still need to have the plan enacted, the securities bought and trades executed at the right time, at additional cost. This also means every time you think a rebalancing is in order, you have to pay more fees for an opinion. Besides, you have nobody to blame.

Fee-based. This person refuses to collect commissions (like the mutual fund people), and instead gets a fee based on the amount of money handed over for investing. Never pay more than 1% for portfolios of less than a million, and expect a discount above that. There also should not be any additional cost for trades or tax advice or a full financial plan. Rebalancings should be done automatically for you – at no cost. And outside of your registered accounts, the full fee is deductible for tax purposes. Never write a cheque upfront, either, to have a plan done  or receive tax avoidance advice – the advisor shouldn’t start charging a small monthly amount until everything is set up. Plus, demand the guy pay for any transfer fees that another company dings you to move your money.

Or, you can do nothing. Or, like the wackos who come here, embrace Bitcoins. Or, make mom happy and buy a condo. Just ensure you check her credentials.

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Bank on this Mon, 01 Sep 2014 18:02:56 +0000 RADIATION modified

If Canadian residential housing were to plop, would the big banks take a dive along with them?

That’s been a simplistic point of view held by some people who misunderstand the Canadian banking system, the depth of CMHC coverage for high-risk, high-ratio loans, or those just trying to scare the poop out of you so you’ll buy gold. Even smart people, like analyst Ben Rabidoux, have been known to make this error, when he hooked up with a metals-hawking, Van-based financial advisor a few years ago. Since then banks have scored record profits, quarter after quarter, and bullion has lost a third of its value. Oops.

Does that make banks impervious to a real state correction?

Definitely not. Shrinkage in the growth of mortgage portfolios is always a major worry for the bankers – something they’ve been dealing with for some time already (personal and real estate loans are both under pressure). In addition, low interest rates squeeze margins. But the banks have meanwhile been concentrating on diversifying into more international operations, while beefing up the wealth management, insurance and capital markets revenue streams.

In other words, consumers are drowning in debt, there have been virtually no new jobs created in 2014, and yet TD’s marking record money, Scotia profits are ahead 57%, and together the Big Six earned$7.37 billion in the second quarter alone. In other words, $80 million a day – in an economy with stagnant growth, tipped-out consumers and historically low rates. Meanwhile eight in 10 Canadian residential mortgages – and all of the ones with less than 20% equity – are backed not by the banks, but by the taxpayers. If you worry about risk, worry about that.

Of course, if real estate does tank, there will be a kneejerk reaction (thanks to the Chicken Little analysts and advisors), and bank common shares may decline in value. Yes, vultch time. But if you worry about such things, just buy bank preferreds which are immensely more stable, pay dividends approaching 5% and give you quarterly income which is taxed at 50% less than your paycheque. They lose capital value when rates rise, but we all know that will be a gradual event and fixed dividend payments continue unabated.

Here’s another view, from Morningstar equity analyst Dan Werner, FWIW.

Now, here’s something better to fret over. Back when the US housing market was at its frothiest, with the foam spilling over into Canada and HGTV pumping ‘Flip this House’, everybody wanted to be a flipper. Conversely, interest in specking in residential properties crashed in the years following the GFC, with HGTV turning to shows about renos and morphing your dank basement into a subterranean rental suite for poor people. Well, guess what?  It’s back. According to Google’s trending-thingy, people have been searching for flipping news and advice in growing numbers. Here’s the chart.  

Obviously we’re nowhere near at pre-crisis levels, but the line’s progress looks pretty convincing. Is this another sign of late-market madness?

Don’t you love rhetorical questions?


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Ugly Sun, 31 Aug 2014 21:49:28 +0000 UGLY modified

Last week I picked on Paul Etherington, cartel boss of the nation’s biggest real estate board. It was so much fun, let’s do it again. Easy, too, when he writes drivel like this:

“Making regular mortgage payments represents a method of forced savings: as you pay down the principal on your home loan, and your property’s market value appreciates, your home equity builds, setting you on a path to greater financial structure, even if you count poor budgeting or excessive spending among your vices.

“In addition to compelling you to take a disciplined approach toward your financial future, homeownership offers several other benefits that are equally important.  A 2012 study…found that respondents who had recently transitioned to homeownership reported feelings of improved health, pride of ownership and ties to the community.”

See what I mean? Houses always go up, so they’re good investments, and you’ll be okay even if you piss away all your income. Just keep making those loan payments. Hey, and mortgages are healthy, too. So get a big one, kids.

Sadly, our society oozes with people who believe this stuff. And, from time to time, we get a glimpse of the potential mess they’re walking into – not to mention the detritus all their house lust could leave for Canadian taxpayers. Such a glimpse is here, in the latest data from the guys who make 95%-financing possible, CHMC, as flagged by the trade site, Canadian Mortgage Trenda.

The ugly stats tell us this about what the masses are doing lately:

  • In the first six months of this year, CMHC insured 143,151 new mortgages worth $25 billion
  • Of all those borrowers, 88% borrowed more than 85% of the property’s value.
  • The average down payment was just 8%
  • In fact, with 70% of all loans, the average down was less than 10%.
  • The typical loan equaled 92% of the property’s sale value.
  • The average insured mortgage is $231,000.
  • CMHC lending plunged by 13.3% in the first six months of this year compared with 2013.
  • An estimated 80% of all home sales in Canada now have an insured mortgage – meaning the buyer couldn’t muster 20% down.

The federal agency is not telling us how big the mortgages are for those putting the least amount down, but the picture is scary enough. An average down payment of just 8% – when you consider that includes a fat CMHC premium heaped on top of the equity loan plus (quite likely) a repayable RRSP homebuyer’s snatch – shows just how much floating debt most fools are willing to walk into.

So long as real estate values hold or continue to rise (like Mr. Etherington promises), then we might be able to keep the wheels form falling off. But eventually the market will correct, equity levels will decline, and this giant vat of debt will remain. Now there’s a new poll of analysts and housing economists showing more of them are worried. In fact, they think the chances of a “steep fall” in prices have increased in the past twelve months.

The Reuters survey showed most smart guys (“many of whom work for mortgage lenders,” said the company) think house prices will continue to creep higher. But seven in 20 believe the chances of a market meltdown have intensified, particularly in Toronto and Vancouver. Said Queen’s Prof John Andrew: “The risk has increased due to house price increases significantly exceeding income growth and the oversupply of condos in downtown Toronto.”

The big threats are well-known to readers of this pathetic yet spoonable blog: higher mortgage rates, especially when the BoC starts swelling next year, and the expanding sea of debt (shown by the CMHC stats above) being swallowed by people who obviously can’t afford to buy. But the experts don’t expect a massive price tumble, or a US-style houseaggedon.

Maybe they should. After all, the American real estate market peaked in 2005, but didn’t convulse until ’08. It’s simply a myth that these events take place in months, because house prices are massively sticky. Sellers are greedy little things (especially the FSBOs), who would rather sit on the market for nine months, then cancel the listing, than reduce the price 10%. It can take a year or two for a general price decline to ripple through, but once it does then the dominoes start to fall. Listings increase and buyers decrease. It’s already happening in secondary markets across the land.

This does not mean anybody with a house, lots of equity, and other investments should bail in fear. But the vulnerable – house-rich, pensionless Boomers and cashless, horny Millennials – need a reality check.

As for the 143,151 who just bought at peak house levels with 92% financing at rates destined to increase, well, pucker up.

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Throwing in the towel Fri, 29 Aug 2014 22:17:47 +0000 GIN modified

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Time for some follows.

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

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

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

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

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

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

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

Not so fast.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s the pitch:

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

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

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

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

Total Return on Investment: $161,692

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

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

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

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

We’ll all pay for it.

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

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

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

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

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

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

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

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

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

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

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

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

And what a recipe for heartache that is.

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

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

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

Of course not.

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

Decidedly not.

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


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

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

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

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

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

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

GDP modified

So, what should you expect?

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

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

What are the consequences?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what are the lessons?

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

My advice to Kirsten. Stay cynical, kid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

HBP CHART modified

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