Greater Fool - Authored by Garth Turner - The Troubled Future of Real Estate Book and Weblog - Authored by Garth Turner Fri, 18 Apr 2014 20:57:00 +0000 en-US hourly 1 Good bones Fri, 18 Apr 2014 20:57:00 +0000 ROXTON modified

Well, that was a bitch.

Remember what this pathetic blog’s been saying now for the past year about yuppies and geriatric semis? Because money’s cheap, most buyers are naive and detached houses costing over a million don’t come with mortgage insurance and 5% down payments, young morons have been madly escalating the price of half-houses on dodgy streets that realtors call ‘emerging.’

As Toronto agents Josie Stern and Valerie Benchitrit told their clients this week: “The real estate market is setting stratospheric records.  Today we recorded the highest sale price ever on the Multiple Listing Service for a semi-detached property on Ellsworth Avenue. 95 Ellsworth was listed for $799,000 and it sold for $946,000 with seven bidders.”

With land transfer tax and routine closing costs, that half-a-house actually ends up being one used Kia less than a million. And here it is:

ELLSWORTH modified

So Matt and Krysten Christie probably thought they got a pretty fair deal with they scooped 290 Roxton Road, in Little Italy, a few months ago. The saggy but soaring 120-year-old Victorian semi was bought from an estate which had listed it for $989,000 for many months – passed over because of its condition. The Christies got it for $925,000.

Here’s how realtor Harry Gliddon described it in his listing:

A Grand & Spacious Victorian Semi, 3,290 Sq Feet Of Living Area. Built In 1895. Soaring 10′ Ceilings On Main. Located In One Of TO’s Coolest & Most Desirable Neighbourhoods. Parking From Lane For 2 Cars. Legal Right-of-Way From Street. An Estate Sale, Requires Your Personal Touch To Return To Its Previous Grandeur. Could Be Configured As A Single Family Or Multi-Unit Property. Good Bones. Carson Dunlop Inspection Report Held.

The Christies began their renos a few weeks ago, which included getting a crew downstairs to dig out the medieval basement. Then one night last week Mireille Albornoz, who owns the other half of the house, started hearing shearing and groaning noises. Somebody called 911. The cops came. Ten minutes later an entire wall of 290 Roxton collapsed, spewing bricks and timbers everywhere.

Then the firemen arrived. Houses up and down the street were evacuated. The gas and hydro guys showed up, and severed the Christie house from its services. Then the City sent inspectors, who ruled both halves of the structure uninhabitable.

Finally the TV reporters and trucks came because, as you know, everybody loves real estate. And here is the report:

By the way, if you want to see some before pictures of the property – as it sat when Matt and Christie coughed up their nine hundred grand – here they are.

After the collapse, realtor Harry called the place “a fixer-upper, priced to appeal to renovators. It was considered to have good bones and a lot of potential.” And that’s exactly what the young Christies are all about – specuvestors who buy up properties, gentrify them, and flip ‘em to hipsters.

But don’t blame them. If the banks weren’t plying the kids with cheap mortgages and the government wasn’t backing them, or if people actually had to have money to buy seven-figure decrepit heirlooms, or we’d taught our offspring to value freedom over indenture, Matt and Krysten might be doing something productive.

Now, take another look at the TV footage above. See what a million buys. We are so screwed.

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Spring fever Fri, 18 Apr 2014 00:30:59 +0000 LOVE modified

As Toronto motorists joyously celebrated the advent of Easter by jamming highways and playfully gesturing to each other with their fingers, the local real estate cartel was publishing some astonishing numbers.

Sales in the first two weeks of April, “started off on a strong note,” said the board, “with a 10.8% year-over-year sales increase.”

Wow. Maybe I was wrong. Said Reatress princess Dianne Usher: “The robust increase in sales speaks to the fact that home ownership remains affordable in the GTA.  The majority of home buyers purchase a home using a mortgage.  A household earning the average income in the GTA can comfortably afford a mortgage on an average priced home.”

Hmm. Let’s parse this a little.

First, it’s impossible to know the truth. TREB has secretly fudged its numbers yet again. Sales this month are actually only 6.6% higher than those reported one year ago. But last April’s sales were 6.5% lower than the previous year – which means no growth in two years, while the population has increased dramatically. Not good. In fact, with the exception of last year this was the worst April (so far) for GTA detached house sales since the financial crisis back in 2009.

See how much fun numbers are? Of course, besides quietly revising its stats the real estate board never supplies context for its reports, because… it’s always a great time to buy!

Now, how about the average family affording the average home, currently $583,697? Well, the average GTA family earns $96,040, which means houses cost six times income. According to Demographia, that falls into the ‘severely unaffordable’ category. It also means to buy the average home a family would need at least $45,000 for a downpayment and double land transfer tax and a mortgage (including CMHC premium) of $570,000. The monthly (with property tax and insurance) would be $3,400, or 42.5% of gross (before-tax) income.

Now let’s refer to CMHC’s rule:

Affordability Rule 1
The first rule is that your monthly housing costs shouldn’t be more than 32% of your gross monthly income. Housing costs include your monthly mortgage payments (principal and interest), property taxes and heating expenses. This is known as PITH for short — Principal, Interest, Taxes and Heating.

See what I mean? Fail.

But the average resale price in the GTA also includes a lot of one-bedroom and loft condos which clearly do not attract families, and aren’t suitable for them. So maybe we should look at detached houses only. But when that happens, a whole new level of risk emerges.

Here is the scorecard for detached houses in 416. Sales of 628 for the last two weeks came in 11% higher than last April, which was 10.8% lower than in 2012, which was 3.9% less than in 2011. So, this April fewer detached homes were sold than in 2010, 2011 or 2012.

Of course this year we have 2.99% five-year fixed mortgages, which means you can’t blame higher interest rates for poor sales. But you can blame a lack of listings, and exceptionally unhealthy public attitudes, for a massive and dangerous escalation in prices.

The average detached 416 house is now changing hands for $1,012,172 – an increase of 19.2% over last Spring. Yikes. This surpassed the 14.2% price pop in 2011 when sales crested and F freaked at the prospect of a bloated gasbag that could rupture at any time, blowing up the economy. He tightened mortgage rules – which brought year/year increases down to 3.2% (2012) and 6.22% (2013).

Quick summary: sales are back below 2010 levels for detached 416 homes, and prices have risen since then by 50.1%. Nice news if you own one (but only if you sell and crystallize the capital gain), but it all boils down to a single word: risk.

Feel free to ignore me, of course. Most people are.

But not Carmen and Ricky. Yesterday I ripped the immigrant couple a bit for wanting to buy an inflated house at the wrong time, with no money, so they could get a washer and dryer.

Says she: “We saw what you posted. Thank you so much. It made us clear of how to proceed and my husband was celebrating that he listened to you. Thanks for that washer idea as well…lol..

“Your advice made us think what is important and we are considering saving more and putting up in some investments, although that’s our next research of where to put the money and using some of our monthly dollars to invest for my sons sports or some extra music classes.

“Thanks again for your time and will be holding on the idea of buying home until we see your GO on your blog.”

My Easter just improved.

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What could go wrong? Thu, 17 Apr 2014 00:16:52 +0000 WRONG modified

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

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

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

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

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

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

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

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

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

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

Now, there’s Adrienne Warren.

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

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

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

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

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

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

How is that not obvious?

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Gen F Tue, 15 Apr 2014 20:52:03 +0000 SPECIAL modified

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

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

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

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

Sexy story. If it were only true.

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

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

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

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

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

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

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

CHART modified

So what?

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

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

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

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The heartbroken Mon, 14 Apr 2014 22:16:35 +0000 chimney modified

Ruben admits he was surprised to read about heartbroken hipsters littering the housing landscape, when I referenced them a few days ago. Then he and his wife went to some open houses on the weekend.

“Of the 3 houses we went to, all of the other potential buyers were hipsters! Each had that neatly shaven ‘beard’, short sides, and hair combed neatly to the side, or with a baby in one of those baby carriers,” he says.

“I was wondering, how did you know that hipsters were driving a good part of the market, and many were heart-broken? I completely believe it after this weekend.”

Well, RBC knows it too. And BeeMo. Plus all the other lenders that are slavishly targeting the Millennials, that innumerate, over-educated, under-experienced clot of people whose life goal is to become helplessly mortgaged.

These are the ones turning trash listings into almost-million-dollar homes. The net effect of Ottawa cutting off seven-figure houses from CHMC insurance, in a market short of listings, has been to morph $750,000 properties into $900,000 ones. And why not? When you’re only plopping down 5% of the purchase price, and extra $150,000 amounts to a lousy seventy-five hundred bucks. Mom’s good for that. As for a bigger mortgage, who cares? Millennials never expect to pay it off. Houses always go up, so you just roll it over until you die, then it’s the bank’s problemo.

And you wondered how the average SFH price in Toronto just passed $900,000. Silly you. Hipsters.

Well, this crotchety old blog has only two things to say, as it sits rocking on the front porch in a cardigan, cradling a Remington. First, more evidence we have reached a peak in real estate values. The Teranet-National Bank price index has stalled. For the first time in 15 years it failed to register an increase between February and March. If I were buying with 95% financing, that would toss my cookies.

Second, do these kids actually know what they are purchasing? Especially when it comes to decades-old semis in ‘emerging’ neighbourhoods when former owners were too busy surviving to maintain their dumps?

Roger thinks not. He’s a home inspector who would like his Ontario company kept out of this blog because, “I can’t afford to slap the hand that feeds.” I think you might want to hold down a hipster, and read her this:

I get a ring side seat to the house horny in all of their glory.

First question I ask my clients is this: “Do you have any concerns regarding this home that you wish to address today?”  With younger clients, the answer is, “Yes – we want to be sure that there is nothing here that will cost us money to fix.  We won’t have a lot of cash kicking around after we purchase this home.”  At this point my radar goes up.  Why?  Because these nice people, try as they may, have scrimped and saved but they just don’t have a lot of money – but what they can afford with their modest down payment is what I’d call a sock burner. They’re often older, dirty and unkempt houses, so after I’ve been in them I don’t bother washing my socks – you’re better off just to burn them.  Sure, they have some fresh paint over the cracked plaster and maybe someone slapped in a Home Depot special kitchen, but at their heart they are disasters. Rotten structure, failing masonry work, asbestos, knob and tube wiring, galvanized plumbing, mould and water leakage, old HVAC components and roof coverings as well as a host of other items that are expensive to correct and insure and may make the home difficult to resell in the future.

Once I’m done with my assessment, this is where the realtor’s really need to turn it up to 11.  We’ve now determined that this “cozy, move in ready” home will likely require between $40-50,000 in work.  This is due to the fact that prior owners have not looked after or updated the home.  The realtor takes the clients aside and tells them that my estimates are for worst case scenario, I’m embellishing a bit, I’m ultra conservative and the realtor really thinks that they can do this – they know their clients! Plus, they know “a guy” who can help them with the renos – for cash!  They (the agent) have the paperwork right here (waiver) and they need to get this baby firmed up so the clients can become proud, new home owners. Remember too, the vendor’s going to continue showing the home and the next person might swoop in with a clean offer  And if all that was not reason enough to just rush in and sign, if they don’t take this home, it’ll mean another 3 weeknights traveling around and looking at houses.  That’s a crazy waste of time!!!  Just sign here…

Everyone is horny now – agent, buyers, sellers.  Everyone.

Then I get a phone call a couple months down the road.  Same couple. They now have some concerns.  They were firming up the terms of the insurance and their insurer has insisted that within 90 days of close, the galvanized plumbing and all knob and tube wiring need be replaced, or the policy will be deemed void.  They are facing the potential of having no insurance, which means no mortgage.  They’d like to know how I missed this.  I subsequently direct them to pages 46 and 63 of their lengthy report (which I take enormous efforts to write and no one ever reads), where it indicates that such materials are present and they are advised to seek the services of a qualified plumbing/electrical contractor to further investigate to determine the extent of such materials and systems installed, evaluate their condition and correct and/or replace as required, based on the contractor’s further evaluation.  I suggested they budget for significant cost associated with the replacement of such systems as required and also indicate that their presence may inhibit their ability to insure the home.  Other end of the phone – silence.  Once the nice couple can begin to form words again, they tell me that their agent said I was being “very conservative in my assessment” of the home and they figured they’d be able to spread the costs out over the next 10 years.  They never expected this.  Now they are facing $10,000 in repairs in the first 3 months.  The couple is no longer horny.

If they did their due diligence and really thought it out they probably would have concluded this wasn’t the place for them and kept looking or sat on the sidelines for a bit and continued to rent.  Instead, they are going to need to get second jobs to pay for electrical and plumbing systems that really won’t add any value to their home.  No saving for retirement.  The idea of starting a family, the reason they wanted bigger digs, is pushed out indefinitely for the time being.

Agent’s happy though.  They have their cash in hand and like Teflon, nothing will stick to them. Rinse, wash and repeat.  See the same thing over and over.  Agents rushing clients into quick sales and wiping their hands clean after the fact.  Lives destroyed or at least significantly interrupted.

I’d be the first one to tell you that very, very, very few realtors actually have their client’s best interest at heart.  So many are in it for the quick money, the “prestige”, their face on the back of buses. Especially the younger ones.  They show up in their $75,000 car, dressed in fine clothes and looking every bit the successful realtor.  A rock star really.  Fact is they’ve never sold a home before and couldn’t tell the difference between their ass and a hole in the ground.  The industry as a whole needs to be cleaned up and some oversight with teeth put in place.  Until that happens, I’ll continue to watch nice people struggle through significant hardship because they were deceived by the one person they thought they could trust.

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Treats Sun, 13 Apr 2014 18:35:20 +0000 TREATS modified

Thanks in no small part to the swollen river of cash that gushes into this blog monthly, I have the mother of all tax remittances to make, come two weeks Wednesday. Some days I wish I were just an NBA star. Or Leonardo DiCaprio. Or Justin Beaver. Then I could merely TurboTax.

For a lot of people, April’s when you wish you’d been on the ball in February, making a honking big RRSP contribution and thereby avoiding a tax bill. As you know, up to $23,800 a year can go into one of these (or 18% of your earned income), with that amount deductible from taxable income. Better still, every dollar you ever missed contributing can be squirreled, then used to offset taxes in a fat year. You end up paying less tax – from a third to a half of what you set aside.

But RRSPs are out of favour. Makes sense. All the money put in there eventually becomes taxable. Unlike the cheap rates you get with capital gains or dividends, here the money’s taxed as heavily as income. Lots of people have decided the odds of taxes being higher in the future offset current benefits.

But what if you could take money out of an RRSP twenty years from now and be tax-neutral – in other words, not lose a third of it to the voracious burghers in Ottawa? Could be a game-changer.

Well, there are ways. A complicated one: when you hit retirement, borrow a mess of money and put it into an investment portfolio. Then withdraw RRSP to cover the interest-only payments on the line of credit that financed the account. All of the RRSP withdrawal is taxable, of course, but all of your interest is tax-deductible. So, if you orchestrate things right, you get to slowly collapse the retirement plan and transfer the money to the non-registered portfolio.

But here’s an easier one. Use your TFSA to offset the tax you’ll face down the road when you blow up your RRSP. As you know, they both do the same thing – grow money in a taxless environment so it multiples faster. But while an RRSP contribution nets a substantial tax reduction, putting money into the TFSA does not. Conversely, withdrawing funds from the tax-free account is (of course) tax free.

Here’s an example. Let’s say you make $95,000 a year working in the Spell Check Department of this blog. Your average tax rate on your entire income is 25.3%, and you end up taking home $70,500.  If you make a $10,000 RRSP contribution (of the maximum $17,200 allowed), you’ll get a tax break of $2,570 and a refund cheque in that amount.

Over twenty years of doing this (ten grand into the RRSP), and earning an average of 7% within the retirement plan (what a balanced portfolio did over the last decade, which included the ‘08 crash), then in two decades you have $448,600. Taxable.

Given a tax rate of 30% (assuming a few increases along the way), that means you actually have $314,000 to spend on babes and knee replacements, while losing $125,000 to the feds.

Now if you were smart enough to put the annual $2,570 tax refund into your TFSA for twenty years and invest it for the same return, the problem might be largely solved. In two decades that little sucker would bloat to $115,300, and all of it would be available to you without any deductions. In other words, almost enough to entirely offset the tax payable on the RRSP.

As you anarchistic, government-loathing iconoclasts will note, this is a simple and effective way to use a shelter to permanently reduce your taxes and mitigate the tax-deferral on retirement funds. You use money the feds give you to fund an investment vehicle that eliminates the taxes Ottawa let you postpone. You didn’t even have to earn it.

Revenge is so underrated.

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Safety first Fri, 11 Apr 2014 22:00:25 +0000 SAFE modified

It was like the passing of the passenger pigeon. The Vancouver daily ran a big spread on the death of the $599,900 home, with experts telling the locals never again to expect to buy anything (well, a garage maybe) for less than six hundred thousand.

By the way, the last $599,900 house, a 700-square-foot Lilliputian special on a dirty laneway snaking between several businesses, went for above asking. A builder snagged it, will destroy it, and erect a big house with a rentable suite and a laneway rental.

Over in Toronto all the housing buzz is about bully offers, bidding wars, heartbroken hipsters and a persistent lack of listings. Demand is less than it was two years ago, but there are significantly fewer houses for sale, and mortgages are 2.99%. Ergo, a price pop.

It’s a self-reinforcing cycle, of course. People don’t list their homes because they’re afraid of buying again. As I have said in the past, no seller today would actually pay what they want for their own house. Everybody knows it’s stupid time. So, fewer listings keep prices buoyant because there are always enough idiots around to buy.

This is not a healthy market. Don’t for a minute believe the flotsam that Royal LePage or Re/Max turn out in their ‘reports’ about higher prices equating a buoyant housing scene. There’s lots of evidence demand is slacking, even in the hot spots of Vancouver and Toronto. (Calgary is another story as that market heads in fifth gear for a wall.) In other major centres, like Halifax, London or Edmonton, varying degrees of rigor mortis are setting in as the Canadian economy stutters.

Hell, even in Vancouver – where monthly sales just shot way past 2013 levels – there’s a serious social problem in full flower. A municipal report this week revealed 71% of all the houses in the region are only affordable to those who earn at least 20% more than half the population. In fact, only 29% of homes were judged to be affordable by the typical family.

More evidence of a market that is unsustainable. When the average family can’t buy the average house – even with mortgage rates at the lowest point in history – then a correction is inevitable. And I wouldn’t be at all surprised to see it start right along with the equity markets.

Now, we have this other problem. The kids. They didn’t get the memo.

Not content with the emotional blackmail dripping from its latest YouTube marketing campaign, (“Honey, I need that house. I’m pregnant. We’re running out of time…”) RBC has just delivered a stunner of a survey. Either the bank is straight-up fibbing, or we’ve just raised a generation of innumerate morons.

Says the bank’s poll on home ownership…

  • Percentage of those between the ages of 25 and 34 (prime rutting years) who think buying real estate right now, at the most inflated prices in history, is a ‘solid investment’: 86%
  • Percentage of those who felt the same way last year, when houses cost less: 78%
  • Proportion of people who therefore plan on buying this year: 41%.
  • Those who planned to buy last year, at lower prices when there was more choice: 25%.

See what I mean? This is the same group of people who think a bank account is the best vehicle for retirement saving, and whose one goal in life is to turn into their parents, and be safe. They’re hot to get mortgaged up the wazoo as soon as possible, to trade mobility for Miele, and yet seem oblivious to the mounting risk.

More proof that people lust after what’s rising in price, and eschew what’s falling. There’s no doubt when real estate cools, prices moderate and listings bloat (it always happens), the RBC survey will find the number of virgins who think houses are solid investments will plunge. So when they should be buying, they won’t.

Of course, that’s when the $600,000 house will migrate back to Vancouver.

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Finale Thu, 10 Apr 2014 21:09:39 +0000 F modified

Since F was omnipresent here, a few words on his early call home.

Without a doubt, he’s been mauled on this site for a few years. F’s viewed by many as the architect of a real estate bubble which turned housing unaffordable in the nation’s largest cities. He created zero-down mortgages and shifted that risk onto the taxpayers. He brought in 40-year amortizations, dropping monthly payments, and making it easier for prices to inflate. He supported throwing interest rates in the ditch, so people would borrow fiendishly and the economy could recover on the back of household debt.

For each of those transgressions against the middle class, we raked him.

F also came to see the error of his ways. He revoked the zero-down mortgages. Then he shortened insured home loans from 40 years to 35, then to 30 and finally to 25. He cut million-dollar homes off from CMHC, and raised the borrowing standards for the cashless newbies. He yelled at the banks when they sliced mortgages rates too aggressively. He warned people about excessive debt and wagged a finger saying rates were destined to rise.

In short, he recanted, reformed and tried to repair some of the damage. It takes a gutsy man to backtrack, carefully laying out the reasons you screwed up the first time, then trying to make it right. Most people can’t do that. Especially in the glare of public.

F destroyed the retirements of many people when he taxed income trusts. But he was told. I know that. It actually disturbed him greatly to have campaigned on one thing, and then do another. On the other hand, he improved millions of lives allowing creation of the TFSA and letting retired couples share their pension income. He caved in to the prime minister on income trusts, then did the right thing standing up to him on family income-splitting. He also brought in a valuable program to help families cope with the cost of disabled kids.

F presided over the worst annual federal deficit in Canadian history. He helped add about $70 billion to the national debt. But last month he brought in a budget which was in surplus, considered a Herculean task for a finance minister who took office two years before the economy committed suicide.

So it’s a mixed legacy, as it should be. And those were just the final chapters. F was the finance minister of Ontario before that, a hard-ass, right-wing disciple of iron premier Mike Harris – the kind of guy who was tight with the Ford family in Toronto, and himself ran to be leader. Impressively.

As I’ve written before, F and I knew each other, ate together, sat in caucus together, argued and fought. He took an active role in throwing me out of my political party, and he certainly did not need to do that. But he was told. I know that. F was a good soldier most of the time, truly believing that if conservatives don’t run things, even in a badass sort of way, then we’re all doomed.

Having been in elections, winning and losing, having stood in public and shouldered every consequence of all actions, real or imagined, I have a lot of sympathy for the elfin deity. Just lasting eight years in that arena is more than most people could endure. His body showed that. A few weeks after shedding the burden, and the adrenalin, of his lofty post, F’s dead.

Sad. He was ready to monetize years of public service, and all the crap that entails, on Bay Street. That resource is now gone. So we all lose a little, because I’m sure he would help important companies make better choices. One learns a lot along the way, and by your sixties a great deal has become clearer.

Ideology and arrogance are the fuel of younger men. But mileage counts more.

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Choices Thu, 10 Apr 2014 00:07:50 +0000 COOL modified

Sure, Rick says, I get it. “I enjoy reading your pathetic blog and know a main theme is house prices, affordability, high debt levels and younger people sacrificing all financial investments for the sake of an illiquid roof over their head.” But young people are so boring. And juvenile. Rick wants advice for an early-50s guy.

My wife and I are looking at retirement within the next 8-10 years. Fully paid for 4 bedroom house in smaller town north of Toronto – valued at roughly $750K. About $400K in RRSPs and TFSAs. We like the house and location where we live and still need to commute to work, but with kids at University we’re looking at when the time is best to downsize. Ideally I see that happening when we actually do retire. However your blog makes me think what the market will be like (if we can even predict) in 10 years and based on demographic shift will there be buyers for my house when 8 million other soon to be retirees have the same idea.

Maybe selling soon and finding a smaller place now is best (assuming we can find a suitable place that works well for retirement as well as the last working years) – sell when the market is favourable and invest the difference. Or just stay put and enjoy where we are for now and use the next decade to add to retirement funds. Your thoughts?

Thought One, Ricky, is simple. Talk to your wife. Gently, but with conviction. Whatever happens, don’t let her read this blog. Take all of the credit for the demographic, real estate chill thingy and ensure she knows your one and only burning concern is her life-long financial security. If you need to quickly slip in the words ‘bag lady’, it probably won’t hurt.

Now, without knowing if you have a pension or not (most people don’t) it looks like 65% of your net worth is in one asset – a house in the boonies north of the GTA. The bulk of your liquid assets are in RRSPs which, of course, will be taxed as income once you retire (and I hope they’re not in mutual funds). It also sounds like you want to stop working in a decade, which makes me wonder what the plan is.

What you both will need in ten years is a big pot of money to provide monthly cash flow. If you are able to achieve decent growth for a decade inside the RRSPs and TFSAs, that money should double. Similar returns after that would generate about $56,000 a year in combined income (fully taxable). Add in early CPP and it might get boosted to $76,000. If that’s anywhere close to your current income (and I bet it isn’t even in the ballpark, given the paid-off house and kids at college), you can get by. But will she be happy?

Let’s look at a couple of alternatives. For example, sell the four-bedroom house with the three empty beds, and buy a nice condo or townhouse in the northern burbs for $350,000. Put the other $400,000 in a joint non-registered account and hope that a balanced portfolio will continue to do what it did for the last ten years (including the crash), which is turn out 7%. Now you have $800,000 in retirement in the non-reg account, and an equal amount in RRSPs and TFSAs.

After work you can draw $4,500 a month from the unregistered portfolio and enjoy it as return of capital, which means the money is not added to your reportable income. Cool. Add in the CPP, and it equates to a $96,000 income (if it were drawn from an RRSP). The only tax you will pay will be on the dividends and capital gains generated within the account, which should be well under $10,000. The other $800,000 inside the registered accounts can continue to grow in a taxless environment until you and your squeeze turn 71, when it should have swelled to more than $1,000,000. That will generate another $70,000 a year in (taxable) income.

Or, you can sell the house and buy nothing, invest the $750,000 to churn out three or four grand a month in rent money, and have $1.1 million liquid. Or keep the house and remove four hundred thousand in equity through a home equity line of credit at prime, invest the proceeds in a well-balanced, carefully-managed portfolio to (hopefully) double over a decade, and along the way have 100% deductibility of the interest-only payments. Should rates rise uncomfortably or plans change, the HELOC can be paid off within a few days.

Or, of course, you can do nothing. Be conservative. Wait for real estate to correct, and regret it. Wait for all the wrinklies to start panicking, and regret it. Odds are that rural residential properties will be a tough sell, given the urbanization going on now, and the migration of the Boomers. We know where demographics is taking us. We know the cost of money will be swelling. And we know a couple retiring today in their early sixties will have a quarter century of living to finance.

Talk to her, Rick. She’ll swoon. Trust me.

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Detached Tue, 08 Apr 2014 22:28:55 +0000 GAS CAR modified

Another day, another juxtaposition. Is it any wonder the dewy virgins are so confused, now that the rutting season has finally arrived?

On one hand, here’s Royal LePage earning headlines with its latest ‘report’ saying real estate has stirred along with the beavers. “It appears that it took only the slightest hint of spring to bring home sellers out of hibernation,” says our fav CEO rodent, Phil Soper. In fact, LePage claims, “the stage is set for a robust 2014 spring market. This is particularly good news for buyers, as the home price spikes we have seen in a number of cities should be alleviated by additional supply.”

Of course, the higher prices LePage celebrates are good for its agents, but misery for the house-lusty kids. And they might be Sopered into taking the plunge at precisely the wrong moment. That’s because along with Phil’s faux survey and unicorn outlook, there’s some real news suggesting all is not well.

House construction is tumbling, bigtime. Economists didn’t expect what CMHC told them on Tuesday. Housing starts fell 18% last month, and are now at the lowest level since the lights went out back in 2009. Worse, building permits – those indicators of construction to come – cascaded lower by 21%.

When it comes to just condos, the news is worse. Starts on multiple-unit housing dropped 26%, with the big hit coming in Vancouver and Toronto, while the value of building permits cratered 32%.

Hmmm. What shall we make of these numbers?

First (obviously) idle drywallers mean less demand for new housing. Way less, it seems. So how does that square with a ‘robust’ market? It doesn’t. Rodent talk. Second, with construction falling to 2009 levels, this could signal real estate’s coming in for a landing. Will it be the soft landing the banks and realtors have been praying for, keeping prices high but slagging sales? Or will it end up a smoky hole in earth with a tail fin sticking out, bringing plunging volume, soaring listings and fading values?

Third, as this depressing but coquettish blog has suggested for more than a year, it’s all more evidence we’re closer to asset deflation than inflation. Natural gas and bananas (for God’s sake, don’t mix them) may cost a lot more, but sputtering growth is inching us closer to falling incomes and inevitably cheaper houses. In fact, we’d already have them, save for absurdly low mortgage rates. And while the Bank of Canada is in no mood to raise its key rate anytime soon, there’s no controlling the bond market.

The US Fed, as you know, continues to slice its massive bond-buying program. Each cut reduces demand for bonds, leading inevitably to lower prices and higher yields – with three more reductions coming by the end of the year. Figure it out.

Now, none of this will faze Royal LePage one bit, nor deter any moist newbie from joining a bidding war for a sad semi on a trashy street. I fully expect the spring season to be intense as we see the perfect storm of 2.99% mortgages and a paucity of listings. But sales volumes in places like Toronto and Vancouver are running significantly behind long-term averages for a good reason. House prices and debt are at historic highs. Can they continue to march higher together? For how long? What happens when the trend breaks?

Isn’t the Canadian housing market like the US stock market? Both are at all-time peaks. Both are supported by the greatest amount of leverage on record. Both are being fed by oceans of cheap debt. Both have the highest prices, but on less volume. Both are detached from reality. And both will correct.

The difference? Financial investors don’t have 95% debt, and can get out in thirty seconds.

So, your choice. Beavers, or facts.

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