Throwing in the towel

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.”

More ambition

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.