The inbreds

HERMAN CARTOON modified modified modified

“We can’t live with my parents. They’re still living with their parents!”

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“I’m a blog dog,” she said, “but I’m Italian.”

So, I replied?

“So real estate is kind of inbred with us. But still, I need you to tell me what’s going on this is completely nutso. How long can this last?”

Seems Junior went to offer on a house last night in a Toronto burb near the family home. There were 13 bidders and the scene was chaotic. Cars idling everywhere. Thick with realtors. Tense.

“The asking price for this place – just a plain bungalow – was $649,000,” she said, “and my son was ready for that because the agent told him there would be competition. So he had a good offer – $785,000 with a closing in just two weeks. No conditions. Not even an inspection. And that still wasn’t good enough.”

The property sold for $810,000. She was enraged. “How can this be allowed to happen? Who the hell is doing this to us, so we get thirteen offers on a single house? I want to know who’s responsible for creating this mess.”

You are, I said. At least your child is. And twelve other idiots.

Turns out her son is 25 years old, lives in the basement and is single. What does he need an $800,000 house for, I asked? Why would he want to do that, no matter how much he’s saved?

“Well, where else is he going to invest? Condos are too scary with all of them being built and the window problems. Plus he thought about a duplex or a triplex, but that might not be so good later on when he moves out. So, what else is there?”

Then I asked her why she’d want Junior buried in a mortgage for the juiciest part of his life, instead of being mobile, debt-free, flexible, young and quixotic. “What?” she hissed. “You mean, have him…. rent?” I felt so dirty.

Well there you have it. When 25-year-old studs think they need a bung, an epic mortgage and a horny mom to prove their manhood, we’re all in a little trouble. (I’m not sure that sentence came out quite right.) But these are the days in which we live. This is what 2.6% mortgages, a cultural obsession and rampant financial illiteracy have done. Every day the house lust and borrowing continues, at least in the two remaining property bubbles, we drift closer to a hard landing. When people think the whole range of their investment options is limited to three flavours of real estate (condo, multi-family or detached), wise people run in the opposite direction.

We’re in a mess now, with a severely weakened economy and disintegrating household finances. More and more middle class net worth is being stuffed into a single, over-inflated asset, puffed up with extreme leverage. So just imagine what’s gonna happen three weeks from today when the goofs in Ottawa drop interest rates again. Thirteen hormonal bidders could turn into thirty.

The ‘buy now or buy never’ drums are beating as big lenders drive rates to insane new lows, seeking to suck in as many clients as possible before everything changes in the months ahead. And change it will. US rates will start their ascent in 2015. Our dollar will be clobbered further. The shock waves of oil will spread. And already we have the worst job creation record in 40 years, double-digit youth unemployment, a declining savings rate, record family debt and 25-year-olds turned on by bungalows.

Instead of using history’s cheapest interest rates to trash debt, Canadians are embracing them to borrow more. It’s not how big the mortgage is that matters any more, but the size of the monthly. Scarier, a whole generation of moist millennials and genuinely numbed GenXers has now matured (sort of) in a time of runaway house prices. These little tweets think it’s normal.

So, shame on those who feed the myth. Like Vancity, the Vancouver-based mortgage sausage factory which has refined the art of giving loans to people who don’t deserve them. The latest technique is a ’report’ – which gained massive media attention on Wednesday – claiming the average YVR house will cost $2.1 million by 2030, and take 100% of household income to carry.

The title: “Downsizing the Canadian Dream: Homeownership Realities for Millennials and Beyond.” Now, do you have any doubt who it’s aimed at?

And what does the Vancity report suggest in order to ensure people in our most delusional city can continue to indenture themselves for an entire lifetime to mortgage lenders like, oh, Vancity? Financial institutions should give out mortgages which allow borrowers to add as income the money they can get from renting out bedroms, and to provide 100% financing by making loans for down payments as well as the mortgage, it says. (Vancity will already give you half the down payment, provide a mortgage for someone living in your garage or garden shed and offer financing if you and your swingles club decide to buy a property together.)

The main message here is simple. If you don’t buy now, you’re screwed.

They sure got that backwards.

The illusion

SHUT modified

What to do when the housing boom turns to bust
Financial Post

Housing market hints at changes with declines in key cities
The Globe and Mail

There ya go. Headlines earlier today in a couple of the mainstream national papers. Finally.

As this consistent but obsessively repetitive and oft-terrifying (but manly) blog has been yammering about for a few months, the housing market is sick. Sales are stagnant or declining in 80% of regional markets. Personal finances are in worse shape than Smoking Man’s teeth. Debt is off the chart, wages are stagnant and the savings rate has tanked. I hear RRSP contributions were a shock this year. And with the oil peril spreading, we have a two-market housing bubble that looks increasingly delusional.

TD now says the economy will soften more in 2015. A realtor dude in Calgary credibly suggests prices there could fall 40% and not recover for eight years. Some analysts look at US oil stockpiles increasing by 1-2 million barrels a day and are forecasting $20 crude within a few months. We have a federal government too chicken to bring in a budget. And people in YVR and the GTA are still snorfling houses? What are they high on?

Crack cocaine mortgages, of course.

This week one of the country’s major mortgage insurers, Genworth, came out and stated the obvious. Alberta is a time bomb:

“What we’re doing is we’re looking at the stacked risk factors a lot closer — so people that have higher debt service ratios, that are employed in the oil and gas sector, that may be dependent on one income versus two, that are buying a home with five per cent down — we’re going to take a lot closer look at that deal.”

What comes next: Panicked feds will lean on the Bank of Canada to drop its key rate another quarter point at 10 am on Wednesday April 15th. (What a sad thing that we have come to this.) The dollar will dive more, immediately. And a five-year, fixed-rate mortgage could be on its way to 2.5% at the major banks – at least for a while. The stock market should jolt mildly higher.

It’s a gamble. Will Canadians keep on toking, or start choking? With mortgages already totaling $1.2 trillion – double in the past few years, despite swampy incomes and higher unemployment – how much more cheap debt can people absorb? Now that most housing markets are flatlining, even with the lowest mortgage costs ever, will buyers stay home – the way they are in Calgary? Will these mainstream news headlines help turn the tide so moist millennials, even in Van and Hogtown, see the towering risk real estate now poses?

Beats me. I just ask the questions here. But we’re certainly closer to a turning point, it would seem.

When we do turn, prepare to see a lot of tears shed over false equity. This is a good term for absolute illusory wealth – the kind that turns nice, good friends into insufferable dorks when they talk about how much money their houses are making.

In reality, there is no money until it’s realized in a house sale and put into your bank account on closing day by the lawyer. Then it’s real. But until that point it’s a fiction, based on market value which can quickly change (remember Calgary?). False equity also refers to the unsustainable gap between what people pay for houses these days, and what they cost to (a) replace or (b) rent.

A US firm studying real estate values nationwide found something interesting. Prices have rebounded from the GFC lows by an average of 13.2%, but rent and reconstruction costs have increased by only 1.9% and 3.3%. So what? So, the market value of properties is exceeding the utility value of them – which is a good gauge of speculation. People are willing to overpay because they expect prices to keep rising, plus interest rates are thin and they can carry the additional debt.

In a correction, this ends quickly. House prices tumble back to their utility value, or below, especially when the number of buyers is seriously reduced. As you know, inflated real estate appraisals were at the very heart of the US bubble that produced excessive prices and epic debt. (Sound familiar?)

So, when was the last time you heard of a bank appraiser here factoring in how much it would cost to rebuild a house, or what it might rent for? ‘Never’ is the correct response. Residential real estate only costs what it does for one reason. Cheap money.

Now it’s about to get cheaper. God help us on the trip down.