Breach of trust

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.

Big Dog

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.