No hard thing

With five rate hikes in the bag and likely as many to come, Big Bro says it’s working. The central bank this week dumped data showing the proportion of greater fools and total idiots borrowing 450% of their income is falling.

Incredibly, it used to be an average of one in five households snorfling this amount of debt back in late 2016. In truth, that meant 0% in Timmins, Fredericton, Windsor, Lethbridge or Kamloops, and 100% in Vancouver and Toronto. The Bank of Canada began to gag with news that most households buying properties for more than seven figures were diving deeply into debt to do so.

So, the universal mortgage stress test came in. CHMC stopped insuring mortgages on million-dollar properties. And the cost of money started rising.

The result: now 6% of new mortgages equal more than 4.5 times income. Of course, this is just fresh borrowing. All the previous loan piggies are still in place. That makes the economy vulnerable, says the bank. But ‘loan quality’ is going up, “which puts the economy on a more-solid footing to withstand future adverse economic developments.” That’s so comforting.

While the urban uber-borrowers are dipping less as rates rise, a poll shows it’s the moisters who are freaking out the most at the swelling cost of money. Nick Nanos’ latest survey claims 51% of the 18-34 crowd believe what the Bank of Canada’s doing is having a negative impact on their lives. That’s a serious jump in the last three months. No real surprise here, of course, since most of this group’s debt is in the form of mortgages. Big ones.

Remember what banker boss Stephen Poloz told lawmakers in Ottawa when they queried im on exactly this topic:

“I have children who are adults, and I think they don’t understand this, because they’ve never experienced the kinds of interest rates that you and I have in our lifetime. It shouldn’t feel difficult. It shouldn’t be a hard thing for people to service their debt at those kinds of interest rates.”

Nah, it shouldn’t. My first mortgage in the 1970s was 11.75%. When I lost my mind and was initially elected to Parliament in 1988, Dorothy and I were paying 14%. In fact the average home loan over the last three decades has been pegged at 8%. So why are the kids moaning and gnashing over borrowing at 3.5% which may rise to 4%?

Simple. They borrowed too much. And they had to, because as rates fell houses inflated. But because rates are now rising, real estate will eventually follow – yet the debt incurred will not be reduced. And that, simply put, is the best argument possible for renting until this tightening cycle is long over.

Now, in fairness, the hipsters may have a point about real estate.

Millennials appear to be the most urban generation… ever. Just drive across the Granville Street bridge or downtown on the Gardiner and you can see what’s happened to Van and 416. The wall of condos is astonishing. Tens of thousands of little boxes piled atop each other in a density which is at odds with all of the rest of the country. This is moister ground zero, where developers have responded with bicycle elevators, buildings without parking and coffin-like cool cement ceilings.

Of course all that competition has jacked prices. So while detacheds are out of favour and losing value in many hoods, condos have continued to appreciate, even as sales are weakened by the stress test. And now comes some official confirmation that the city kids – many paying $1,000 or more a square foot – may actually know what they’re doing.

CHMC, no less, now says moving to the burbs to get a cheaper house price may not be worth it, once the cost of commuting is factored in. Looking at Toronto, where a stunning 2.6 million commute. Most of them (almost 70%) drive, which explains what TTC stands for – ‘Take The Car’. A million of these people spend 45 minutes travelling, and close to 40% of them take an hour to reach work. So, yeah, it sucks living in Milton, Halton Hills or Clarington where all the minivans go home to sleep.

It also costs a fortune. Like $800 a month when traveling from those places, compared to a fraction of that cost for city-dwellers. And not included is parking – which can easily be three bills in a downtown lot, bringing the commute bill to $1,100. Add in daycare (a median cost of $1,750 in Toronto) and you need about $44,000 in pre-tax income just to have a car and a kid. Ouch. Hard to afford tats and lattes when you’re shouldering such a load.

So while real estate costs less in the boonies, living might not. Guess where prices wither first?

Not quite

Love’s labour lost. Or, in this case, Val’s condo.

“Both my brother and my boyfriend are huge fans, and advised me to write in,” she writes, understanding the benefit of a meaningful suck-up. Turns out bro lives in Ottawa, is a renter, and worries about sis who’s recently moved in with the BF.

Val’s tale:

I bought a (gasp) condo in (gasp) Calgary at age 26 in 2013 with my modest marketing job and immaculate saving skills. I put $48,000 down and paid $231,000. It sure is a beauty. I’ve never regretted buying it and I really enjoyed living there for the last five years, but now I am living with my boyfriend and we plan to get married and start a family.

You can see the listing here.

I am currently flooded with offers around $1700 rent for the condo, as it hasn’t sold in 2.5 months so I listed it for rent. Two weeks before the contract with my realtor is set to expire, I get an offer: $230,000. I dropped the listing from $249,000 twice already and it is now listed at $242,000.

My boyfriend and I want to buy a home and while he is willing to pay the down payment, (although I’m sure it would be nice if I contributed funds from the condo sale) and rent the condo to keep as an investment, we are still trying to decide what to do with it. I hate to sell at a loss, but he is also willing to help me invest my funds from the condo and he consistently yields at least 6% a year from his own portfolio. Please help!!”

I wrote and asked her for numbers. Turns out the mortgage owing is still $185,000 and costs $900 a month. The monthly condo fees are $300, with property tax/insurance coming in at $120. A 6% return on her downpayment equals $240, so the true carrying cost of the condo ends up being $1,560. Not bad, and apparently a little less than if she had rented the same unit for $1,700. So her annual benefit from owning would be $1,680.

So has it been the “investment” she believes?

Meh, not exactly. The market value is apparently $230,000, and to realize it will cost $11,500 in realtor fees. After the mortgage principal is retired (assuming a zero break fee) it leaves Val with $33,500. In other words, she put down $48,000 and is recovering $33,500 five years later. Ugh. But over five years she had a net benefit of $8,400 (since the cost of owning was a little less than renting), which reduces the overall loss of $14,500 to just a little over $6,000.

The conclusion: bro is right. Renting would have been cheaper. But what to do now?

If Val rents the place out for $1,700 a month, she ends up with a small cash flow which is added to her employment income, fully taxed. She gambles that real estate values in Calgary will recover to the point where she might be able to sell without a loss –which (with $55 oil today, ouch) is far from certain. On the other hand, if she sells the place and eats the loss she still has $33,500 to add to her BF’s stash in order to buy a home and start a family (apparently you need to do both at the same time in Calgary).

However if she invests the $33,500 to earn 6% over time, and does it entirely within her TFSA (she has no savings now) the $2,000 annual growth will be tax-free.

Now for the tricky, emotional, touchy-feely part. Val loved her condo.  Yes, she didn’t have  much equity and ended up losing a piece of her net worth, so it was a lousy investment. But it was hers. Moving in with the BF changed everything. That was risk and love, co-mingled. If the relationship doesn’t work out, and the condo’s gone, she is adrift. Selling the place and dumping her proceeds into a communal house takes things to a new level of dependency and trust. But by renting the condo out, and telling herself ‘it’s an investment’ she can hang on to a piece of the old Val, in case the new one is hurt.

And you thought this blog was just about ETFs and carburetors.

Well, Val, here’s a solution. Keep the condo you fancy. Wait for that Jason Kenny guy to win Alberta back and ram a few pipelines through. Invite the BF to move into your place, cementing your position as emotional overlord. Forget the house until you see if this is the real deal. And understand there’s nothing stopping you from starting a family in a two-bedroom unit.

Now, quick, delete this before he reads it, for I have broken the Man Oath.