‘Canada is not immune’


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Posted: March 08, 2008, 10:00 AM
By Jonathan Chevreau

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The U.S. real estate crash is about to sweep into Canada, says Garth Turner in a just-published book entitled “Greater Fool.”
Turner – the Liberal MP, entrepreneur and real estate investor – says the problems underlying the American subprime crisis “go far beyond mortgage products and also reach into Toronto, Calgary and Vancouver.”
In a nutshell, Turner urges his Canadian readers to sell their real estate if it makes up much more than a third of total family net worth and consider renting until the storm passes.
He suggests baby boomers sell their “McMansions” while they can still get decent prices and find more reasonably priced modest homes located near hospitals, public transit and other amenities.
The book is timely enough, considering it includes such recent news reports as the line-ups for downtown Toronto condos: line-ups he says were largely fabricated for the benefit of gullible media types.
“When bungalows in Vancouver cost $900,000 and resale homes with no parking in midtown Toronto are $1 million, it’s only forty-year mortgages and an embracing of debt that sustain the unsustainable,” Turner writes in the Key Porter published book, subtitled The Troubled Future of Real Estate.
He warns that overextended young Canadian couples are buying into several real estate myths, “egged on by real estate marketing machines and reassured by economists paid by our largest lenders.” They “cling to the absurd belief that paying too much for something is okay” and that “there will always be a greater fool willing to pay more.”
Turner does not believe the American housing crisis was caused by subprime mortgages extended to otherwise unworthy borrowers. “That was but a symptom” of the real disease, which was the rush into real estate that followed the flood of cheap money Alan Greenspan unleashed following the shock of 9/11.
With 5% down mortgages and the new 40-year amortization schedules, Canadian homeowners are just as overextended as their American counterparts, Turner argues. He also notes that subprime [or near-prime] loans are also available in Canada through firms like Toronto’s Exceed Mortgage.
“The inevitable conclusion is that the current Canadian real estate market is floating on a sea of unrepayable, and perhaps unserviceable, debt.”

Among the myths Turner identifies:

1.) Unlike stocks, real estate is a riskless investment.
2.) Houses [always] appreciate
3.) Canadian lenders are more conservative [than U.S. subprime lenders]
4.) Industry experts are worth heeding
5.) You need some place to live anyway
6.) A house is a great investment
7.) Better to be an owner than renter
8.) Rising markets are normal
9.) Real estate profits are tax-free
10.) Canada is different

And here are his recommendations (or what he terms “strategies.”

For Homeowners:

• Wait and see what happens
• Hang on and hope for the best – a downturn of just a few years
• Liquidate now, invest the proceeds and rent
• Sell with a long close, hope the contract is honored, then buy back into a declining, buyer’s market
• Ignore it all
• Diversify, and promise you’ll never be so foolish again.

For Homebuyers:

Turner suggests buying real estate with a future and that empty-nester boomer couples will be downsizing into bungalows, townhomes and condos of 750 to 1500 square feet. Access to urban services will be important. In other words, “buy real estate with a fighting chance of retaining its resale value.”
And for those thinking of buying a second home, Turner’s one-word recommendation is “Don’t.” Those who want cabins on a lake or farms with a pond should rent instead, because overextended investors will be dumping their country retreats before their urban principal residences.
And finally – here I’m talking to anyone who viewed the recent video blog interview with Mark Dziedzic – Turner warns Canadians not to
get sucked into buying “bargain” foreclosure properties in the United States.
Turner closes with the disclaimer that “my views may be prescient or be proven wrong. Regardless, there will be a greater fool.”
Well, that’s covering all the bases.

And what do I think? Turner makes some good points and he’s certainly been around the real estate block a few times. I wouldn’t disregard his points out of hand. Personally, I’ll be hanging on to our own Toronto residence, but then it already qualifies as a modest home near public services, it’s mortgage free and does not exceed a third of our net worth. Nor do we own a second property.

However, if I were among the many people tuning into TV shows like “Flip this house” and thinking of speculating on real estate, I’d certainly want to consider Turner’s arguments before borrowing money in the hope of instant riches at this stage of the game. It’s one thing to have a paid-for home you live in and quite another to be speculating on real estate on the hope prices will always rise and a greater fool will arrive to save you from your greed and foolishness.

Much of Turner’s criticisms are directed at people who have saved nothing for retirement or even for emergencies and who live beyond their means, buying more house than they need with such atrocities as 40-year amortizations. I agree with Turner that if the only way you can afford a home is through a 40-year am, then you’d be better off renting and waiting until you do have enough money saved to buy a more modest home. Thankfully, the new Tax-Free Savings Accounts (TFSAs) Canadians will have by 2009 will help young Canadians take such a prudent approach to home ownership.

Whether the real estate market cracks before then remains to be seen.

Original posting here.

4 comments ↓

#1 grant on 03.10.08 at 8:02 pm

Jonathen;

I’d like your take on Garth’s assumption’s that boomer parents will be down sizing into a smaller homes/condos?

Quite frankly! I’m not seeing it. I’ve done some anecdotal surveying of family and friend’s parents… and guess what! They have no intention of moving out of their existing homes into something smaller. They have grandchildren that they want to come over.. they’re happy in their present homes with all THEIR STUFF… and happy memories!!

From what I can see/hear (and I think Sherry Cooper also mentioned this in her recent book) that we’ll be hauling our parents out feet first from their homes.

I’m not saying Garth is not perfect… (most of these economic specialist aren’t. In the same breath! Sherry talked about not investing in Gold back in 2001… and look what’s happened to her call on that one)

I wonder if any company has done any HARD research into this theory of Garth’s. Because he’s been talking about this in his books for some time!!

thanks

Grant

#2 Grant on 03.20.08 at 12:19 pm

Turner suggests buying real estate with a future and that empty-nester boomer couples will be downsizing into bungalows, townhomes and condos of 750 to 1500 square feet. Access to urban services will be important. In other words, “buy real estate with a fighting chance of retaining its resale value.”

Gary….. what you make of this recent study by RBC and Ipsos Reid??
Thursday » March 20 » 2008

B.C. boomers won’t head for old-age home

Bruce Constantineau
Vancouver Sun

Wednesday, March 19, 2008

B.C. baby boomers want to live near young people when they retire but they hope those young people aren’t their own kids.

Those are among the findings of an RBC/Ipsos Reid poll of Canadian baby boomers’ retirement housing plans.

The online poll of Canadians born between 1946 and 1965 found that 80 per cent of B.C. residents want to retire where there is a mix of younger and older residents — the highest level in Canada.

But just 31 per cent of B.C. respondents want a home with separate living quarters for their adult children — the lowest level in Canada.

Fifty-six per cent of Quebec residents want homes with living quarters for adult children.

Kevin Lutz, RBC Royal Bank regional mortgage manager for B.C., said rising B.C. real estate values have put many parents in a strong position to help their children purchase their own homes.

“Rising property values in B.C. have given people a lot of equity in their homes so they can refinance and provide a very good downpayment for their kids,” he said in an interview.

Fifteen per cent of Canadian baby boomers surveyed said they have adult children, aged 21 or over, living at home. Of that percentage, 41 per cent have returned home to live while 59 per cent have never left home.

Sixty per cent of Canadian baby boomers — and 58 per cent in B.C. — said they want to stay in their existing communities when they retire.

“Most retiring boomers want to stay in their communities and live near young people rather than be confined to an old-age community,” Lutz said. “That’s obviously food for thought for developers planning retirement homes for people.”

He said a lot of retiring Vancouver baby boomers buy downtown condominiums now because they don’t want to leave the city.

The poll found 50 per cent of B.C. residents like the idea of retiring to a home in a downtown or urban centre — with easy access to the arts, cultural events, restaurants and entertainment venues. That’s the second highest level in Canada, behind the 53 per cent of Quebec respondents attracted to urban centres.

The poll also found that 22 per cent of Canadian baby boomers believe their home will be their primary source of income when they retire.

“We’re seeing people more comfortable with carrying debt throughout their retirement than ever before,” Lutz said. “The previous generation was more about paying off their mortgages and being debt free but this generation is more into using home equity lines of credit into retirement.”

The online survey of 1,238 adult Canadians was conducted between Jan. 17 and Jan. 21 this year and is considered accurate to within 2.8 percentage points, 19 times out of 20.

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© The Vancouver Sun 2008

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#3 Recession Roadmap - The Wealthy Boomer on 04.16.08 at 3:04 pm

[…] supply of "Greater Fools" out there, as Garth Turner noted in his recently published book of the same name, also noted in this earlier blog […]

#4 SAM on 05.07.08 at 8:09 am

I believe one day we will wake up with high interest rates like back in the mid 80’s. Those that have been living on lines of credit will lose everything.
Lines of Credits and especially the one’s linked to homes will be the first victim for the find print usually state that the bank may recall the loan at anytime giving a maximum of 30 days notice no matter if payment(minimal or more) are being met.
I know for a fact there is not enough money, gold, diamond, oil etc to cover the debt in this world lest our country so it just a matter of time when this invisible economy will become unstable and collapse.