Feeling seduced

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Liberal MP Garth Turner says in a new book that Canada has its own ‘hidden debt crisis’ that’s ‘just as dire as the subprime mortgage fiasco’ in the U.S.

By Bea Vongdouangchanh

hill-times.jpg Liberal MP Garth Turner is predicting doom and gloom in his new book, Greater Fool: The Troubled Future of Real Estate. Recent changes to buying and selling real estate laws, such as allowing 40-year mortgages and zero down payments, have allowed Canadians to plunge the furthest into debt in the last 10 years.

“Our real estate values have gone way beyond the ability of the average family to afford houses and the only way they can afford them is taking on all kinds of new debt. That’s exactly what got the Americans into trouble,” Mr. Turner (Halton, Ont.) told The Hill Times last week. “The same conditions exist here.”

Mr. Turner held a book launch on the Hill last Wednesday in room 238-S Centre Block. After a late House Finance Committee meeting and a series of votes in the House, MPs and Senators attended the event to hear Mr. Turner’s real estate advice. He said that more people are unnecessarily buying “great big fancy brand new houses” with all the fixings and they can’t afford them when they should be downsizing or working within their budgets. He wouldn’t divulge how much he spent to buy his own house, however.

With the housing bubble starting to burst, Mr. Turner said the House Finance Committee should be looking at the debt crisis to make people more aware of it and in the process, softening the blow. “Nothing goes up forever and booms end badly. That’s a law that we’ve forgotten,” he said.

How do you know that Canada “has its own, hidden debt crisis just as dire as the subprime mortgage fiasco” in the U.S.?
“Many people think the American real estate market went from good times to terrible times because they had been giving mortgages to people who didn’t deserve them, called subprime mortgages. Actually, in Canada we had pretty well the same situation. We’ve developed in the last couple of years, mortgages that actually are paid back over 40 years instead of 25. That drops monthly payments and it lets people buy houses they wouldn’t be able to afford normally, so we have our own version of these subprime mortgages in Canada. At the same time, our real estate values have gone way beyond the ability of the average family to afford houses and the only way they can afford them is taking on all kinds of new debt. That’s exactly what got the Americans into trouble. The same conditions exist here. It’s just we’re a couple years behind what’s happening in the U.S. Meanwhile, Canadians have 80 per cent of everything they own tied up in real estate. I mean, we have this huge gamble that we’ve taken that real estate will go up forever. You know what? Nothing goes up forever and booms end badly. That’s a law that we’ve forgotten. The conditions are very similar today in Canada to what they were a year and a half ago or two years ago in the U.S. I think there’s no doubt in the world that we’re cruising for the same thing, maybe not a disaster with real estate the way the U.S. is having, but certainly things are going to go down.”

When is that going to happen in Canada?
“It’s already started.”

Has the bubble burst?
“It’s already unwinding. In January, the number of resales went down dramatically across Canada and in February the number went down dramatically in Toronto and the number of listings have gone up. A lot of people are bailing out of houses already and prices are starting to fall. It’s not grabbing headlines yet, but it’s definitely out there. So it has started and I think over the next year or so, it’s going to become a really big story. ”

So what’s your advice to homebuyers?
“If you haven’t bought a home yet, be careful. I wouldn’t take one of these 40-year mortgages, I wouldn’t buy a house with five per cent down, I wouldn’t do what a lot of young buyers are doing today because the only way they’re going to be okay is if houses continue to go up forever and it’s not going to happen. If you’re a 50-something baby boomer with a four-bedroom suburban house, get rid of the sucker now, okay, because things aren’t going to get better in a year or two. If you’ve been thinking of selling, do it. I think we’re at the top of the market and it could be a lot of heartache for people who don’t realize it.”

You’re saying people shouldn’t buy, but people should sell? If people are selling when you’re saying don’t buy, where do the buyers come from?
“That’s the name of my book, it’s called Greater Fool. You’re always hoping that there’s a greater fool who’s going to come around and buy your house. That’s what people have been hoping for in the States. We are going to get an imbalance of buyers and sellers and that’s what makes a market go crazy. Before we had more buyers than sellers, so prices went up and now we’re getting more sellers than buyers and it’s the other side of the pendulum.”

Should Parliament be doing anything about it? Can it do anything about it? Can it prevent something like what happened in the U.S. from happening here?
“There are a few things. These 40-year mortgages are not good news, and they only came in two years ago. In fact, back when I was a Conservative—I admit it—I was the only guy who objected. I was on the Finance Committee and these things came before us and I said this is going to be a big problem, but we passed it, so that’s something the government should look at. The easier we make it for people to get into debt, the more debt they’re going to take and then there’s going to be more problems so that’s an issue. Interest rates, we have to work hard to make sure they stay as low as possible. Of course, the thing that should really happen is everyone should buy my book and read it and then they’ll know exactly what to do.”

But should Parliament be looking at it as a big picture policy area?
“One of my colleagues has suggested that the Finance Committee start to look at this debt problem and the credit crisis that’s being caused by the U.S. real estate market. So I think we are going to be looking at this, which is good. The more awareness we raise, hopefully we won’t have a problem. Hopefully we’ll be okay, but I don’t think so. So the more people who know about it in advance, the better.”

Toronto Life magazine in a recent cover story suggests this generation of home buyers is “house poor” and a “mortgage enslaved generation.” Do you agree with that?
“I do. I think because houses have gone up and not only that, the fact is everyone wants granite countertops, everybody wants a media room and a deck and everything, so it’s not just that young people are buying houses, they’re buying great big fancy brand new houses with a small amount down. We’re the most indebted generation. Canadians have never had as much debt and mortgage debt has gone up seven fold in the past 10 years. So yeah, people are going to pay a big price for that granite countertop.”

So how much did you pay for your house?
“Actually I sold a big suburban house and I bought an urban house for half the price. I did that six months ago.”

Can you tell me how much?
“Nope, but I follow my own advice.”

Greater Fool: The Troubled Future of Real Estate, by Garth Turner, Key Porter Books, $21.95, 220 pages.

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1 comment so far ↓

#1 FarFarAway on 03.18.08 at 5:32 pm

Thanks Garth … Remember a prophet is never recognised in his own home town! Anyhow, We sold our USA property some 4 years ago (a little too soon – but for a pretty good return – if we had waited, we would have lost it all) and our Okanagan lake-view home almost exactly 2 years ago (No home has been sold for more, yet, where we lived, so I’m not too sad about that sale) and being the 50’s generation and thus mobile, decided to move to Panama and buy here, 2 years ago – before their boom really took off. It’s doubled here too in the last 2 years and I’d be selling about now because even here the same dynamics eventually will unfold, if it were not for the building of the Panama Canal creating a huge demand for some 5 – 7 years as about 12,000 foreign workers (engineering companies employees from abroad) flood into a tiny real-esate market in only 1 city – which has no rentals available and where the massive boom of 200 approved Condo towers cannot even house these workers and their families, even if they all magically were built overnight. Still, the idea is (if you can do it) to cash in your equity at or near the high (tough to call) and move to a location where the boom is just starting (or downsize) … but remember not to get too comfy there, as any boom does have it’s bust. Now into my 50’s, I’ve seen that happen time and again – even (perhaps especially) after most “experts” say “It will never happen here”. Garth, you are (for now) “a lone voice in the wilderness” but time and events will exonerate you yet. Well, time for a pina-colada, so cheers to you and all my fellow Cannucks!