Crunched in cottage country

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Also: Troubled in Toronto, delusional in Kelowna

Hi Garth,
I just listened to your interview on Howestreet and am looking forward to reading your book. In the meantime, do you have any good presentations/research reports on the Canadian housing markets, specifically Toronto? I’ve been looking for hard data for a while, but haven’t found what I needed. To give you one example, I was looking for lending statistics to determine how vulnerable our market was, but even the CMHC didn’t have such reports. The only thing I could find was a report on the canadian consumer that determined that we were heavily in debt, borrowing to consume.

Thanks for the great work,

Good luck trying to find such numbers, because I can’t. There is no publicly-available current accounting of mortgage and consumer credit. The major chartered banks have their own internal numbers, of course, and I am told they show a dramatic turn in recent weeks. The only hard stats relatively in step with reality are sales numbers released by local real estate boards – the kind which now showing a plunge in activity in both Toronto and Vancouver. CHMC? Forget it, since it measures only events which are too far in the past to mean much. As for the big bank economics departments, well, smart people, but hardly objective on this file. They know who pays them.

Hello Garth, (I am calling you by your first name cuz I feel like I know you now)

Thank you for your recent book – I bought it and read it almost in one sitting – partially on the way down to the Toronto Cottage Show (where we have been looking at cottages). My brother had called me in the morning, after reading your book, and was pleading with me—- to read this book and NOT BUY COTTAGE RIGHT I did and I didn’t.

Here are my two questions:
1) You didn’t say a whole bunch about cottages. We keep looking up north after selling ours and wishing we didn’t and now struggling to get back into the cottage market….we are also flying out to Victoria in May to look at property there…..can you give us your opinion about what will happen with real estate for recreational properties, particularly cottages, and properties in retired types of cities like Victoria.? We are only 46/49 so we have time to wait but would like to start enjoying it now. I do not want to make another mistake. The last one cost us dearly.

2) You didn’t say anything about inheritances and how that will impact real estate and I guess I think it is a pretty big factor (not for us, mind you, but a lot of our friends)..what’s your take on how they figure into everything you have been saying?…

I am sure you are a busy man, but I would really like to get your personal input – my brother will listen to you more than he will listen to me. We have both read your earlier book(s); I read the one you wrote in the early 90’s.. I look forward to hearing from you!
Kind regards,
Julie, Waterloo

Hey Julie, I am glad you listened to that wise brother of yours. The cottage market is going to tank. There are many reasons for this, the most overriding of which is the fact that when real estate in general declines, recreational and second homes take the brunt of this. People under financial stress will sell their cottages over their city homes ten times out of ten. In fact, lots of cottage-owners today bought their seasonal homes by borrowing against the equity in their urban properties.

Thus, when cottage prices start to drop, the debt used to obtain them remains constant, and that’s a worrisome scenario. My bet is a flood of listings are about to hit the market in Muskoka, the Kawarthas, Collingwood and points inbetween. Secondly, the Boomers have already had their fling with second homes and as they enter their sixties – with real estate values on the decline and energy prices on the rise – are actually going to become more urban. Third, as the credit crunch continues to affect lending practices you will see mortgages for cottages and moose pastures a hell of a lot more difficult, or expensive, to get.

You ask about buying a property in Victoria? Don’t.

1. How much would you say I should expect in terms of a “correction?”in the price of my condo in downtown Vancouver?

I ask this question because I may just wait this thing out. Moving and real estate fees will eat up a considerable amount of my 110K equity. Therefore, since I enjoy living here [I believe there is value in where one lives] and a few years from now my condo may be close to where it is today in terms of value I may just stay and tough it out. Crazy?

2.When do you think the “correction phase” will begin?
Thank you in advance,
AL in Vancouver

Nobody can answer that first question with certainty, since real estate is a local commodity, since the 2010 Olympics may further skew, distort and render dangerous real estate in Vancouver, and since the depth of the Canadian recession is yet to be known. At a minimum I’d brace for a 10% equity decline, but it could be as much as 30% if conditions worsen.

When will it begin? It started a month ago. Sales activity levels decline first, prices after that.

Hi Garth,
I’ve enjoyed your books and editorial over the years. I respect your thinking and would love to see you and Ozzie Jurock duke it out on the noon news one day.

However, I don’t particularly agree with the impact of the situation you articulate in your most recent work. The main reason your theory of total value meltdown would happen is only if employment opportunities dry up, which would add fuel to the fire of people’s inability to pay their mortgages. This would be equivalent to the wheels falling off the economy, which for *most* people is unlikely given reasons that I’ll share in a moment.

Am I in denial? Maybe, but so what?

The problem with real estate today (and every day for the last 50 years) is the people see their primary residences as a speculative investment, which is just plain wrong…it is your HOME, not a stamp collection or a hot mining stock. When you own a second or third property as INVESTMENTS, then the conversation is very different. Everyone at cocktail parties these days thinks they are Gordon Gecko from the movie Wall St. I’m embarrassed for people I listen to brag about how much their homes are worth because it’s got nothing to do with their ability to invest or take care of money.

Your home is worth twice what you paid for it two years ago? So what! You can’t eat those profits.

People need to just buy what they need and not much more. Stay there as long as you can. And for those who did overbuy on space or ego gratifying zip codes, as long as they have the financial means to keep paying the bank, who cares how much the house costs. In 9 cases out of 10 owning your own home is a better situation than renting anyway. So what if your house is worth less than what you paid for it. Provided the income situation is solid, I say people just need to suck it up and ride it out.

If you lose your job, you’re F*&#@ed whether you rent OR own. Either way, you’re gonna have a shelter expense every month unless you live in the backseat of your car. Folks should be working towards boning up on their ability to ensure their earning capacity is protected and their skills in the marketplace remain in demand. I’m concerned at the false sense of security of those people who think that Uncle Sam is going to take care of them in their government jobs because we’re moving away from a world of “careers” to a world of work.

Learn to develop web pages, become a great sales person, become a pilot. The world economy is growing and there’s a huge labour shortage coming people need to figure out how to tap into that global income opportunity. Thomas Friedman’s book The World is Flat underscores this clearly. Telus is facing 35% of its work force retiring in the next 3-4 years and isn’t sure how they’re going to replace those folks here in Canada.

Brooks Van Norman

Kelowna, BC

Well, sounds like you’ve got it all figured out. But real estate values and the market’s direction have little to do with employment levels. Try flogging your theory in suburban San Franciso or the counties north of Miami to see what I mean.

Markets drop when buyer confidence wanes and people ask themselves if they want to take on the debt of a small nation to buy homes from people who brag about the size of their equity at cocktail parties. Hello. Is this all that different from elevator boys giving stock tips in 1929?

Ominous parallels, dude, and delusion may be your only refuge.

By the way, in much of BC today, you are actually better off financially renting than owning. Yeah, nine times out of ten.


#1 Sphinx on 04.04.08 at 12:40 am

The lack of data on the canadian housing market was one of the reasons this 10 yrs cycle is prolonged and reached this unprecendented level in many area of the country. The Joe & Jane public don’t have enough information to make a smart calculated decision, and has been rushed by realtors to “buy now” or “priced out forever”, all on the promise “prices always goes up”.

Prices are driven up by a 1-Fear on missing out, 2-Greed to make money off appreciation (something for nothing, always goes up!), 3-Envy of friends/coworkers/relatives who bought a house, 4-Earning a status buying the biggest house on the street if you can, 5-Elusion of a safe “investment”, 6-A sense of entitlement of homeownership, the list goes on…there’re no data/figures, just emotions, all emotions!!. and many think renting is throwing $$$ down the drain or paying your landlord’s mortgage, well the interest component on the mortgage is thrown as well but to your happy lender!!, and with current insane prices the interest component is well above the rent on the same property. Nobody bother doing the math, nobody!, totally ignorant and repeating the same realtor’s mantra.

At the end of a runup, affordability is hammered as it’s the case now in major canadian cities, and buyers specially first timers, won’t be able to afford current prices (banks are now trying hard to fix that with 40yrs mortgage), sales slowdown, supply increase, sales slowdown more, sellers reduce asking price trying to unload, buyers get scared to jump on a declining asset and demand decrease, and so on….turning into a vicious cycle spiralling downwards. Again, all emotions, no numbers or figures to base their decision on.

I feel sorry for many for their financial illiteracy. We really need to teach our kids/ourselves how real economy works, and how to make financial decisions based on feasibility and smart sense, not emotions. We need our government to make housing information publicly available and in a form easy to understand and consume by the public, and also to enforce the time tested rule of monthly mortgage payment not exceeding 30% of gross income, and bringing 20% down payment to the table (it’s coming back in the US as the lenders are spooked by the housing crash) which will caution any down turn in housing prices and will force homeowners to have skin in the game….this will maintain the housing affordability – one of CMHC’s mandates, or am I dreaming?!


#2 Future Expatriate on 04.04.08 at 7:55 am

DEFINITELY do NOT buy in Victoria… price decreases are evident all over the place for the first time in decades, and this is just the first month of the “correction”. I’m assuming Garth’s warning goes beyond the coming crash though, taking into account skyrocketing fuel costs and the passed-on cost of transport of people, food, and things to and from the island. Vancouver Island may well never recover to current levels.
Then there’s the added “bonus” of global warming increasingly wreaking havoc with the “nicer” weather there. Not to mention inevitable higher sea levels that will put much of downtown Victoria under water.

#3 MaryRose on 04.04.08 at 9:14 am

Hi Garth,

As a regular follower of yours and reader of your blog, I’d like to add my 2 cents.
For years I regularly turned to your weekly column in the Toronto Real Estate News for your comments and analysis, and took note a few years ago when you clearly identified 2008 as the year to watch the proverbial kaka hit the fan! Here’s my story to share…

Previously I bought and sold a couple of homes in Toronto and profited to a degree, but when you add in renovation costs and taxes and real estate fees, much of the “profit” is easily eaten up. During these renos I also used much of my available cash for the house instead of investing in RRSPs for the longer term.

Soooo, as a result of divorce (probably speeded up by the pressures of renovations!) my ex and I sold our home 5 years ago. I decided to relax, go into a rental apartment, work 3 days a week, look after my kid, and pay attention to saving in a predictable monthly fashion. My rent is less than what I would have paid in interest and taxes on my previous homes. I continued to invest the amount I normally would have paid, so it was not “frittered away”. With some regret I do kick myself and think I should have bought back in 5 years ago when I prices were lower, but that’s spilled milk now. I did enjoy a greater cash flow and free time for all those years, as well as someone else to fix things and clear the snow!

Eventually I returned to work full time, my income doubled and in 5 years my savings increased about 7 times greater than any money I made in 7 years of home ownership. Much of my savings are in RRSPs and will provide me with a great retirement, but I also saved for my next downpayment. I do want to own another home….and to stay there for the next 25 years!! In fact, while the trend is toward 5% deposits and a long amortization, my objective is to have a big fat deposit and a short amortization so I’ll be paid off by retirement.

So now I’m in a good financial position to buy…..and last year my patience for the long anticipated “downturn”was running out so I started looking last summer. I want to buy in our community , the Hillcrest Village area in Toronto. Unfortunately, this area has now been identified at the new hot spot of Toronto so there is increased interest here. With no need to rush, I’ve looked at tons of places. Most end up being tiny, or substandard for lots of reasons, no privacy, little yard, and highly overpriced. I stand in the houses and think “do I want to borrow X amount to live here?” . The answer as always “No!!!”.

Your book could not have been more timely for me, as I was getting impatient with renting and the years are going by……after all, isn’t a woman’s mission in life all about decorating her home? ( helpful hint!! stop watching al the decorating porn on TV!) I bought your book as soon as it hit the stands, and read it in a sitting. Now with sales falling across the country, and our economy teetering, it is a time that a buyer needs patience. And for that I thank you, because your thoughts and analysis encourage me to have confidence to delay a purchase, hang tight,rent longer and keep looking for a bargoon. I might even move to a larger rental to take the pressure off for a while….

I encourage any potential buyers out there to become best friends with a mortgage calculator, available easily on the internet. And also with the amortization charts… see how much interest will be paid over the duration of a mortgage and how much of your hard- earned after-tax cash the banks will suck up. How many months and years does it take to generate another $50K, $75K, or $100K for the bank? That’s a lot of extra $1000 per month payments. That’s also a lot of snorkeling in Jamaica!

Ultimately, we have to blend living in a home and a community with managing a large financial asset. Thanks for all your efforts and for putting yourself on the frontline for the benefit of us all. You must have a very thick skin to tolerate the criticisms. I greatly appreciate your assessments of the spin that is created by self-serving real estate industry types and government hacks.

You’ve got my vote, Garth, even though I’m not in your riding….keep it up and I’d be happy to see you as our next finance minister!

Have a Happy Spring….MaryRose

#4 Keith on 04.04.08 at 9:34 am

Looks like reality is starting to set in:

Though the realtor’s are spinning it as best they can.

btw – Garth, I picked up your book. Fascinating read… to the point where you really scared the crap out of me to the point where I don’t ever want to buy anything (with a mortgage that is)! But I’m glad I real it before I bought anything… was this close to buying something in the GTA but lost in a bidding war. After I read your book, I chilled out and decided to wait awhile and now I see reports like in today’s TO Star. Thanks!

#5 Drachen on 04.04.08 at 10:47 am

“I’d brace for a 10% equity decline, but it could be as much as 30% if conditions worsen.”

I’m sorry but that’s just unrealistically sunny. Markets of all kinds tend to crash the amount they rose in a bubble situation. In this case prices have more than tripled in adjusted dollars without any real change in the fundamentals of the market. So it is not certainly true but it is likely that prices will fall a corresponding amount, ie. TO 30% of current values or 70% off.

I know Garth is a politician and has to walk softly but saying 10-30% drop is just not borne out by any comparable historical situation and history is our only guide. Unless of course you are one of the millions of Vancouverites who insist that here and now it’s “different” (I have yet to hear anyone explain effectively WHY it’s different, usually there’s just some mumbo jumbo about Olympics, standards of living and rich asians, none of which add up).

#6 Another Albertan on 04.04.08 at 11:05 am

I have directly heard anecdotes in both Edmonton and Calgary of parents in their late 50s to late 60s tabling the idea of splitting ownership of the family cabin.

These are cottages built by grandma and grandpa back in the 1940s and 50s and which were subsequently split between the two or three children in the late 70s and early 80s. Now the parents want to see if their 20 or 30-something kids will buy out their portion, causing another multi-way split. This comes at an insane price-tag of $100k to $250k per time slice. Tack that on top of your existing and sizeable mortgage, along with taxes and upkeep!

And what is the motivation of these boomers and war babies? Well, the stories I’ve been told amount to this: “They just want the money.” The shock, surprise and disappointment with the kids is palpable. As one colleague told me, “I am frustrated that my parents seems to have no concern that this is essentially one generation wanting to take money from the next. They just want the money now and they don’t care where it comes from, even if it means preventing their own grandchildren from ever enjoying the use of the property. The cabin has been mortgage-free for decades. The fact that they even suggested this has caused a rift.” This comment resonated with the others who were found in the same situation.

And in two of the cases, what was the intended use of the money garnered through the sale? To buy a retirement house in Arizona. The level of self-serving and selfish indulgence is disheartening.

#7 Daniel on 04.05.08 at 11:51 pm

Yah Yah Yah……Garth or Darth is a huge investor in real estate…has he sold every thing and headed for the hills?-or is he sitting back and reinvesting his money from the book in more real estate? Personally, I thought parliament hill was a busy place-where does he find the time to write a book?Hey may be after all the panic sets in we can start up a real estate investment pool to pick up all of the bargains. Thnk that has happened before.
Do you really thing the best locations are to be had for a bargain now in the states?…Dream on. You think the US is going down….?
Yes,Garth I am getting out my tent and camping stove with my 3 kids-right now…may be if you are nice you can rent me one of your apartments at a discounted rate!Better still how about a rent to own?

#8 SMWhite on 04.10.08 at 2:48 pm

Garth, is this true? Are you buying up all the Canadian real estate on your billion dollar MP salary; knowing full well that every house in Canada will be worth a cool million in 5 years? Shame on you!

I noticed the Ottawa real estate shills are crying snow on the fact the numbers are down, -16% on resales, yet no explanation why the snow hasn’t effected housing and condo starts which are were at +27%?

MaryRose is bang on, the mortgage calculator is your friend, play around with 5 – 10 years mortgages, see what happens to your rates if rates are up 1%, 2%, 5%… Would your mortgage still be affordable, would you be better off renting and saving you money in less risky equities such as blue chips, Canadian treasuries, GICs, instead of just renting from the bank?