No money? No problem.

Wednesday’s real estate news, here.

Canada’s own little subprime secret

The country is full of smug people who think real estate here will go up forever, even though US housing has gone to hell. Why? Because we’re Canadian. We’re better. We don’t subprime.

The interesting thing to remember is subpime mortgages – those famous loans given to people with low intro rates so they could afford to buy into a rising US market – were not the cause of the American real estate disaster now unfolding. They were just a symptom – one of tools myopic people find to keep a party going long after the guests are pie-eyed and wasted.

The real reason middle-class Americans are living through an endless hangover right now is because they let home prices rise too far, too fast, while they were all inebriated on newly-brewed equity (to keep a metaphor alive). Subprimes, like 40-year amortizations here, dropped the bar for home ownership and let people buy, who otherwise would not have been able. Because every real estate boom needs new suckers willing to swill debt for the privilege of being last in, the system allowed it. Hell, even blessed it. As is happening right here in Canada.

But this is not just about 40-year mortgages (or, “rent”, as I like to call them) which can turn a $300,000 loan into $884,000 worth of lifetime debt. No, this is about something even more dangerous which spells certain doom for the Canadian real estate market – no-money-down buying, courtesy of the banking system and the federal government.

Here’s how the ponzi scheme works: Young Couple lusts after a home, for some unfathomable reason, and are willing to do anything to get one. Sadly, they have no money.

But no matter. The condo developer whose building they want to live in comes up with the down payment – $20,000. This money is given to Young Couple on condition they put it into an RRSP with Bank of Montreal for ninety days. By doing so, Young Couple gets a tax refund which boosts their income, and allows them to qualify for financing under the federal Canada Mortgage and Housing Corporation’s Flex 100 program designed for cashless real estate buying.

Under the RRSP Home Buyer’s plan, the RRSP money can be withdrawn tax-free for a real estate purchase. So, the money now flows out of the BMO RRSP and back to the condo developer, which then applies it to the sale of the unit, and slaps on a CMHC-insured mortgage for the rest.

The young couple get their home, albeit with a honking big mortgage which, combined with property taxes and condo fees, costs them far more every month than renting the same unit. The bank has a new RRSP on its books, into which Young Couple have to pay the $20,000 in equal installments over the next fifteen years. The condo developer sells another unit at full price. The mortgagor gets its hooks into two more ingénues whose monthly payments are 95% interest. A realtor or salesguy along the way pockets 6% of the purchase price. The municipality and province collect land transfer tax. Lawyers get paid. CMHC fulfills its mandate of helping Canadians buy homes, even when they actually don’t buy them – they just pay lots of money so they can move in and take on debt.

The sale is recorded by the local real estate board, showing other buyers the market is vibrant, even though prices are at historic levels and affordability levels have plunged. Reporters write stories about robust housing statistics, and bank-employed economists cite sales and prices as evidence the market fundamentals are solid.

I mean, what’s the problem?

It could never happen here.


#1 Keith in Calgary on 04.14.08 at 11:07 am

You have just described “Pointe of View”: development Corporation here in Calgary.

IMHO they are the premier builder of the poorest quality cardboard boxes on the panet.

#2 Not Young on 04.14.08 at 11:21 am

We are in our 40s. We have an expanding family and need space. We have owned property for the last 20 years in Canada and Europe.

We need a much larger house with our 4 kids and one on the way. Went to the bank and could not believe how much money the bank would lend us. They wanted to lend us money. I had stars in my eyes and started thinking of my dream home but luckily my husband is more down- to- earth than I. He said – remember we have to pay this back.

The bank was almost insulted that we would not take their money.

Many people (especially in Victoria) have the misconception that people that buy the higher end homes do not have mortgages. They buy everything with cash. Well I can state for a fact that many of the people we know with these large stunning homes also have large stunning mortgages to go with them. One RE agent said that most people who are buying homes in Oak Bay and Uplands are not too worried about what happens with the RE market or interest rates.

I think the downfall is going to hit everyone.

#3 homeinboca on 04.14.08 at 11:24 am

Hello Garth,

I have been a loyal reader of your columns and blog. In reading about this mess we are in and I am wondering if there are any people like me anymore.
After being burned and losing my first house while living in Calgary during the bust of the 80’s I returned to Toronto. I saved for years, and put down the full 25% downpayment on a modest $250,000 home in a great neighborhood. I have payed off my mortgage early, and have resisted trading up like many of my friends to monster homes with monster mortgages.

Instead I bought a small condo in Florida 5 years ago for $60k before all the madness down there. My parents currently rent it and I plan to spend winters there starting in 10 years. I have been maxing my RSP and now have over $300K saved for retirement and a two mortgage free homes.
Is this traditional approach still valid? Financial planners keep telling me I should mortgage the home and put the proceeds in Mutual Funds.

#4 Crikey on 04.14.08 at 12:49 pm

My family and I recently moved to Saskatoon from Vancouver, hoping that the cost of housing would be more within our reach. It is, but just marginally- instead of a comfortable home being insanely out of reach, it is now just “out-of-the-comfort-zone” out of reach. We are not young either… late 30’s and early 40’s, and although we both have professional degrees, we still have student loans to pay back.

We did go through the “pre-approval” process for a mortgage, and also qualified for far more than I would ever feel comfortable paying back. When we balked at the monthly cost of the mortgage payments alone (not including property taxes or possible renovations) we were told, “Oh yes, but when property values go up another 30% this year, you’ll be laughing”, and “If you don’t get in to the market now, you’ll end up regretting it”. The 40-year amortization is heavily flogged as a “convienient” way to keep monthly costs low. Nevermind the fact, of course, that you could have bought two more houses with what you’ll be paying in interest alone over that period! We’re currently able to put 10% down, yet we were actively encouraged to put less (3%) down so we could use the rest of the money for “renovations”. All this at RBC, folks… this is no fly-by-night mortgage broker.

Needless to say, we found this insane, and Garth’s book (excellent, btw) has served to confirm the insanity. Prices have got to come down, don’t they?? Saskatchewan has been covered pretty well on this blog, but our agent is still telling us houses are still going from between 10-30K over list. He’s endlessly annoyed that we will NOT go over 2.5x our combined income (which is about 120K per year, not a pittance, by any means) and refuse to go over list. Unfortunately, there is nothing on the market in our price range that I would live in without extensive renovations. I just want to give up, and given the current market conditions, that’s probably the best idea at present. We’ll just go on renting and saving… but it makes me mad!!

I’m finding myself less conflicted, but increasingly upset, with all of the RE propaganda being spouted out there. The article below, I’m very sorry to say, was on this morning. I wish I could find it humorous, but knowing that many young people are actually going to swallow this pap is nauseating.

Realizing the dream of Homeownership

Minimal down payment and extended amortization can make owning your own home less of a dream and more of a reality

Here’s hoping someone can find this funny… ;)

#5 wealthyrenter on 04.14.08 at 7:09 pm

Not Young – we have been kicking the siding on a few places, and we too were stunned by the amount the banks we do business with would lend us. We qualified (without asking) for 600K and 700K for 15 years. This was before the summer financial meltdown, but they still won’t balk at >$500K. We make very good money, but that amount is truly crazy for middle class people. I am wondering who can afford those types of mortgages? My guess is very few, and the rest are choking on debt.

Homeinboca, we are very much like you. We are in our mid 30s, and have been saving our loonies for a long time. We fully intend to buy a modest home, in a good area of Toronto, if (and when) the price make sense. I bet your “modest” home is beautiful, and your condo sounds like an investment of a lifetime.

The advice from the financial planning “experts” should be taken with caution. Using equity in your home to invest in the markets is a risky proposition. If you are risk adverse, if you don’t have the means to absorb substantial losses, or if you have a short time horizon, please reconsider this strategy.

The Ontario Teachers Pension plan only made 4.5% this year. They are diversified over many asset classes and highly disciplined. The market is a tough place to make a buck these days. Many money experts on BNN are holding plenty of cash.

#6 jesse on 04.14.08 at 7:17 pm

The other part of subprime in Canada are the so-called “stated income” mortgages.

#7 Don on 04.14.08 at 9:46 pm


You have done so well on your own… Please do not listen to those “financial planners”. They desperately need trailer fees and commissions from those mutual funds so they can pay for their own monster homes, fancy cars and country club memberships.

In my opinion borrowing to invest only makes sense when you wish to top up your RRSP. You already have a sizable RRSP and you could invest that one into a relatively safe portfolio with a low fee provider (such as a bank). All you really is a return on investment of about 5-7% a year. You really don’t need much more… Slow and steady wins the game.

#8 Al on 04.14.08 at 10:01 pm

“Financial planners keep telling me I should mortgage the home and put the proceeds in Mutual Funds.”

I suppose if you like someone else having 100% control of your money with a side dish of ZERO transparency, Mutual Funds are a great idea. Especially the fact that Canada has the highest MER’s in the free world. No small wonder judging by the regular 2 page spreads they take out in the popular business magazines.

Mutual Funds for the majority of my retirement portfolio? No thanks. A good base of index tracking ETF’s perhaps, with their low MER’s and cash distributions.

Before you choose a financial planner, ask them to show you their personal financial statements, showing you their assets and liabilities, and more importantly if they invest in what they are trying to get you to invest in.

Most are nothing but salespeople taking advantage of financially unedumucated populace.

#9 Justin on 04.15.08 at 1:02 am

Oh yes…the CMHC. The organization that has managed to socialize an economic bubble.

Garth, what can the average Canadian do to hold these faceless bureaucrats accountable?

#10 Toronto real estate agent on 04.15.08 at 4:00 am

I don’t think that it’s so bad. Working as a Toronto real estate agent I am meeting people who wants to buy some real estate daily. I have mainly good experiences with young couples. Things are really going better. Maybe one of the reasons is that there is plenty of information you can find on the Internet (mortgage calculators, guides, blogs with experiences, blogs like yours ). I think people are more aware of importance to make this decision in a right time. We are different mentality like Americans. Anyway, things are going to change also in US after last year.

#11 Al on 04.15.08 at 11:01 am

“Garth, what can the average Canadian do to hold these faceless bureaucrats accountable?”

How about we start with ignorant, greedy buyers coming back down to earth and not buying more house than they can afford. Why doesn’t anyone ever take responsibility for their own problems anymore?

#12 Not Young on 04.15.08 at 11:36 am

I look at many other Bear Blogs and they all ask the same thing that Justin asks – how can these people be held accountable????

#13 Dom-GTA on 04.15.08 at 11:38 am

In the Globe and Mail there is another article on foreclosures…how the worst has yet to hit. I posted a comment and almost got lynched.

The herd mentality is still very bullish.

This is definately the time to sell, this kind of euphoria reminds me of Google at over $700 and the tech bubble in 2000.

Just no negativity tolerated. houses will go up and all of us are “chicken littles”…

Be safe.

#14 wolfey on 04.15.08 at 12:11 pm

as for finances i sold my gold and oil @ record high prices it’s getting kind of scarey . i boufght some agriculture stocks because people need to eat more than oil and silver. i still bought tech @ year end lows

i moved almost all of my can equities mutual funds to money market in oct – 2007 to keep my games .

any advice guys

#15 Sam on 04.15.08 at 12:20 pm

>>Garth, what can the average Canadian do to hold these faceless bureaucrats accountable?<<

nothing , I believe….

#16 SMWhite on 04.15.08 at 7:55 pm

Wolfey, I’m not adding to my metals holdings but I haven’t dumped any either, lower expected rates on both sides of the border will push the prices up higher, I’ve heard everything from $1000 to $1200 by years end. This is rhetoric I’m hearing from a solid source, Peter Schiff of Euro Pacific Capital.

I would be careful with “money” market or at least investigate what the “money” consists of, as is what do the pieces of paper represent. Some of those funds are in other securities(cash equivalents, isn’t that juicy?) other then cash, which I was not aware.

I was in money market and moved to a GIA/GIC instead because of all the problems with this worthless paper circulating the globe. The offer last fall for the GIA was 4% at for a year from my banking pimp, its now down to 3% for the year, glad I made the move when I did. I figure +4% is better then -10% in equities.

As AL stated some fund mangers really dig their hooks into your money on management fees, when you consider that there is a good chance that things are going to hell in a hand-basket, cheap fees and dividends paid will help along the way.

I have no experience with exchange traded funds but think I’ll take a look into them for poops and giggles.

BTW for those wondering, what can we do? It isn’t the responsibility of the banks and lenders to do YOUR due-diligence, thats how markets work, if your buying magic beans don’t be surprised if you get duds. They are after all trying to sell you products.

1/7 of the population actually does fact checking, so if your watching the HGTV or LIFE channel, being bombarded by commercials from Rona & Home Depot, the banks and their “miracle better the sub-prime mortgages” and your expecting the big pay off cause it happened on TV; or your real estate agent, who’s under the age of thirty with the bleached smile telling you “this property is a great deal but bid 10% higher” put up a stop sign and think.

The good news is you can always live in your “investment” property, but if you’ve been buying houses like Casey Serin then you deserve a hard fall.

#17 Jas on 04.15.08 at 9:24 pm

After reading Garth’s book, I think the place to put your money is in solid dividend paying stocks in Canada (and don’t buy US stocks…US is done for the foreseeable future) or Emerging market dividend fund of some kind. Why? because as Garth argues, baby boomers will cash out of RE and where else will they move their money but into income generating stocks (not growth stocks)
although as Garth has admitted in the book, he is keeping some of his investments in RE.

Garth I had asked you a question from RE investors perspective but you have not replied. I’m trying my luck again:
I have rental property with positive cash flow and with 50% equity in North Delta, BC. If I sell I don’t realize much of capital gain (20,000 max) should I keep it or not?

Sure, why not? If the cash flow is positive, and your capital gain will likely evaporate in a realtor’s commission, then there’s no reason to sell. The storm will eventually pass, and it’s not a financial drain in the meantime so long as you can keep your tenants. But be aware, they could be looking for a rent reduction in the future. Could you hack that? — Garth

#18 Marv on 04.15.08 at 9:31 pm


it’s refreshing to see someone in Canada such as yourself who is actually willing to stand up and say what allot of us consider to be the obvious. That house prices are so out of touch with reality and that we have a generation of families and singles who are putting themselves in debt that will take a lifetime for them to pay off. The Real Estate industry, developers and speculators have turned the Real Estate market into their own money making scheme at the expense of those who probably can afford it the least. I am thoroughly disgusted by this. These families and singles are taking on mortgages which are way more than they ever should take on because of the hype and fear that is part of the marketing plan. Fear that as the industry tells them “they better buy now or be priced out forever” and hype as the industry tells them “It is a good investment that will only go up in value”. They rarely hear the warnings that they will be in debt for life and their house value could nose dive in the future.

The word has got to get out and people have to be made aware of just how reckless it is to be chasing this Real Estate bubble. It’s time to put the Real Estate speculators out of business and let homes get back to the place where they are seen as a place to live and not an investment to get rich off of.

#19 Al on 04.15.08 at 10:06 pm

“The word has got to get out and people have to be made aware of just how reckless it is to be chasing this Real Estate bubble. It…..”

I think that people should be making themselves aware and investing in their own education instead of listening to every so called expert spewing sales spiels with their own self interests in mind. I’m a busy Realtor here in Victoria, and whenever someone asks me where the market is heading, I tell them:

A. The easy money has been made, flip at your own risk.
B. Pigs get slaughtered.
C. Don’t try to time the market.

I try to educate them on what type of Real Estate is better to buy and where i.e. centrally located condos, and what will be in demand in the near future as boomers retire and downsize.

#20 Al on 04.15.08 at 10:13 pm

The problem with putting paper into a GIC paying 4% is atleast half of it will be eaten away by inflation.

I’ve been watching the REITs that have been taking a beating lately. I also put my money where my mouth was on Monday and bought a bunch of Proshares DOW Short ETFs. Beauty of those is the protection from the downside, yet all the benefit from a falling index. Just my .02 and a little of topic I suppose haha.

#21 SMWhite on 04.16.08 at 9:19 am

All info is appreciated Al, especially honesty coming from the mouth on an some whom is in the real estate industry. That’s the key to longevity in any area of business.

I’m fully aware of the inflation dangers we are facing but as stated just happy to not see minus signs, but shorting the DOW sounds dreamy! The US Fed is almost out of interest rates to cut, one more dead-cat bounce and here comes that slide that sends our neighbors into their worst economic period since the early 80’s.

It doesn’t look real rosy for anyone, don’t know how you missed this one Garth:

#22 shoutoutoutout! on 04.16.08 at 10:57 am

Real Estate always goes up?
Luxury inner city condo in Calgary (inner city always a good investment right?)
1982 listed at 215,000-no sale
1984 listed at 161,000 NO SALE
1991 listed at 187,000 no sale
2007 listed at 800,000 no sale
2008 listed at 599,900 NO SALE… its not mine

#23 Keith in Calgary on 04.16.08 at 6:34 pm

Which condo is that ?

#24 Al on 04.16.08 at 9:28 pm

“Real Estate always goes up?
Luxury inner city condo in Calgary (inner city always a good investment right?)
1982 listed at 215,000-no sale
1984 listed at 161,000 NO SALE
1991 listed at 187,000 no sale
2007 listed at 800,000 no sale
2008 listed at 599,900 NO SALE… its not mine”

That could be based on a large number of factors.
Uncooperative tenants is a lot of the time the biggest pain in the rear for an owner trying to sell. Can’t really judge one expiry based on thousands of listings.

On the other hand, the other day my hot sheet showed just as many price changes as new to market listings. That was interesting…

#25 Justin on 04.17.08 at 12:39 am

Al said: “How about we start with ignorant, greedy buyers coming back down to earth and not buying more house than they can afford. Why doesn’t anyone ever take responsibility for their own problems anymore?”

What are you talking about Al? Don’t you see that the CMHC plays a major role in underwriting mortgages for ignorant and greedy buyers…precisely so they don’t have to be fully responsible.

#26 shoutoutoutout! on 04.17.08 at 2:34 am

well i just wrote a nice long answer to the last two comments, the my wireless connection faultered. But here is the gist of it…
The point is this example can be used for any property that has been around since the 80’s and has been listed a few times, and doesnt matter if it actually sold or not. This is a cycle that almost every Calgary home followed, just adjust the scale of price for what neighborhood. That is a ridiculous comment, that it didnt sell because of uncooperative renters? I doubt many renters could afford this property anyways. Your a realtor and thats your answer? Brutal. Here is a personal example then where I know no lunatic renters were involved…my parents house bought in 1982 for $80,000. Brand new, first one on the street. SIX MONTHS later some other homes that were to be built on our street were selling for $50,000.
Also, on the condo pricing I pointed out it is interesting to note the interest rate in 1982 was around 18.5%, by 1991 it was around 11%. How many buyers of the last few years who bought at historically low 4-6% range are going to be able to afford their homes when they renew their mortgage in a few years when their 5 year term is up at 9-11%?

#27 vultur on 04.17.08 at 8:30 am

What makes you so sure that the 5 year mortgage rate is going up to 9%-11%? If you are so confident of such then why waste your time here- you should be shorting the 10 year government of canada bond.

I love all these geniuses with their bond market expertise. It’s only a trillion dollar market dominated by the sharpest finance guys in the world. But you know for certain where interest rates are headed, right?


#28 Dom-GTA on 04.17.08 at 2:55 pm

Shout, brilliant. That is the real question isn’t it? I know I can afford my payments at 4%, 8% or 12% because my credit isn’t great and I never qualified for low interest loans.

I have been doing calculations of what the mortgage would be at different interest rates and while we will not be seeing any increases soon, when we do, people with $500K or $600K mortgage will be floored and stunned by the increase in monthly payments. The worst part is that with declining values people won’t simply be able to sell and move on. That means this cycle could be going on for many years to come.

These are interesting times we live…and buyer beware is a motto that I have adopted after having made my own errors. Be informed and don’t believe all the “great” news you are hearing.

#29 shoutoutoutout! on 04.18.08 at 2:43 am

vultur said
“What makes you so sure that the 5 year mortgage rate is going up to 9%-11%? If you are so confident of such then why waste your time here- you should be shorting the 10 year government of canada bond
I love all these geniuses with their bond market expertise. It’s only a trillion dollar market dominated by the sharpest finance guys in the world. But you know for certain where interest rates are headed, right?


first of all, im not wasting my time here. Im reading and learning a lot, which is not a waste of time. Im getting informed. You know, the thing you need to do to make good decisions.
secondly, I have no idead what “shorting the bond market” means. Im 21. The main things i care about are playing my playstation 3 on my 86 inch projection tv, snowboarding in winter, motorbikes in summer and banging smokin’ hot chicks. I bought my first house in 2005, “made” $110,000 on it in nine months when i sold it in 4 hours for $20,000 over list with multiple offers of course. I bought my next house in a better area, but just sold it the other day for a good chunk of $$$$ after stumbling upon the alberta bubble blog and garths site here. I read his book and totally agree with basically all of it. You dont have to be a “genius” to see WTF is going to happen. Its painfully obvious, the timing is the only question. Where do you expect rates to go next? 2%…. 0% The pattern is for it to go up “soon” , when, i dont know. Who cares, thats my landlords problem not mine…hahahahaha
ps..what did i do with the money…Im spending some, saving some…Not too worried about it as I and most of my friends are convinced thanks to the tv/”news” programming and movies we watch that are produced by your generation that you and your baby boomer frineds have doomed our planet so you could, do what you want, when you want, at any cost to anyone any where, so you could live in a POS mcmansion to show your neighbor you were a “success”. But woops, you needed a bigger house, so you built one in feb 2007, now its done, and you thought you would sell your mcmansion this year for 25% more than last year….wooops
oh and ps it will be hard to afford payments on two houses worth less then what you paid for both of them with your new unplanned baby on the way….hey on your wifes side of the bed I left my underwear, can you grab it for me?

#30 Debbie on 10.31.08 at 10:10 am

PointeofView build “crap”. If you purchase from them make sure your lawyer reads the purchase agreement before you commit. These guys are “sneaky” bastards. If you have to buy from them or have bought from them measure the condo before possession. These assholes will make the condo smaller to cut costs thinking you won’t notice. Most people do not measure, MEASURE! Most home depot stores will sell you a digital laser measuring tool that will do the calculating for you. It’s a “no brainer”. MEASURE! MEASURE! Do on the walk through because Pointeofview will not let you in to verify on another day. These guys market to the first home buyer who they think are “stupid” and treat accordingly, don’t be the stupid one.