Entries from April 2008 ↓

Prelude to crisis?

Four days ago the Bank of Canada torpedoed its estimate for economic growth. The bank boss, Mark Carney, has changed his tune dramatically. The US will not recover for two years, he says.

Others aren’t so cheerful. Yale economist and real estate guru Robert Shiller says the American housing disaster is only half done. In fact, late last week the Canadian Real Estate Association shocked the industry by reporting house sales in Canada this year have fallen off a cliff. Around the entire world, there is nothing so devastating, far-reaching or destructive to wealth as a real estate meltdown. I can only imagine the effect on my street.

No wonder a new poll Sunday shows a majority of Canadians – for the first time in more than a decade – now worry we are sliding into recession. Over half of those surveyed say the Canadian government does not offer confidence or inspiration.

It’s hard to understate the importance of this, since the current government came to power promising competent economic management, lower taxes, trustworthy government, a better deal for families, and hope. Some two years later, families struggle with an identical personal income tax load, pay the highest energy prices in history, see job losses thanks to a runaway dollar and now worry about the value of their homes, where 80% of all net worth resides.

The fear is fear. Mounting fear of the times to come already has people second-guessing real estate purchases, which is why sales are down 22% in Toronto and 36% in Calgary. As sales drop off and sellers outnumber buyers, prices follow. And as housing values decline, so does the equity owners have – a serious issue with mortgage debt at the highest level in history, and the national savings rate at zero. After all, it was a real estate bust which made middle-class Americans feel stressed, which soon sank car sales, Bear Stearns and Home Depot earnings.

Does the Canadian minister of finance understand this?

Apparently not. If he did, he’d have cut income taxes, not consumption taxes. He’d not have approved 40-year mortgages, our own subprimes, in his first budget. He wouldn’t have talked up the dollar like a cheap sideshow barker. He would not have jacked federal spending to an unheard-of level, or squandered a $14 billion annual surplus.

I’ve said it here for months. The nuke waiting to go off is the housing market. The finger on the button’s attached to the minister.

Whoops.

The emotional house

‘Garth Turner is no Nostradamus’

Mr. Turner:

Thank you for five years of enlightening reading on the real estate landscape in Canada- you are truly a lone voice in the wilderness.

My situation is as follows:

– 30 years old

– sole earner in a three-person family (homemaker wife and a one year-old son)

– income of $140K a year

– currently renting a 2+1 bedroom condo in North York for $2200 a month

– $70K in savings

I am facing increasing pressure from my spouse to purchase a home so that my son can have a yard to play in/we can have “breathing room”. My dilemma is this- I fully realize that a correction in the real estate market is inevitable, but am concerned that waiting for prices to reach a reasonable level could be four years off, at least. In the meantime, my son’s formative years will be spent in a rather antiseptic condominium.

Am I better off renting a home and sweating it out, or is it reasonable, even in this over-priced market, to purchase a home if it is not for investment purposes but solely out of necessity? Thank you for your time.

You are asking for a financial answer to an emotional question. The reason you pose for buying a home is pressure from your wife you so your one-year-old can have a backyard (which he will not likely appreciate for at least a couple of years). The financial answer, of course, is to wait to purchase since prices have only started to stabilize, and will be lower by this time a year from now. The market downturn will be years in length, although at this point is is impossible to know the duration.

If I were you, and making decisions based solely on the best possible financial security of my family, I would find a nice house and take out a two-year lease, then buy. But she’s your wife, not mine.

Hi Garth,

I have always looked to you for mortgage advice and took your advice when we built our home 4 1/2 years ago. We locked in for 5 years at 4.75, a move we didn’t regret. We are coming up for renewal in a few months, and it looks to me like the rates will continue to fall a bit, but my question is, should we try to negotiate and lock in the rate, or go variable? I really miss your newspaper column and financial advice, and wish that you would consider touching on this subject in your weblog once in awhile.

Thanks! Tina

Without a doubt, go variable. Rates are falling substantially, and will continue to do so for the next year at least. Might as well enjoy the ride down, and if the bottom looms, you can always lock in with a phone call. While you’re at it, change the monthly payment to a weekly one, or shorten the amortization period by five years. You will save gobs of money. By the way, my real estate site is www.GreaterFool.ca.

Hi Garth,

I read your article in the editorial page of the Vancouver Sun, which sent me out immediately out to acquire and read your new book. I appreciate your direct approach and all of your ideas and information regarding the future of real estate. They make total sense, a bright light in the confusing sea of both positive and negative information that we receive daily about the Canadian real estate market.

My husband and I are currently trying to make real estate decisions to support our future early retirement in Feb 2009. We own a debt free home on Pender Island which we want for a main retirement residence. We also want a second place in an urban area of Vancouver or in the lower Lonsdale area in North Vancouver.

Currently we own a debt free house (900K) and a rental one bedroom condo (330K with 40 K debt) in North Vancouver. The house is a two storey with a lg one bedroom suite on the first floor, side by side duplex style. It also has the potential for a basement suite.

We are trying to decide quickly after reading your book which of the following options to pursue that we have been considering :

Sell the house, keep the rental condo, renovate it and move in ourselves.
Sell the house, keep the rental condo, buy another 2 bedroom condo for ourselves.
Sell the house, keep the rental condo one more year before selling and rent a condo for us to live in now.

Keep the house to live in, rent the suite, renovate for a rental basement suite to collect rent for retirement income and hopefully in our lifetime prices will climb again.

The real estate agent we recently consulted is suggesting we put the house almost immediately in May to catch the peak selling months of May and June. If we can’t make the move this soon she suggests waiting until next spring. This would be ideal waiting until our retirement, however after reading your book I’m thinking that may be too late.

Any advice you can give us will be most appreciated.

Thanks
Karin

Simple. Sell the house. Could be that never again in your lifetime will it be worth what it is now. Why would you keep almost a million bucks in a seasonal home, unless you are multi-millionaires already? If not, then it makes vastly more sense to rent a seasonal home and purchase one principal residence. Since you already own a condo in Van, what’s wrong with that?

The idea of retirement is to simplify and consolidate, not to accumulate properties and debt, or futz around with tenants. You’ve made the money, so cash out and spend it, for God’s sake.

Hi Garth

I really enjoy your blog and I look forward to reading your book. My question to you is can you please explain to me why you think housing prices will decline over the next 6 to 18 months? The BofC just cut interest rates again and there’s no sign of inflation anywhere, March coming in at 1.4%, so I don’t get it. The BofC is lowering rates, as it did today, and the big banks will soon follow with the lowering of mortgages rates why are prices going to decline so much? I understand the effect of inflation and why the central bank will increase rates to fight it but it doesn’t look like inflation is playing a part right now or in the near future thanks to the strong dollar.

Thanks. Confused and Not sure.

Dear Confused: (a) Find $21.95. (b) Buy my book. It’s all in there.

Garth – a couple of questions.

First, have you followed your own advice and sold your house, and moved into a rental?

Second, you say in your book at the end (talking about Canadians buying real estate in the US) “why would you buy when everyone is selling?” Well, from a long-term investment perspective, that is exactly the right time to buy. Sellers outnumber buyers and a cash buyer has a very strong negotiating position. There is a huge selection of properties. Given your background in personal finance, I can see you offering that type of advice to people managing their stock market portfolios, so why is the opposite true for real estate? Is it really better to buy real estate when the buyers outnumber sellers and there are bidding wars all over the place?

You say that the real estate boom is over “for a generation,” but it is cyclical, just like the stock market, and the cycle time seems to be between 10 and 20 years. That’s not really “a generation.”

I’m lucky enough to live in my house mortgage-free, so I’m fairly well insulated from property value cycles. I don’t doubt there will be a down-cycle in real estate prices in Canada, and there will be losers just as there are in the stock market cycles. But eventually, it will cycle back up. You are telling people it is over for them in their lifetimes, and I think that’s alarmist and almost certainly not true.

I am reminded of the Y2K disaster theorists, the most famous (Canadian) one being Jon Chevreau at the Financial Post, who wrote a book urging people to liquidate all of their stock market holdings before 2000 because the worlds financial computers were all going to crash on 1/1/2000, and everyone who didn’t have their assets under the bed in the form of bank notes would be wiped out. He missed out on a big part of the stock market boom as a result, as did anyone who took his foolish (no pun intended) advice.

Regards, Nick

Yes, I always follow my own advice, which is why I am so deliriously happy. I own two properties, free of financing and exactly the kind of housing which will appreciate according to the demographic, economic, social and climatic changes identified in my recent book.

As for US properties, my advice not to buy has been echoed by Yale economist Robert Shiller and stems solely from the obvious fact the American market is in decline, and is far from hitting bottom. A piece of real estate bought now will be depreciating, as much as 15%, over the next couple of years – hardly a smart financial move. Besides, Canadians have trouble getting mortgages on US properties, which means you have to tie up a lot of cash.

As for the long-term validity of my advice, I could care less if you take it or leave it. Good luck.