Entries from February 2009 ↓

Ya think?





There was a conference of real estate heavies in Toronto on Wednesday. The shocking conclusion reached by Scotiabank economist Adrienne Warren and Royal LePage CEO Phil Soper, as reported in this Toronto Star headline:

Real estate boom over, experts agree.

Ya think?

This, of course, is why we have a professional media. Well, maybe we used to. I see that CanWest Global is on the ropes and has TV stations for sale nobody wants. This week CTV said it would let two of its television stations in Ontario just die. The CBC asked Ottawa for $60 million more to make up for lost ad revenues (mercifully the feds told the corp to twirl). And in the US, the San Francisco Chronicle was the latest big newspaper to announce its own death.

But back to real estate. Yes, Adrienne and Phil, the boom is not breathing. Once again buyers are drivers. They can ask for, and get, conditions for financing, insurance, home inspections and even the sale of another home. As the faux Spring market arrives, sellers will get still more vexed as the number of competing listings zooms skyward, and prices drop as supply overwhelms demand.

So, if you do not need to sell your house now, don’t. If you’ve been waiting to buy, start sniffing. But be advised you’ll certainly do better in August or September than you will in May or June.

Meanwhile this week there’s a big honking hole in the heart of Vancouver to provide graphic evidence of the housing collapse about to beset that lovely, unaffordable city. The $500-million Ritz-Carlton hotel-condorama downtown has died a death forecast on this blog months ago. The 60-storey soaring glass monument to bad judgment on West Georgia will remain a soggy excavation until somebody fills it in for a parking lot.

The developer is blaming everyone’s favourite villain, ‘worldwide economic turmoil’, for the demise. The real culprits, however, are our old friends Greed and Stupidity, since even they could not convince enough Vanbots to spend between $1.4 million and $28 million for a box in the sky. It’s also a loss for local legendary condo shill Bob Rennie who was marketing the project and will now have to return to feasting on the few first-time homebuyers left washing ashore.

Vancouver, of course, has major problems because of the big pile of rocks which prevents common sense from blowing west. Average house prices have come down by over $125,000, and there’s an equal amount yet to be peeled away. Even then, the city’s housing stock will still be unaffordable to most of the people living there. The trip back, once the 2010 Olympics are over, will take at least a decade.

Meanwhile, shall we start the death watch on the Toronto Ritz-Carlton?

GTA house prices in the first half of February were down a few hundred from the same month last year – which was a disaster because of Toronto’s bone-headed gouging real estate tax. Prices dipped marginally in the last few weeks, and in some areas of the city where the snow has vanished, buyers have been cruising around in small packs. These are the delusionals who now think it’s a great time to buy since the average home price has dipped 18.3% from the peak.

I guess they haven’t heard about the other 18%.

Let’s wait for the headline.

No cash cop


He’s a mid-thirties cop in the West.

“First of all, thank you for “After the Crash”. I basically devoured it,” he writes me.  “Whether you respond to all your mail (if you do you are an even greater positive during these troubled days), that I can only imagine must be too numerous, I would be honored to have your solid advice.  Daily I read your blog, process what I can, and stay informed beyond what governments and media dish.  I will be brief.”

Then Philip writes me a long letter.

“I’m spooked.  Not scared.  Just spooked…for the moment.  I’m not financially spooked, I’m preparedness spooked.  Your book describes choices – I am in the middle.  That things are weird and could get worse so I want to take some action. My thing is ready cash – I have none if something crumbled one day.”

What he does have is a small house worth $200,000 with a $115,000 mortgage at 5%, a $30,000 line of credit, $25,000 in mutual funds, a $70,000 salary and a classic motorcycle.

“So, if the bank shut down tomorrow, I got nothing to buy groceries or anything with for…who knows?  I want that insurance.  Do I – a) stop paying the principal on the credit line for a while to build up a reserve (which would take a while to have 6 months living reserve), or b) refinance 3yrs into a 5 yr closed term to a low variable rate for between 140 and $150000 using some of the new mortgage to buy gold and have a cash float in a safe.  I believe I could get a similar payment with a shorter amortization.

“If I didn’t want to prepare I would stick to my status quo, feeling stupid about my inflated credit line.  However I just don’t want to rely on new space in my line of credit if I need money.  I guess what I’m afraid of most is sitting across from my banker and thinking they are a Greater Fool than I!”

Okay, Philip – assets are $25,000 in funds and $200,000 (hopefully) in the house. Debts are $30,000 in the LOC and $115,000 in a mortgage. Net worth: $80,000. Cash: zero. If you ran into financial trouble and could not sell your home, you’re basically screwed. You now feel vulnerable because you have no cash reserves, no liquid assets, no gold, no escape money in case Obama does not save the world (even after last night’s platitudes). Should you worry? What should you do?

Well, yeah, you should worry a little. The uncertainty of the times dictates that all wise people have a cash reserve – enough to buy daily necessities for a minimum of two months, and better for six. Gas, food, utilities, clothes – the basics that need to be covered. Legions of people are coming to this same conclusion, which accounts for the run on home safes and a record number of cash withdrawals at local banks (I have my sources).

The reality is, if there was a financial meltdown, if the banks closed for a spell, cash would be the most prized commodity, hard to come by unless you had something of immediate value to sell. Mortgages, loans and other payments would not be the big problem. Instead the day-to-day essential needs – garbage bags, diapers, shampoo, saddlebag polish, toilet paper, tums, fuel and food – would be impossible to get without cash. Face it, debit and credit cards may not work in the middle of a bank crisis.

Of course, I could be a wild-eyed extremist. This could be insurance that’s completely unnecessary – in which case you just put the money back into the bank when Barack fixes everything (as CNN expects).

Now, Phil the cop, what should you do?

First, do not increase your debt to get cash. That’s no strategy. Don’t refi the mortgage or run up the LOC any further to get money. Never, ever consider increasing your home loan to buy bullion. All you’re doing here is piling on non-deductible debt for non-performing assets.

Second, work more. You’re a cop – go guard something. Sign up for overtime or weekend shopping mall patrol or get some time as a security officer. Not glamorous, I know, but this is how to get dough.

Third, you say you live alone in a house. Why? Either sell the thing (now, like immediately before listings explode, then rent) or lease out your basement to a tenant (one with cash). Fourth, review your investments – you might actually be better off cashing in a third of the mutual funds and dumping the rest into a short-maturity (five years or so) bond or strip bond, because you will know exactly the amount upon maturity, and you can free up liquidity now. Or, fifth, talk to your financial advisor about a loan facility based on your funds’ value. Yeah, more debt, but at least this would cost you nothing to maintain and you’d only draw on it in an emergency, with tax-deductible interest.

Or, you could sell the bike. But, I mean, what’s the point?

Then it’s over.


For today’s blog on the future of real estate, go here.