Entries from July 2009 ↓


35 Coulson1

His voice was a bit husky, and his manner faltering. “We haven’t met,” he said on the line, “but I know of you and your reputation.”

I said nothing, listening. “It’s about my daughter…”

Interesting times, these. Helicopter parents. Maturity delayed. Adults in their late twenties and thirties barely out of the nest, and certainly not out of the web. Dorothy and I could not wait to escape, marry in university, live in a rented hovel and buy soon-to-be-discarded head lettuce which the grocer down the street saved for us. Just give me ten cents, he said.

It sucked, of course. We were robbed. I was mugged. Our family transportation (a bicycle) was stolen, and I parked cars at night. Our middle-class parents seemed to understand completely, since they’d done the same. Adversity, bad decisions – they have a role in every life. But the early years of my marriage, as difficult as they were, grew the roots that support me now.

“They want to buy a house in the Annex,” the stranger’s voice continued, “and I told them not to six months ago, but now things have just exploded. They won’t wait. They blame me. I’m worried sick about this. What should I do, oppose it or just stand back? Are they making a mistake?”

Turns our daughter earns forty and hubs makes sixty. They have been qualified for $600,000 in financing, with basically no down payment, and want to spend it all on a first house in midtown Toronto.

Because he asked, I answered. Of course it’s a mistake. There is no excuse for buying a house at the top of the price cycle in the middle of a recession. Were it not for dirt-cheap interest rates, prices would be melting instead of spiking. Today’s rates will not last. The unemployment scene will get worse. Taxes are going to be higher for years to come and the inevitability of a real estate correction is absolute.

The last thing any first-time buyer would want it to have no equity and $600,000 in debt in 2013 when mortgage rates have doubled, the economy is slagging and the housing market has been pricked by harmonized sales taxes, falling affordability, a glut of Boomer listings, higher energy costs and lower family cash flow.

“I wouldn’t touch Toronto real estate with a barge pole,” I said. “But she’s your kid.”

Some kid, I thought, hitting the End button. Twenty-eight, lusting to buy a house which is a want and not a need, closing costs probably covered by daddy, shrugging in the face of unrepayable debt, eschewing a starter home on the edge of town, prime candidate for a bidding war in which the winner loses. They deserve one another.

_ _ _

Behold the Toronto house pictured above.

The lot is 25 feet wide – not enough for a driveway, so there’s a parking pad for two vehicles on the front lawn. The exterior is stucco over mystery materials. The inside features a new kitchen, pot lights, fireplace, three bedrooms and ‘an interior and exterior sound system.’

Property taxes are just under $10,000 a year. 35 Coulson Ave. was listed for $1.329 million, and sold for $1.329 million. Days on market: 4.

God help us.

You want logic?

Spock Kirk

In kicking around the money business for many years, as newspaper columnist, business editor, a network TV talking head, book author, radio guy, financial speaker, a gig running the country’s tax system, blogpreneur and (soon) something radical, I’ve come to understand there are but two emotions.

Of course, fear and greed. People in the financial business know they power 98% of investor decisions. Greed, for example, is what kept otherwise smart millionaires glued to Bernie Madoff, who gave them incredible returns in good years and bad. Fear is what provoked millions of stock and fund investors to panic and bail last autumn, even though they sold at the moment of capitulation.

Greed is what makes people buy assets when they’re at their most expensive. Fear drives them to sell when they are cheapest. Thus, fear exaggerates losses and greed erases gains. Nothing changes. Buy at the top. Sell at the bottom. It suckers us all

Today, of course, palpable and debilitating fear seen eight months ago is melting into unbridled greed. Why else would normally successful, professional and savvy people try to outbid each other for houses nobody wanted a season ago? After all, these are folks that would never buy a car that way, even though it’s worth hundreds of thousands less. They’re also the ones piling back into the stock market, many of them on margin, after a 40% rise since March. Would they rush to buy anything else whose price rose 9% a month? And why weren’t they shopping at Easter, when everything was on sale?

Emotions. That’s why. When they roil, logic goes limp.

And this brings us to humid, smoggy, fetid, emotional Vancouver.

Hi Garth: I’ve been in a running battle with my girlfriend for over a year now on buying real estate in Vancouver: she is itchy to buy and I am content to rent. And of course, the more it looks like the worst is over, the more she is tempted to throw all our savings in to catch the gravy train. I’ve given her all the arguments about why it’s preferable to rent than to own in this city at this time, although she understands the arguments greed and emotion always prevail in the end. Like most people, a) she does not like writing cheques to landlords even though owning means writing cheques to banks instead; and b) she believes inflation will eat away her savings if we don’t buy and leave our cash in GICs.

So, last week I came up with what I thought was a very original argument:

To rent a $20,000 mid-sized car from Avis/Budget for a month, you’d pay ballpark $750. Expressed another way, 20000/750 = 27 months of rental to pay for full cost of a brand new car.

To rent a $500,000 2 bedroom and den in Fairview/Yaletown/Kits/whereever, you can expect to pay ballpark $1800/month rent. The ratio here is 500,000/1800 = 278 months (or 23 years) to pay back the principal cost.

It is about 1/10th as expensive to rent housing as it is to rent cars. The return on capital just doesn’t come close.

As I expected, this very compelling argument failed to have the desired effects. It leads me to a very sensible conclusion: all the logic and reason in the world cannot prevent a housing bubble. It’s driven by emotions and the masses will always do what they’ve done: walk into the slaughter. By the way, my girlfriend is a very successful lawyer with a BA in Economics to boot. Intelligence and education count for nought.

Just thought I’d share this with you. — Hank

P.S. To win the housing debate,  I had to resort to threatening to leave her if she signs on any dotted lines. Fire must be fought with fire.

Nice try, brother. But we both know you were bound to lose this one. These days it seems to be a Mars and Venus thing, too. Nesting girlfriends, even smart, lawyerly ones, just can’t see any logic in having piles of money lying around when it can all be thrown at a home you do not actually own.

Of course, her arguments lack reason. It’s cheaper to rent than own exactly the same accommodation, even with rock-bottom teaser mortgage rates. And while the interest on savings may be minimal, in a deflationary age (that’s now) even bags of cash grow more valuable. Your g/f has to admit she wants to buy in at the top of the market (pre-Olympics, average SFD price $701,384), and that there’s absolutely no evidence Van prices can continue to rise in the near future as mortgages escalate and affordability plops.

You say she sees a gravy train? I see a train wreck. So do you. But you love her. So I like the sign-and-I’ll-leave thing. Nice touch.

Now print this blog and leave it on her pillow. Let us know how that turns out.

OK, beam me up.


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