Charged

On Friday night I received reports that so many people were camped outside a new homes sales trailer in Milton, that the cops had to move in and clear the roads. The attraction was a new release of townhouses, starting at $230,000 for a thousand square feet.

As usual, Mattamy Homes was selling from drawings for homes that will likely not be ready for occupancy until the Spring. Also usual for the area, electrified young couples showed up days early to camp out. Finally, as usual, they will surely sign for the biggest purchase of their budding lives, short on sleep, gassed up on emotion, without lawyering the contract or likely even reading it. After all, why spend the night on wet grass in 12-degree temperatures drinking Tim’s and peeing in the bushes if you’re not going to buy?

Exactly. It’s marketing. And it’s scary good.

Of course, these kids could be securing home ownership at a bargain price. Or, they could be committing financial suicide. I guess we’ll all know on closing day. But the odds are at least 50-50 that whatever they pay (prices in this development range from $230,000 to $634,000), the homes they’re buying will be worth less on the day they get the keys.

After all, there is simply no denying that – coursing hormones and granite lust aside – residential real estate is a pile of glowing embers right now, with flames but a distant memory. It will be several years before Americans can forget the sting of houses destroying their family net worth. And it will be 2011 or 2012 before Canadians actually understand this.

So why are people camping out in Milton? More on that in a moment.

First, a letter of interest, written by a realtor from Vancouver Island to his gadfly MP, Keith Martin:

Thank you for taking my call regarding the huge concerns and hardships in the new mortgage qualifications regarding suite income and people having to qualify.

This is the way that it used to be: you could take the suite income, say it was $1200/month and they would add it to your mortgage qualifications as a $200,000-$250,000 increase in your qualification amount, now what they do is take the amount of the rent: $1200 /month, multiply it by the 12 months in a year and add it to your income, making only an extra $ 40,000+ to your qualification amount.

This is why the market has completely softened. The market is completely dead. Brand new houses in Sooke, down to $299,900 from $399,900, no calls. The market has dried up all due to financing. I talked to 7-10 mortgage brokers and many agents while I was at the Victoria Real Estate Board golf tournament and everyone is scared. Hundreds of foreclosures coming, about 75% of the home owners could not qualify to buy their own houses (especially with suite).

So what happens when their term of mortgage is up and the banks need them to re qualify? They are doomed. Please look into it. Last month there were 300 home sales on the Lower Vancouver Island with 4700+ listings. One of the worst ratios ever. End of June is supposed to be the closing day of the year. Every Realtor has a few nightmare bank stories right now. Keith, this will put us into a huge recession.

Shayne Fedosenko
Pemberton Holmes Ltd.

Our realtor buddy is lamenting a recent change in CMHC rules aimed at closing a loophole encouraging people to rent out their basements. Formerly homebuyers could get a huge additional amount of financing based on the income a suite might produce, without ever having to actually find a tenant. More importantly, they’d be able to borrow an amount their employment incomes would never qualify them for.

This suite deal from CMHC was one of the factors contributing to an unholy explosion in residential real estate prices in Vancouver, a city with so many basement dwellers there’s a new mutant race of blind pale people. And the changes were needed. Badly. This was another example of taxpayers’ money being used to inflate a basic asset (shelter) beyond the point of affordability. Sure, it may have encouraged more subterranean living, but the costs for all far outweighed the benefit for a few.

In any case, if Shayne and his golfing buddies are correct and this is responsible for a virtual collapse in the housing market, then that collapse was coming anyway. Besides, I thought this was because of the HST. Or the hot weather. Or the Bank of Canada. Or locusts.

The bottom line is that easy credit and sloppy rules combined with industry greed, voracious sellers and idiot buyers to create a housing bubble. Bubbles never last. And all booms end badly. That anyone should be surprised – let alone an experienced realtor with politician friends – is a surprise. This, Shayne, is just the start.

Now, back to Milton. Why are the buyers stacked so thick that Halton Regional Police moved in?

Like I said, sticky marketing – preapproving prospects, holding back product, creating an event, and using sophisticated direct marketing to target your demographic. In this case, many young people are the children of recent immigrants whose families have a strong tradition of home ownership before all else.

Nothing wrong with that. It’s a free country. We can’t look out for everyone.

Just too bad nobody is.