What to fear

‘You’ll like this one, Garth.’ Dougie wrote me yesterday, as I was engrossed in a new episode of Property Virgins. Sandra was in a tube top. It was exciting.

I was also digesting the latest news about houses, all pointing to the inescapable conclusion we are about as screwed as Sandra’s tasty young victims. Like, here’s the City of Saskatoon approving a program to give down payments to people who don’t have money so they can buy houses. But these are not poor people. Instead the target is families earning up to $75,000, who have sadly pissed away their earned income and therefore cannot purchase real estate. Of course, today a home is an entitlement, so they get public money.

Said a civic official: “We think there are a number of households out there that are in rental situations that will find it extremely difficult to fund the down payment.” The city is also vexed because its staff found that “many middle-income earners fund their down payment through borrowing from a bank or on a credit card at a much higher rate than what the city is offering.”

See what I mean? When people who spend all their money want a house, we create a social program to give them one. With 100% debt. Mortgage insured by taxpayers through CMHC. Down payment provided the same way. Tell me how this is different from US sub-prime loans which put people into houses that would later destroy them. And everybody else.

And speaking of the USA, two more things to know: American house prices just returned to 2003 levels. That means families who bought in the last seven years paid too much, lost money and have a one-in-three chance of being underwater. Houses are more affordable now than in 35 years. And still, people do not buy. This is what happens when booms turn to bust.

And remember Robert Shiller? He was the academic economist dude who forecast the dot-com crash and the US real estate collapse and is not considered a demi-god. He spoke in New York a day or two ago and said, “Canada looks to be headed for a big drop in home prices.” And where have you heard that before?

There’s more: a new report says falling house prices or rising interest rates would hit Canadian families hard, and pretty much tank BC. And both seem poised to happen. The forecast by TD economists is for VRMs to triple by the end of next year as the Bank of Canada raises its key rate by a factor of three, making the country’s most unaffordable real estate market into an Ozzie Jurock meat grinder. In fact, while the household savings rate in Alberta and Ontario is zero, in BC it’s actually negative.

But do the sheeple care? Nah, says Jon.

Garth, I’m living in Abbotsford, and I just can’t believe my eyes here.  Despite the destruction literally miles away in Lynden, WA where a comparable house is a quarter of the cost in Abby, people act like real estate is their saviour.  I don’t even understand what most people do for work here that they can live such a lifestyle.  People in BC are just completely ignorant to what is about to happen to them.

And there’s more. Now F himself has joined the chorus of people telling you what comes next: “The recent increase by a couple of the banks is exactly what we expected. We’re likely to see higher interest rates as we go forward because interest rates are still very low.”

Now, trust me, federal finance ministers never talk about this stuff. They don’t hint at the future direction of rates because (a) that’s the turf of the Bank of Canada, which is supposed to be divorced from government and (b) chatter like that moves markets and the dollar. So the fact F is doing this just a couple of weeks after he murdered 35-year mortgages speaks for itself. It’s the political equivalent of a screaming air raid siren in Kabul.

So, Dougie wrote me as I was thinking of such things. You might like this, he said. And I do.

There is one thing above all – more critical than rising rates, runaway debt or stupid politicians – that you must fear now. And this you cannot change. You can only run.

It’s human nature.

“My sister moved to Cape Coral, FL in 2005, bought a nice home for $305,000 and planned to stay for a very long time.

Fast forward to 2009, no end in sight for the real estate collapse, she eventually short sells the house for $99,000 and packs up and returns to Vancouver, BC and moves in to a rental house.  Original down payment plus 4 years of mortgage principle payments… evaporated.

Two weeks ago, she calls me.

Her: “What do you think the real estate market is going to do here in the next year or two?”
Me: “Probably drop and keep dropping”
Her: “Really?  How much do you think?”
Me: “No clue, but I imagine it will slide for many years and probably over-correct.  Maybe 30 or 40 percent or more, hard to say”
Her: “Hmm… I hate throwing my money away on rent”
Me: “You’re not throwing your money away on rent, you’re paying less than what you’d pay to own that house.  The owner is the one who will lose money, not you.  Why don’t you just save your money for a year and see what happens?”
Her: “But what if I buy a house and plan to live in it for many years and don’t care if the market goes down?”
Me: “Well, it’s your money I guess.”
Her: “Thanks!” (We hear what we want to hear)

A few days later, she drops her savings on a down payment for a $600,000 house that will probably be worth $400,000 (or less) in 2015.

House lust is an amazing thing.  It overpowers all reason.”

Do the world's dumbest people live in China?

“For mainland Chinese, Metro Vancouver is what Phoenix or Palm Springs is to Canadians right now… cheap.” — Global TV Vancouver