Entries from June 2011 ↓

The expert

Angela Calla and Greece are connected, of course. It works like this. The Greeks revolt and tell lenders where to put their debt. Sideways. Stock markets sag. Investors freak, sell off, and run to safe bonds. Bond prices soar, forcing yields to crumble. Long mortgage rates dip, and Angela gets hot flashes. It’s positively Darwinian.

Calla’s one of an army of mortgage brokers who specialize in virginal finance. Along with her rapacious colleagues, they target first-time buyers lacking the experience to know when to walk away, or when they’re being lied to. But this lender babe is more audacious than most. Her business card reads, simply, “Mortgage Expert.” And she must be, after all, since she’s got her very own radio program, “The Mortgage Show” on Vancouver’s CKNW, where editorial integrity is sacred, unless you brought your chequebook.

Of course, I don’t mean to pick on one poor beguiling brokeress trying to flip a living. But she makes it so easy, especially since she’s coaching young couples to leap blindly into one of the most bubblicious markets on earth. “If you’re a first-time homebuyer,” she says in a testosterone-laden ad, “get out there and BUY YOUR FIRST HOME.”

But, Angie, what happens when I buy with nothing down and my mortgage renews in five years at twice the monthly payment?

And she says. “Even though rates have nowhere to go but up, upon renewal you will have paid off enough of your mortgage that you should not have payment shock… If you continue to rent, your landlord has every right to raise your rent in accordance with inflation, and you receive no equity.”

Well, so much for the ‘mortgage expert’ stuff.

Horny kids buying a cheap $400,000 condo in Burnaby with 5% down would end up with a mortgage of at least $390,000 after paying off CMHC. At 4% for five years with a 30-year am, they’d have a monthly payment of $1,900. Hey, cries Angie, just like rent! So let’s buy!! Of course, with strata fees and insurance, it comes to about $2,400, but don’t sweat the details. Dammit, we’re building equity here.

Five years later, 2016, mortgage rates have normalized to 7%. The kids have now made $113,133 in mortgage payments, and $144,000 in total payments. And the mortgage amount to be renewed stands at $353,350. WTH? Turns out they coughed up payments totalling $107,350 for interest, fees and taxes – which is $1,789 a month. Just like rent! And they still owe a bundle.

So they renew for another five years at the prevailing rate of 7%, and the monthly payment jumps to $2,300 (plus fees and taxes). And five years later, they still owe $332,000. In other words, to build equity and reduce their debt by less than $60,000 over an entire decade, they spend $306,000, or $2,550 a month. Of course, they could have rented the same place for $1,600 a month, or $192,000, saving $114,000. Even with all that gorgeous equity stripped out, they’d still be $74,000 ahead of the lucky owners who fell for Angela’s considerable charms.

Of course, I can hear the siren song now. ‘Real estate always goes up,’ she whispers into a newly-moist microphone. And the climax: “Despite what you may have heard, real estate is affordable in BC.”

Panting, you cannot stop listening. Simply. Too. Seductive. “The reality is, if you make $30,000 per year, you can own a condo in over a dozen hot municipalities for a payment that will likely be less than your current rent! The property ladder does not start at the top with a million dollar home – the sooner you start, the faster you can move up the ladder.”

Or down. No amount of lipstick and personal lubricant can mask the horror of even a modest crunch in prices when you are an equityless, over-indebted, deflowered property virgin. That hugely expensive amount of real estate net worth you were building up can be wiped away in a matter of weeks, leaving you with all debt, an illiquid property, and endless payments.

And in the Lower Mainland, as in Winnipeg, Saskatoon, Calgary and Toronto, this will happen. It need not be 40%, either. Just a few points down, then a flatlined market (the best case scenario) and the virgins are toast.

In which case Angela moves on. Like to refinancing credit card debt.

“If you have debts (including credit cards, lines of credit, loans)… it’s almost like it never happened! Restructure your mortgage with today’s low rates to include your debts. For the average Canadian who carries $600 a month, if that debt was restructured into a mortgage today, you would save $500 a month.”

You read it here first. Refi a debt load costing you six bills a month by borrowing more money and save five hundred a month. Almost like it never happened!

Damn. I hope the Greeks are reading this.

 

Leverage

So tomorrow I talk to a bunch of cops, which probably means I shouldn’t arrive on my Harley while I simultaneously text and post blog comments. Actually it’s a conference of chiefs of police, and my job is to tell them about the future. I will wear body armour.

Reality is, public finances suck right now. Just as house lusty couples have mortgaged up their future to have GC-tops & SS today, whether they can afford them or not, so too have governments lived way beyond their means. The two are about to collide.

A few dozen people who work for the federal Industry Department had a crappy day yesterday when they lost their jobs. At least they have company. Seven hundred more are being fired at Public Works. More went at the organization which runs our museums. And more at Environment Canada.

In fact the federal public service is about to shrink by 11,000 people a year as the feds implement an austerity and downsizing program few people knew existed. No retiring workers will be replaced. Soon whole programs will be cut. Departments will be slimmed. Ottawa real estate will meet the Cookie Monster, aka Tony Clement. When asked if more people were about to be trashed he said: “I would say there are more layoffs coming, yes.”

But this is not just the feds. Every province but one (okay, okay… the first one to tell me which gets a book) is running a budget deficit. Some, like the $19-billion bottomless pit in Ontario, will be almost impossible to contain, unless health care is nailed and taxes goosed.

Cities? Forget it. Vancouver is a basket case, thanks to some recent sporting event. And Toronto is sinking faster than modesty at the Gay Pride parade. Debt there soared 20% last year and now stands at $4.4 billion. To pay the interest on that takes $400 million a year in tax revenues, which is more than the fire department costs. And every year, the debt rises more.

Imagine. Every Torontonian coughing up a double land transfer tax, per-garbage-bag levies and a car tax, while watching the province’s debt rising by almost $20 billion a year and the feds spending $40.5 billion more than they take in. It’s unprecedented. Never before in history – even during the Depression – did virtually every government in the country pee away more money than it took in.

This is called leverage. It’s when you need to borrow to get what you want because you can’t afford it. It’s a fundamental principal of real estate ownership these days, and also a reason why the cops won’t like what I have to tell them. Because leverage can’t last.

Take Greece. Those ouzo-swillers have been living on leverage since Aristotle was a rock star, and the results are in. Interest rates soared, bonds crashed, banks are wobbling, the government’s under siege and a national debt default (at some point, inevitable) will wipe away pensions and public services.

Too much leverage is why some US cities don’t answer most 9-1-1 calls anymore and teachers are being laid off. Beleaguered taxpayers simply hit the wall and are unable to finance governments which need money just to pay the interest on old debt, while they accumulate new debt. We’re not there yet, but we’re on the path. Every leader knows it, and now that H has his majority he’s determined not to go into history as they guy who left the cupboard bare and sold off the copper plumbing.

This is why deleveraging is coming. It’ll happen through austerity, cutbacks and layoffs. The stimulus spending that kept recession from becoming depression will end. Civil service (and corporate) pensions will be under review, then attack. Government will of necessity become smaller and meaner, and not necessarily without a measure of public support – since the alternative is endlessly higher taxes.

Of course, taxes will go up anyway. It’s one good reason you might want to stop stuffing your RRSP. The odds are in future personal tax rate increases mean you pay more money in tax on withdrawals than you ever saved on contributions.

For house hornies, this is not cool. With deleveraging comes less economic growth. With public sector layoffs and pension revisions come downward pressure on private sector wages and benefits. This is not what a nation needs where half of us, effectively, have no savings and household debt’s endemic. Thousands of young fools with no money bought houses since 2008 convinced they could borrow big because economic recovery would bring rising prices to wipe away their debt. Surprise.

And I haven’t mentioned European debt, a stagnant America, unreliable China, a nuke-oil crisis or the threat posed by Canuck fans.

Which brings me back to the cops. We might be needing more of them.