Entries from June 2011 ↓

Flip this

Tom has a question. Says he’s been reading this blog for a while. It’s helped him understand what’s probably coming, but he also complains my words kept him from scoring. Now he sounds pissed.

“About a year and a half ago, a couple of friends bought a detached house north of Toronto while in development. They closed this January. The price was around 440k. Similar houses in the area are selling for over 500k now with some asking as high as 580k. At the time I told him it wasn’t a good idea based on what I read here. Now he’s going to split about 100k profit with our mutual friend.”

You can tell where this is going…

“So, I followed the advice and lost out on an opportunity. The question is: You Garth are now saying the correction begins this summer. You gave bad advice then and why is it good advice now and how do you know this correction will begin soon? From what I can tell, alot of people are kicking themselves for not flipping a house and taking advantage of this opportunity based on your advice and now who knows when that will come along again.”

Well, Tommy the reluctant flipper, let’s start with the math. A $440,000 house bought on spec with, say, $40,000 down would actually cost about $460,000 with closing costs, including LTT and CMHC. If your friends really scored, and sold it for $540,000 (an improbable 23% gain in 18 months), than after realtor commission, the net would be $517,000. Gain: $57,000. Of course, that’s 100% subject to capital gains tax, which brings it down to $45,000. And the lost earnings on the $40,000 over 18 months (at a modest market level of 8%) would be $5,000, reducing it to $40,000. Divided between two friends, that’s $ 20,000.

But, hey, twenty grand is twenty grand. Almost enough to buy a KIA sport wagon, or two Game 7 tickets with special post-hockey entertainment, but not enough for Katie Michaels (the Las Vegas call girl says she costs $30,000).

However, this ain’t the point. Tom moans if he hadn’t listened to me and actually had the cajones to buy a spec house in the GTA in 2009, he’d have more money today. It sounds like he’s right. And, of course, I don’t care.

First, this pitiable blog does not exist to help anyone make or lose cash. It’s a cheap and tawdry daily dishing-out of opinions, observations and conclusions about the stuff that surrounds us. You are supposed to read this drivel, Tommy, and throw it into the hopper of your brain, then come up with your own opinion. It’s called, um, thinking.

Second, speckers and flippers should probably be castrated. Or, if women, forced to learn how to roof. This is gambling and as with all idiots who buy lottery tickets or visit a casino, it’s motivated entirely by greed. However, specking on a house also means risking (in this case) hundreds of thousands of dollars, which is a tad more serious than throwing your money away on $2 lotto junk. The risk’s extreme and if there’s one thing you should have learned from this sumbitch site, it’s the wisdom of mitigating danger in a volatile world.

Third, I presume you were drawn here, moth-like, after realizing real estate prices were ridiculous and a saner, contrarian view to lemming love must exist. So what changed you. Tommy boy? How did you turn from a common sense crusader into a greed-is-good capitalist pillager? Don’t you understand it’s cravings and urgings like yours that have unleashed house lust, and jacked up prices? You just proved every point I have clumsily made.

For every dollar of unearned profit a flipper makes, real estate gets more unaffordable, and an end user is probably more indebted. When it comes time to haul your moldy butt out of that basement rental and buy your family a home, well, you’ll see what I mean. Guys like you helped indenture the country.

So, moaner Tom, no apology here. No sympathy. No pity. Flip this.

And get new friends.

Carnivorous

If Mark Carney had hailed a cab after his speech Wednesday afternoon, a few hours before the riots, and asked where he could buy a dime bag, he’d be half way there. After all, it’s just a 15 minute ride out from the iconic Convention Centre building along East Hastings, past the hookers, the sad sea of humanity milling in front of the ancient Carnegie Library, the perforated bodies splayed on the sidewalk and the alleyways, the pushers, the pimps, through a downscale Chinatown and into a working-class hood crouching near the flyway to the Second Narrows bridge.

There the erudite central banker could have climbed out and stared at a small example of what he has done to a city – render it utterly unaffordable.

The house above, at 2556 Trinity Street, frame covered with a coat of stucco, was built 60 years ago. It has two tiny bedrooms, one bath, contains just 940 square feet and is butt-ugly. It was listed in March and sold in two days to a realtor who paid $773,000. Now it’s back on the market, this time aimed at Asian buyers – at the ‘lucky’ price of $888,000.

That’s an increase of 15% in 75 days, and multiple offers are expected. Says blog dog Doug: “It’s one thing for Joe Public to be speculating on real estate, but when realtors are effectively buying and selling to each other pocketing the commissions or cutting them out completely while inflating the price adds another level to the pyramid and one more ball in the air.”

So what does this cheeky flip have to do with Brother Carney?

Well, I guess the same as the 25.7% annual increase in Vancouver prices over the last year, taking the average property (including condos and crack shacks) to $832,000. Single family detached homes average more than $1 million. In fact, according to Coldwell Banker this week, the average two-bathroom, four-bedroom house in Van – the kind you can’t get rid of in Mississauga – now sells for $1.546 million.

Speaking of the godless GTA, prices there are up 9% in a year when inflation was 2%, and the average SFH in 416 is now valued at just under $800,000. Actually, according to Carney himself (in his big speech yesterday), house prices across Canada have catapulted ahead more than 30% since the financial crisis of just over two years ago.

During that time household incomes have flatlined, unemployment’s stayed mired north of 7%, family debt has hit an all-time high, savings have gone to zero and mortgage debt has bloated.

We all know why. Carney brought the crack. Canadians got stoned.

After all, the inflation rate currently is 3.3% and you can get a variable-rate mortgage for less than three. That makes it free money. Small rodents now qualify for financing on some bungalows. Not only this, but zero-down lending is more readily available than a $50 trick, while every major Canadian bank will loan hundreds of thousands of dollars to people with no savings.

What Carney told us following the financial panic were emergency interest rates are still in effect, feeding the biggest housing bubble in Canadian history. They’ve allowed naive and inexperienced first-time buyers to jump into bidding wars, throwing around wads of monopoly money, knowing they can get at least 95% financing. Virtually free money has fuelled not only greed and speculation, but also engendered a sense of housing entitlement. Suddenly property virgins expect granite, SS and a nicer first house than their parents secured after decades of moving up.

Worse, it’s the price thing. Escalating values and swampy incomes have resulted in this mountain of debt which Mark Carney knows will have to be repaid (or defaulted on) at far higher interest costs. Ironically, when rates go up, prices will go down. Equity will flit away, putting a lot of those buyers under water. People will feel less wealthy as houses lose altitude, likely cutting back spending, and squeezing the economy.

Is this how you expect the Bank of Canada to manage things?

Hmmm. It’s now widely believed that when America’s central banker did the same thing after Nine Eleven (Alan Greenspan), dropping rates enough to fuel a housing explosion, he gassed a bubble so big its bursting blew up the middle class. Does Carney know this?

Of course. He even said yesterday some house prices are now “extreme.” But he left something out. Action.
It’s hard to see what master is served when average people can no longer afford average houses. When, with resentment and hostility, the locals watch helplessly as neighbourhoods are consumed by wealthy foreigners. When dumb kids are seduced into homes they don’t deserve and debt they don’t understand. And when we’re all played – set up for the inevitable and painful trip back.

Monetary policy. Stones not included.

Ironically, riotous citizens just did to Vancouver real estate what their banker dares not. It made for great TV in China.