Entries from October 2011 ↓

Parental guidance

Sally has two kids, which is what you call 30-year-olds when you’re sixty. “My partner and I have been following your blog for a few years now and have done what you have been telling people; we bailed out of the Okanagan, sold our house and are back living in Victoria, renting, watching the market and hope to buy, some time up island when the price is right.

But the kids. Problems. They both received an inheritance of a little over a hundred grand a few years ago. The married one immediately (a) bought a big house, (b) got pregnant and (c) is now struggling. “Only getting by,” Mom says, “because of the downstairs suite income.”

Sally tried to talk her out of sticking the windfall in a house at the highest price point in history, and failed. “Not much I can do about that now,” she tells me.

“However, the younger who is single with a good education and job remains renting and has been holding off, still renting a modest suite but is losing patience , the money burning a hole in her pocket and tired of the landlords upstairs; she’s now out looking at condos here.  She has no debt, makes about $50,000/yr and has been approved for a $300,000 mtge.  She won’t spend the entire wad on a downpayment, but I can’t help but be worried and tell her it’s still too soon and the money should be properly invested, but liquid.  Part of the problem is her father, now retired, house paid off, old school, tells her the complete opposite.  I tell her to invest like you have told us, but the word is no longer heard. What would you advise?”

Well, Sally, the first thing to remember is that she’s thirty years old and fully capable of screwing up her life on her own. Didn’t you? It’s called learning. However, if you want to be a helicopter parent (a) call your ex and tell him to get stuffed, then (b) sit your horny daughter down and tell her the facts.

First, the Victoria market (in fact most of BC not already in a real estate recession) is the second last place on the continent any sane person would buy real estate (guess the other). In a couple of days you’ll see just how much listings have increased and sales stagnated when the local cartel releases its numbers. Simply put, delusionally myopic locals have sold each other properties at increasingly unrealistic prices and created a market now unaffordable by national standards.

Sheer real estate greed has managed to turn BC into a destination most Canadians scoff at. Net migration’s gone negative. Vanished are the days when Boomers could cash out of Mississauga or The Peg and move to Victoria or White Rock to retire. Only 2% of Canadians can afford to cough up that kind of dough, and they’re busy buying mansions in Phoenix and Miami for half the price and twice the heat.

So tell the kid her chances of losing her money on a Victoria condo are exceptional.

Second, anyone making $50,000 a year (and netting $41,100, or $3,400 a month) cannot afford a $300,000 mortgage. Just because the blood-sucking bank offers, is no reason to take. Yes, I know – with a 3% VRM and a 30-year am, the payments are only $1,264. Add in condo fees and taxes and at $1,700, it’s not much more than rent.

Not only is that 50% of what she brings home, but after five years of payments (totalling $75,888), the kid will still owe $266,715. And by that time there’s a 100% chance mortgage rates will be far higher, quite likely double that 3%. As interest rates rise, of course, real estate values fall as the pool of potential buyers shrinks.

In fact Bay Street economist Sheryl King reminds us that a stunning 65-70% of all new mortgages are now variable raters – twice the normal volume. As Americans found out, the combination of cheap money and adjustable rates can be deadly. “The U.S. homeowner was lured down a very similar path by the Federal Reserve at the turn of the century,” she says, and when interest rates inevitably rose, real estate was cooked. King says it will take only a 2% jump to “push a fixed rate mortgage beyond the reach of the average homeowner.”

Third, if rates rise, or real estate dips, or the kid gets a job in a real city like Toronto, she might discover real estate’s dirty little secret. Illiquidity. In time she’ll learn that property is a hell of a lot easier to buy than it is to sell. In a down market (the kind Victoria and the province are entering) it can take months, a year or more, to find a buyer – even after a string of price reductions.

So the question is, why would any young person willfully surrender their freedom and mobility to buy exactly the same condo they can rent? Not only does the kid shoulder a fat mortgage which could get wildly more expensive to service (and which rental payments would never cover), but the condo itself can turn into a life anchor. What about job loss? Marriage? Taking your inheritance, fleeing your Sikorsky parents and flying to Spain?

Here’s the advice speech, Sally.

Why buy, kid? Not to live for less. Not to have more choices. Not to lessen risk. Not to reduce debt. Not to have mobility. The only possible reasons are a capital gain, and to impress your friends. The gain can easily turn into loss. And your friends will mature.

Unlike your father.


It’s called the index of fear. The VIX measures volatility or, more precisely, the expectation of market uncertainty over the next thirty days. Investors gauge the craziness and risk of the world, then forecast how much the S&P 500 (the broadest stock market index) will move over the coming month.

This may sound decidedly unsexy, but it matters. The VIX has just plunged as never before. Check this out:

As you can see, the financial meltdown of three years ago spiked the Vix to an unprecedented 80. That’s when the doomers forecast a depression. The mayhem of August took the Vix back to about 45. And the doomers predicted a bankrupt America and financial collapse. Today the Vix has slumped to 25. In fact, last week the index of fear withered the greatest amount on record, dropping close to 20%. The doomers drove themselves home to the suburbs.

So what?

So the crisis is over, at least until the next one. Volatility won’t end, but August sure did. So did fears of a US recession, as consumer spending and business investment jump. So did the commodities rout, as demand swells and prices recover. So did war, as operations wind down in both Iraq and Libya. So did the Euro disaster, as bondholders take a haircut and the bailout pot grows.

Meanwhile corporate profits continue to augment, the OWS movement squanders its potential and it dawns on more people that stocks are priced 24% below their ten-year average, based on the money companies are actually making. This is what the Vix is trying to tell us. Also why you can come out of the bathroom now.

As this pathetic blog argued through the last 90 days, there never was any reason to panic or, God forbid, sell. The US debt ceiling impasse did not mean America was bankrupt or about to default, as so many metalheads and depressionistas argued here. It was politics. The fact Greeks are tax-evading, fiscally gluttonous, hedonistic Euro-suckers did not mean the end of Europe or the collapse of banks. And there was no damn way central bankers were going to allow anything other than a global fix to happen.

Of course, the world’s still awash in debt, the Mideast’s as stable as Charlie Sheen and the American middle class has a big self-inflicted wound. Problems abound and the gulf between those who have money and the rest of us is now an ocean. Most people are in disgusting financial shape, and will pay dearly for their addiction to real estate and borrowing.

But if you’ve been rooting for an apocalyptic settling of scores, suck it up. Ain’t happening.

It’s a reasonable bet that equity markets will continue to lurch higher, and finish the year with a decent positive return. Quite the reversal from the stockageddon we all heard about. Bonds will come down in price and rise in yield at pretty much the same time. That will make preferred shares cheaper, and you should buy a mess of them. It will also raise long-term, fixed mortgage rates, so if you’ve been thinking of locking in, this would be the moment to do so.

Above all, it’s more evidence most people do the wrong thing almost all the time.