Entries from October 2011 ↓

This pathetic blog

Three years and eight months ago I started this blog to coincide with writing a book on the troubled future of real estate. Months later the housing market tanked. A year on, emergency interest rates in effect, it roared back. Today both prices and debt (they rose together) are middle class time bombs. I’m still at it.

While real estate’s clearly peaked and become unsalable in many areas, in others leveraged homebuyers have made out like bandits. I’ve written 887 posts, and in response to every one have been called an idiot. Or worse. So far in 2011, I have a file with 183 pages full of censored comments I dare not publish. And, of course, this blog was digitally bombed so often in the past year that it’s now hosted on another planet. I also find it necessary to travel in a convoy of plated Suburbans with lesbian Amazon guards. All of them former realtresses.

This personal trauma has left my views unchanged. There’s more danger in Canadian real estate now ever before. It no longer matters if interest rates stay artificially suppressed or not. The masses have gorged themselves on borrowed money, bid up the value of properties, and turned shelter into a speculative commodity akin to a futures contract.

As I said days ago, this will continue. Until it ends. Three years ago it could have wound down in an orderly way, like slippery Greek debt. Now, real estate-related borrowing is so overwhelming, and housing such a huge piece of the economy, there’ll be no soft landing.

So, once more: the people most at risk are (a) those with the bulk of their net worth in a single asset, their home, (b) house-rich, illiquid and pre-retirement Boomers, plus (c) infatuated property virgins suckered into real estate by dumb peers, idiot parents, cash-back mortgages, the RRSP home buyer’s plan and their own incubating hormones.

Which brings us to Katie. And then Sean.

I am ending this tumultuous week with the purposeful juxtaposition of notes I received today. One’s from a first-timer buyer anxious to know when to get in; the other from a first-time seller counting the days until he can get out.

Comment if you wish. I’m going to join the Amazons. Friday nights we clean our weapons, and sponge bath.

From Katie in the GTA:

I’ve been following your blog for a few months now, and I have been trying to apply your opinions to my personal situation.  Since I’m a little fuzzy on what you would think, I thought I would just ask!

Here is my info: Late 20s, married for one year, living in parents basement, saving to buy a house,

We refuse to carry more than a 300k mortgage, and a 20% minimum downpayment is a must.  In the areas we are looking (Vaughan/Aurora/Richmond Hill), this means that we would need a downpayment of about $60-$80k for a starter home.  We are within range now, but the last thing we want to do is to buy something at the top of the market.  We can manage another year in the basement before we will want to move into something larger and closer to work (could be another rental).

So, what to do??  Wait?  For how long? We are not comfortable with the idea of renting for life, although I know that from an investment standpoint this may be the best option.  We are not looking at buying a home as a brilliant investment, but we also don’t want to buy at the top.  Also, if rates rise and prices go down, I feel that the money out of our pocket will not be much different anyhow.

Any advice would be appriciated, although I realize that this might be the type of thing you (rightfully) charge for. Thanks, Katie

From Sean in Vancouver:

I ran by the bank to get my closing costs for cleaning up the mortgage. The payout is 415ish with the 5k penalty. So over 7 years we have paid approx $250K in payments and took a whopping $80K of the principle. LOL.. now to be honest I did know how it works and I knew at the outset how the math works but to actually be reminded of it really made this whole process hit home, and in a good way.

It makes me think that much like cigarettes, mortgages should be packaged with images of massively indebted families and some visual representation of the balance between borrowing costs and principle. You see a box of cigs with a rotting lung or yellow teeth, and it makes you think.. do I want to do that to myself?

The existing warnings the words Credit and Cigarettes are interchangeable.

Cigarettes are addictive – Credit is addictive
Cigarettes can harm your children – Credit can harm your children
Cigarettes can harm those around you – Credit can harm those around you

They all work lol.. And in both cases the government is reliant enough on the income or economic output of both product to mostly look the other way.

Closing day cannot come fast enough.

Why bother?

In the past year, Jan says, a ton of her friends have bought houses. She wrote me last night about three of them. “The first couple bought in Milton – they had their 20% down payment. They purchased a brand new house that has been built and they’ve been living in for almost a year. The next couple, tired of living rent free in their parents basement apartment in Mississauga, decided to buy in Brampton.  They had to purchase the CMHC insurance with putting 5% down. The third couple was tired of paying rent in a home in Ajax so bought a new house in Bowmanville.  It was purchased in January and we just moved them in this past weekend.  They also needed to purchase the CMHC insurance.”

These people had three things in common: The houses all cost around $400,000. They all think they’re geniuses. And they’re all about 25 years old.

Asks Jan: “I know you are calling for a correction, but in your opinion, do you think these areas of Ontario will be heavily affected by a housing correction or will they remain relatively stable?

Now here’s Tony, also compelled to write me in the past few hours, arguing it’s different in Vancouver. “Talk to any resident/analyst/realtor and they will all tell you that Vancouver is a different type of market, and perhaps they’re right,” he says. “The key issue as to why Vancouver is a different market from the rest of Canada comes down to one key issue: foreign money.”

This suitcase cash, Tony says, is here to stay. “As these wealthy individuals do not appear to be “flippers” – but more, “buy and hold” investors, or perhaps even purchasing a second homes from themselves, perhaps the Vancouver market will not suffer a 40% correction like what some people believe will occur in a few years. My premise is a Vancouver housing correction is unlikely because real estate purchases are not based on speculation, the credit rating of these foreign buyers is strong, and should housing correct there are many local residents on the sidelines who are currently priced out who are aching to get in.”

So, it’s different in the GTA, different in Van. Just like it’s different in Calgary (oil), in Halifax (new ships) and in Saskatoon (sex with socks). Seems a slowing economy, runaway debt, government cuts, rising listings and falling sales have failed to hit the masses on the side of the head. Like I said yesterday, don’t expect politicians or realtors to be doing anything about this, since tricking people like Tony and Jan’s friends is the best economic strategy they’ve been able to hatch.

But none of this changes the path we’re already on. Go back and look at the chart posted here last night. Household debt ten years ago equalled 57% of the Canadian economy. Today it’s 90%. And are you making twice as much now as you were then? Or just owe twice as much?

It’s simply no-fly that asset values (houses) can endlessly advance based on debt and speculation. Are Jan’s little friends not a great example? Two of three bought $400,000 houses with just $20,000 in cash (and most of that might have been a cash-back ‘gift’ from the bank). That means they took mortgages of about $398,670 (factoring in closing costs and CMHC insurance), with equity of $1,330. As we all know, house-lusty, first-job kids can only swing that kind of debt when interest rates are at the lowest point in history. Ironically, those cheap rates combined with our insane 5% down federal guidelines create the very demand which has young couples lining up overnight outside sales trailers in Milton.

Does that sound like a Ponzi to you? It should. It is. Houses are not being sold to people who actually have money – just to those who can afford the payments. The fragility of this is stunning. Job loss, rising gas prices, higher mortgage rates, or (Allah forbid) kids, can kick home ownership in the nads. The fact we’ve let real estate surge to 20% of the economy, with much of it based on cashless buyers, should have sane people laying rubber out of Milton, Ajax and Brampton.

And what of Van? Well, along with the nether regions of the GTA, this will probably define the housing correction that’s coming. Sure, there’s foreign money in the city, as there is in Toronto. No doubt this cash has helped raise prices in the top end of the market. It sure has been manna for squirming real estate agents who now scare the crap out of people like Tony, egging them into bidding wars with foreigners, real or imagined.

But let’s get a grip. There have been just over 28,000 property sales in Vancouver this year, up to yesterday. There are no statistics on how many of those went to Mainland Chinese with money belts, but if numbers from sister city Victoria (where they count these things) are any indication, it would be less than 3%. Even if we triple that to, say, 10% of the entire Greater Vancouver market, it still means 25,000 of those sales were between locals.

And did you know that people who live in BC owe more than anybody else in Canada? That they have a negative savings rate? That Vancouver families make just 71% the income of people in Calgary, where the average house costs 40% less? That they are nuts, like Tony?

Ah well. I said days ago, even before markets erupted,  this pathetic blog cannot save people from themselves, so why bother?

The era of the house is over. Love liquidity. And pray for the horny ones.