Entries from November 2011 ↓

Last post, I told you about Roberta and Johnny. They have an investment house which is anything but. The value’s plunged by a third in the last three years, and since languishing on the market for a few months, it’s attracted one offer. Lots of hair – major conditions, long closing and weensy deposit. But like my mama always said, an offer in the bush is better than two hands. Or something like that.

Anyway, R&J made a counter-offer yesterday, getting tough. They did this after learning why the deposit was skinny – that’s all the buyer could get on her credit card. Meanwhile the couple’s taking some heat from neighbours for considering an offer a hundred grand less than they think their (identical) units are worth, while down the street new towns are being flogged in a receivership sale.

This is a small vignette of what happens when a market turns. Vultching buyers. Squeezed sellers. Delusional owners. It’s the prelude to an area turning into a frosty little northern version of Phoenix.

So where is this?

A lot of visitors made a guess in the last few hours, but only four got it right. The location is in (formerly) bubblicious BC, a mere 70 km from downtown Vancouver. And if you think what’s happening here ain’t on its way down the Sea to Sky highway as my half-naked Amazonian EA types this, your last name must be ReMax.

The place is Squamish. The posters who got it right were T.N., Q, Bailing in BC and Fred (the last one is obviously a pseudonym). I promised you a lovingly-autographed book, and it’s on the way as soon as you send me an email with your postal address ([email protected]).

Now, let’s do Assad. But we’ll be gentle. He’s an immigrant in Toronto.

I am newcomer to Canada , have a job that pays around 80K, no additional income, family of four ( two kids), saved almost 20-25k (in one year), no RRSP, no RESP. I want to buy a house, however , cannot make 20-25 % down (so consider CHMC), some people say housing market will see a correction by 20% by the end of next year . However some people speculate that even though the housing market sees correction the mortgage rates will go up and one way or the other you will end up paying the same amount over a period of 30 yrs.

I needed advice as to what should be the modus operandi for a buying a house in such a volatile market. Should I wait? I will really appreciate your advice and response, will help me ease my dilemma and focus my mind.

First, Assad deserves a special place on the GreaterFool wall of fame for supporting four people and saving $20,000 in a year on a salary of eighty grand. You would not believe the number of couples I talk to in a week who make twice that, save nothing, and have no clue where it went. They think you go to a financial advisor to get some finances.

But, as smart as this dude is, he’s seriously flirting with disaster.

Hell, even the Toronto Star, which never met a Royal LePage cheque it didn’t like, ran a story this week headlined, “Alarm bells sound over our house prices.”And buried in it was this little gem from my old economist buddy Benny Tal:

“I think the (Canadian) housing boom is over,” says Benjamin Tal, deputy chief economist at CIBC World Markets Inc. who agrees that Canada’s housing sector is “overshooting.” “The only question now is how do we correct? I think the most likely scenario is that the housing market will stagnate over the next three to four years until prices fall back in line.”

Of course, this comes on the heels of The Economist magazine’s prediction Canadian real estate is 25% too pricey, and the fools who live here now have more housing debt than those dumb pre-crash subprimate Americans. Also this week the Royal Bank said it takes over 50% of pre-tax income to afford a house in the GTA even if you have 25% to put down – which means Assad would end up buried in borrowing and feeding his family shrubs.

All this, plus a lousy jobs picture and stagnant household income, suggests whatever’s in the water in Squamish will probably end up in Lake Ontario. House prices are too high for first-time buyers. There are way too many speckers and flippers. And despite the explosive rally on stock markets on Wednesday (I told you not to bet against America) we’re into several years of tepid growth and structural unemployment.

That means, Assad, real estate values will be falling even if interest rates are not rising. It will not take one to get the other, a simple fact lost on too many people who come to this pathetic blog. Of course, when the economy improves and rates do rise, that increase will be enough to stall out any real estate recovery from the weak years at hand. Hence, a lost decade for anyone dumb enough to buy a condo now at pre-construction prices for delivery in 2013.

In fact, the best of both worlds is likely ahead for buyers. Desperate sellers dropping prices, plus cheap money. This, by the way, is exactly the situation in the US at the moment. Mortgage rates are at historic lows (get 4% locked in for 30 years), yet prices are falling monthly. In fact, Vegas, Atlanta and Phoenix have just hit new all-time lows – a full five years after housing started to burst. All three were real estate superstars in 2005. Like Toronto is now. And Vancouver.

Assad, baby. Have you considered Squamish?

Roberta and Johnny got a call from their agent Monday night saying an offer was coming in. That was big news. They can’t wait to dump the condo townhouse they bought three years ago. “It was supposed to be an investment,” she says, “not a nightmare.” Not that the tenant’s much trouble. She’s not. But it’s tough to know what you paid $499,000 for thirty-seven months ago is now worth $358,000.

At least, that’s what the offer’s for. Worse, the deal has hair on it. Lots of conditions. Long close. Small deposit. Not much of an offer at all, actually. But better than no offer, the alternative in a town where the market’s died.

I’m not sure if they’ll take it or send it back (my advice – make it clean), but Johnny sent me this, while he pondered things last night:

“A side note of potential interest to you is that the owner of a comparable unit in the same complex priced $100K (yes, one hundred) over ours and that has been sitting on the market without viewings for months, if not a year now, called me the other day and left a message saying that he wanted to talk to me about my price.  He felt that I would be leaving “a lot of money on the table” and gave indication that I must not understand the state of the market in the area very well.  In the meantime, another comparable brand new unit (one of many that are coming out) in a complex down the street was just listed under headlines of ‘receivership pricing’ for $345K.  Needless to say I haven’t called him back.”

Another story from the street. This is real life. The housing market’s bleeding out in towns and cities across the country. Reality is now completely divorced from the big-city media headlines or the corporate reports behind them. Yesterday I showed you how the Royal Bank’s housing affordability study is deceiving and irresponsible, for example. This is the kind of stuff you expect from Re/Max or LePage, but not from the country’s largest bank. Nor from the government, sadly.

This week Canada Mortgage and Housing Corporation released its quarterly financial report on its web site near the smiling face of the minister responsible, Diane Finley. She’s managed to politicize this agency recently, making it a part of F’s Economic Action Plan, which should come as no surprise. After all, cheap money and easy credit is the K-Y Jelly of fiscal policy. CHMC just gives the push.

Imagine how different the world would be if the feds didn’t force taxpayers into guaranteeing every high-risk, high-ratio mortgage. Twentysomethings with no money wouldn’t be able to borrow money at the same mortgage rate as people who are actually creditworthy, because lenders would be on the hook for the risk. Bidding wars would fizzle. House prices would normalize. And the economy, now 20% fueled by real estate, would flatline. Ms. Finley might not have been re-elected last May. This pathetic blog would not survive – as market forces, not the federal government’s engineering, dictated the value of a home.

But forget that. CHMC now exists solely to grease real estate and, apparently, to lie about it.

“CMHC, in consultation with the Bank of Canada and the Department of Finance, is continuing to refine models and techniques used to help identify risks of house price bubbles,” the latest agency report says. “At the moment, there is little evidence of a significant over-valuation in the Canadian housing market overall, although some centres warrant close monitoring.”

Little evidence? Canadian house prices have climbed on a trajectory paralleling that of pre-crash America. A SFH in Van is $1.1 million and $750,000 in 416. Even RBC’s diddlynuts report shows it takes two-thirds of after tax income to carry a house in Toronto, while in Vancouver an entire city has been whipped into delusional danger.

Worse, CHMC is trying to peddle the story that housing prices are sustainable because of ‘encouraging signals’ that we are no longer debt pigs. The growth of mortgage debt, it says, has decreased ‘significantly’ since earlier in the year. This also supports the agency’s view that prices are just fine, when you factor in demographics and economic growth.

Is this credible? Doesn’t such talk of stable markets and prudent borrowing fly in the face of everyone’s experience? When people without money can buy granite and SS and borrow at less than the inflation rate, are things really under control? Or does the minister think we will lap this up the way, oh, the Globe and Mail did this week? (“Growth of mortgage debt slows: CMHC finding lends credence to the theory that the country’s housing market will hold up”)

As Kevin over at Saskatoon Housing Bubble points out, this report would grow fine mushrooms. The year-over-year growth in new mortgage debt was 7.5% in January, peaked at 8% in April (the spring real estate rush), and dipped to 7% in September, amid global financial turmoil. As frosty little Kev reported here, “So of course mortgage credit growth is down from the spring but the amount of “slowing” is so negligible it does not deserve a press release. I think this is more of a ploy to try and show that the mortgage rules are ‘working’ and no more mortgage tightening is needed. Which of course, as we all know, could not be further from the truth.”

Which we do.

Fact is that for every one of the months this year, mortgage debt has leapt higher. This has happened while employment has declined and incomes have fallen behind inflation. And most of this $1.1 trillion is financed at some of the lowest interest rates in history (thanks to the feds), which will not endure.

Back to Roberta and Johnny. Without cheap and easy money they’d never have bought that townhouse, since rent wouldn’t carry it. Now they’re selling at a loss to a vulture. And neighbours are pissed because there goes the hood.

Yes, it sure is different here.