Entries from December 2011 ↓

Ten things that will happen this year

The condo market will crumble.
While logic told us this long ago, so many ingénues continued to fall for the siren call of cheap downs and urbanity. Gluttonous builders, ravenous speckers and idiot buyers together formed the perfect storm for shelter which was meant to be a cheap alternative, but became an inflated infatuation. But the demise of the virile condo market is not just a condo story. Virgin buyers are the fuel for real estate’s continued fire, as young people discover it’s way cooler to rent the same unit for less more and more freedom, the entire food chain of housing will be affected. Consequently, this is a big story.

Vancouver will be so 2009.
There’s always been a premium to be a Left Coaster. For decades people have lived in often ugly houses amidst beautiful scenery and felt smugly distant. Over time Vancouver and its flatland burbs turned into a moist version of Mississauga, replete with Staples and Best Buy, but heavier on Starbucks. Then the insularity became its Achilles heel, as locals swallowed their own Kool-Aid and became as special as the snowflakes they fear. Now the region’s unlivable for average families, and real estate’s become the new porn. This year will mark the definitive end as the pendulum swings back. If you sold in the first four months of 2011, you were a genius.

Mark Carey will actually do it.
We all know all the reasons interest rates are supposed to stay cratered. Weak economy. Insolvent citizens. Bankrupt governments. And we’ve heard all the arguments that we’ll turn into Japan, replete with a lost decade and mortgages at 0%. But forget that. Rates will rise in 2012 as Brother Carney takes aim at the very thing which poses the greatest long-term threat: our piggy opinion of debt. The appetite for credit continues to grind higher by three times the inflation rate. Mortgage debt tops a trillion. LOCs are out of control. At some point the deleveraging becomes lethal, so Carney will step up and find the testo to move. Two quarter points in 2012. Not much, but enough to change everything.

Volatile markets will reward.
Last year the Toronto stock market gave up 11% but investors with balanced portfolios lost nothing. This year the market will be just as volatile, but end the year with a double-digit gain. Investors who ignore the ride will end find similar gains. Those rooting for the demise of America will be disappointed at what happens – rising consumer spending and business investment plus the narrowing gap between corporate profits and stock values. As more jobs and confidence return the US dollar will ease, helping trade and jumping commodity values. Rising gold and oil will grease the TSX. Diversified ETF investors will do best. Stock cowboys will need Depends.

Europe will bore. Greece will choke.
So what if the Euro zone slumps into a recession in 2012? Markets will barely notice. Ditto for the inevitable default by Greece on its semi-worthless bonds, its abandonment of the Euro and petulant, ego-centric act of leaving home. The big news is there’ll be no big bank failures, no currency collapse, no defaults by any countries that actually matter. Germany and France, along with Britain, will be on an austerity kick that last through the next cycle of elections and depresses the value of most everything. If you want a great deal on a country retreat in a stable country, go shopping in Normandy this summer.

Obama will win. US real estate hits bottom.
It might be job creation, rising stock markets, the end of the Iraq war, or maybe just the way American conservatives blew their big chance with vacuous candidates, but Barack Obama will stay president. Markets will anticipate this, and reward it with a fat year-ender. Democrats will stand for stimulus, largesse, pump-priming and economic hope. Republicans will be seen as hair-shirts bent on doing the right thing for the future even if it grinds up today. In a democracy, people vote for themselves, not their grandchildren. Won’t even be close. Within months of the re-election, the American housing market will finally hit bottom and start the long, slow advance.

House prices will fall.
Canada, of course, will go in the opposite direction. By every measure – ratio of prices to incomes, household debt levels, lax lending standards, asset inflation – we have equaled or surpassed the Americans when they hit their real estate apex. In the absence of solid economic growth or wage increases, and given a slight rise in mortgage rates and unemployment, house values will be lower in December than they were in January. The decline will be commensurate with local market conditions, but average up to 15% nationally. Some places will fall a little, some will be trounced. People who buy houses before they sell their old ones will need our loving support. Stop snickering.

In fact, all asset prices will fall.
Our times are defined by an epic battle between inflation and deflation. For a while this year, deflation wins. A glacial economy, falling real estate values, tightening credit – these factors and others will be bringing down the value of assets even as the cost of living rises. Houses, cars and iPads will get cheaper, at the same time the cost of gas, insurance and food rises. Asset deflation means what you owns loses value. Price inflation means what you make buys less. This is lousy news if the bulk of your net worth is in your house or a bank savings account. It will quickly separate the investors from the savers.

F will tighten.
Fools among us believe the government wants the real estate market to keep inflating, prices to keep rising and debt to keep growing. Well, they once thought that way – when H and F came up with the 0/40 policy which destroyed housing affordability for a generation. Since then they’ve realized current levels of debt are unrepayable and once housing values normalize vast numbers of people will owe more than they own. Hence, 0% down was dumped. Forty-year amortizations shrank to 35, then withered to 30. The next shoe may be in the March budget, knocking them back to 25 years. If the bubble continues, kiss 5% adios.

Most people won’t get it.
So the back story is one of falling asset values, rising markets, a moribund economy, higher inflation and commodity prices, declining real estate, tighter credit and few jobs. For most people this is a disaster – at least for those who spent their careers paying off mortgages (even when rates were cheap), fearing investments (they don’t understand), paying too much tax (with their TFSAs in GICs) and sticking their savings in the orange guy’s shorts. These folks end up losing money to taxes and inflation, giving up equity on their homes, and paying for more everything else. They’ll be in a funk. Be very careful. Especially around siblings and mothers-in-law. Few will understand 2012 marks the end of a cycle. Financial markets will anticipate this. Your buddies at work won’t. You know what to do. They will vex.

And there, but for the grace of God, goeth this blog.

If the Amazons haven’t been too rough Saturday night (I heard something about nylon rope and vegetable oil), then I’ll be posting my 2012 outlook on NY day. This will include some thoughts on financial markets and taxes, as well as real estate and the economy. I’m confident it will irritate everyone.

Where we’re going is, of course, always critical. When it comes to the future, most people screw it up. Like Trang from Tranna:

Wife and I (in our early 30s) are living in a mortgage free 1 bedroom condo from our parents. We are making 150K plus and saving about 50K/yr. Bought a pre-construction 3 bedroom condo in 2009 ($430,000), which was suppose to be done in 2012. We put down 15% ($64,500). We had planned that when we close the deal we would only have about 200K mortgage and it would take us 6 yrs to be completely mortgage free. Now it’s delay until January 2014. My wife is expecting and the little one is coming this summer so we’ll need more space. We are thinking of a house in the next few years but we are stuck with this pre construction condo deal. I heard that it’s expensive to get out of a condo deal like this… but really don’t know much about it.
Any thought/advice on our situation would be greatly appreciated.

This note raises more questions than it answers, of course. Like why did the parents give the kids a condo, and what’s expected in return? If these thirtysomethings have no mortgage, earn $150,000 a year and save a third of that, where’s the rest going? Why would anybody in their right mind buy a condo in 2009 that won’t materialize until 2014? Did they not have the agreement lawyered? If so, don’t they have the right to walk on a deal that’s delayed by years?

This whiny little note teaches us a few things.

First, never buy a pre-build. Not a house nor a condo. Real estate is, after all, supposed to be real. You need to see it, inspect it, touch it and experience it, especially when this is going to be a home. Buying something from a brochure, a floor plan and a salesguy means you’re entering into a real estate futures deal, paying money now for the right to buy a commodity at a later date when it’s delivered. It might be worth more or less at that time. It may or may not be what you expected. The market may have advanced or tanked. One thing’s for sure – you just bought a heap of risk.

So, never sign a one-sided contract which allows the builder/developer to (a) make changes to the floor plan at his discretion, (b) substitute materials without your prior approval or (c) delay delivery of the unit without specific consequences, or your consent. Of course, there ain’t a developer in Canada who will ink a fair pre-construction contract giving the buyer equal rights, which is why this is a bad idea. At the least, ensure you have your lawyer read the agreement before signing it (or before expiry of the cooling-off period), so she can laugh and tell you what an idiot you are.

Now, what of buying a condo in Toronto, especially one that won’t exist for another two years? Another boatload of risk. There are some 43,000 new condos being marketed, going up, in the pipeline or in approvals in the GTA. That just about guarantees an oversupply. Additionally, about 80% of existing deals are being done by speckers and flippers. That means demand can evaporate in weeks if interest rates rise, mortgage rules change again (watch out for F in March) or the economy takes a dump. Speculators are like flies. When they move in, you know things are too ripe.

The urban condominium market is a dangerous place. In the last few weeks most big bank economists have made this point. Hell, even Brother Carney raised the alarm. We all know if it weren’t for Canada’s own subprime mortgage rules (if you don’t have 5% down the bank will give it to you) all those glass towers would not be populated with people with student loans and bicycles. And speaking of glass, about ten years from now when the building skins need replacing, condo and strata fees will look like mortgage payments.

In short, there are a hell of a lot better places to be spending $430,000.

Finally, what’s this thing about needing a bigger place to live when you have a kid? Where did that come from?

Financially speaking, starting a family is a major event all on its own. It now requires a full year of maternity leave for the mother and the loss of an income for 12 months, at the same time all that baby stuff is purchased. And I have yet to meet a father who didn’t see little feet emerging and immediately feel the need to run out and throw himself at an insurance salesman. This is apparently man’s guiltiest moment.

Succumbing to an emotional nesting instinct at the same time can be the financial coup de grace. And so unnecessary. I hear children (unlike puppies) are not even ambulatory for about a year. And they sure don’t need a pony or a swing set in the backyard. So what’s the rush? Why heap on more risk and economic burden at a fragile time?

The bottom line is that Trang needs to grow a set, get out of the condo deal by threatening a hideous law suit, pay his parents some rent and stay where he is for a year until the real estate market takes the inevitable slide.

And stop reading this blog. It’s depraved.