Entries from March 2012 ↓

The outcome

When F stands (it’s often hard to tell when this happens) on Thursday afternoon in the House of Commons, what will he say about the housing bubble? Will he murder the 30-year amortization? Announce no more insurance money for CMHC? Or just ignore the whole thing, setting up the country for a crash instead of a fizzle?

Looks like the third door. And it’s the wrong one. We’re surrounded by evidence the system is out of control.

For example, did you read this comment posted here some hours ago?

“I’ve been following this blog for some time, but am a first time poster. 28 years old with a wife and baby on the way. I’ve owned a place in the GTA (not downtown) since the mid 2000?s. It is a nice 3 bedroom townhouse with everything my wife and I will need for at least the next five years. It was and remains well within what we can afford. However, because we are expecting I figured I’d go look at a few places.

“I am a finance professional and will have an MBA done within the month, so I preface this by stating that I understand the concepts of interest and debt well, unlike many others in my age group who may or may not be virgins.

“A mortgage professional I spoke with indicated that the maximum mortgage we could qualify for right now was $1,200,000, with a final purchase price of $1,400,000 considering the equity we’ve built up in our current place and other investments. Imagine the granite we could get! Infinite pot lights!

“Here’s the kicker… I’m still in school – I’ve had ZERO income while I’ve been here. My wife makes well under $100,000. The decision was based solely on credit rating, my wife’s income, and my stated income for a job I have yet to start. No proof of job offer required.”

So a 28-year-old student with no earned income, in a marriage with a pregnancy and a no-income mat leave looming, is offered a mortgage of $1.2 million. At the same time, the Real Estate Council of Ontario (RECO) says it has received about 5,000 complaints in the past year from people caught up in bidding wars – mostly engineered by real estate agents.

Worse, here’s a BeeMo study released Wednesday that should shock F to his elfin core. Fully 43% of Canadians say they’re “unsure” about their ability to afford their homes if interest rates were to rise by 2%. And what are the odds of this happening in the next few years? Yes, 100%.

This may not register in Ottawa where everyone’s obsessed with robo-calls and the hairy new NDP leader, but it should be on your radar. The risks of a substantial real estate correction are growing right along with the unbridled river of cheap bank money which has swept away common sense.

Here’s more: Land speculation in the GTA is fevered again, with prices shooting higher as developers scramble to meet the demand rock-bottom mortgages have created. Urbanation, the industry bible, is telling clients “land prices are going through the roof, we may be headed for another 2009-like credit crunch, and there may be as many as 35,000 new units launch in 2012 (not a typo!).” As for condos, it now looks like the GTA alone will have 23,000 new units added to the housing stock this year alone.

Lax lending standards. Excessive mortgage approvals. Over-extended homeowners. Frenzied bidding wars. A new land rush. Massive over-building, with 80% of new units snapped up by speckers and flippers. And it appears the federal government’s about to ignore it all, letting new bank regs and the drying-up of mortgage insurance deflate the housing gasbag.

Trouble is, the banks won’t get slapped with new mortgage restrictions by the OFSI (their regulator) until the end of the year. And CMHC says no virgins will be denied their 5%-down or zero financing deal in the near term. So, while mortgage rates will be higher by the end of the week, the signal about to be sent out by F and the gang in this budget appears to be: party on!

“We think EXACTLY like the Americans did before the financial crisis,” says the MBA student with the $1.2 million mortgage approval. “Couple this with zero down, low rate mortgages, and all of my friends buying houses that are “better” than the one we just purchased.”

His point is poignant and precise, often made by Americans who come to this pathetic blog to watch us with amusement. The actions our government have taken to deliberately inflate a housing bubble are no different than those taken in the US years ago. Lack of regulation over residential lending. Too-low rates leading to borrowing excess. Government insurance wiping away lenders’ risk. Zero-down financing. Liar loans. Tax credits for homebuyers. And mindless promotion of the cult of homeownership, even as families are forced to commit half or more of their pre-tax income to shelter.

Given this, why would the outcome be different?

Every week I sit across the table from people who ask me to help them with their money. Every time I show the same thing. Markets that soared and then fell back to earth. On the way up, people were frenetic to get in. On the way down, they were panicked to get out. We’re going to do the opposite, I inform them. And we do.

Now tell me, where on this chart should you buy or sell?

Written in the wind

Being horny and dumb is now ubiquitous. It could be democracy’s finest hour. Or we could be screwed. History will tell, but I suspect it’s the latter. We have two reports. Three, if you count the yellow copter.

If you hang around people in their twenties and thirties the way I do (they’re hot), you soon discover there’s nothing the majority of them want more than real estate. They want it so bad, in fact, they’re happy to live with their parents until an embarrassing age, just so they can move directly into a condo, or a suburban box made out of glue, plastic, sawdust and pressed cornflakes.

Freedom, mobility, independence, backpacking in Chile, or joining a terrorist cell? Nope, forget all that hippy stuff. This is Gen Mortgage. They can’t wait to be amortized and lie prostrate, in the nude, on the raw, cool, glassy, ramrod stoniness of a granite countertop. That must be it. Because otherwise, it makes no sense – often paying double what rent costs to live in the same place, shouldering massive debt and risking big losses in the inevitable correction.

Face it, the whole system has been engineered to rope in virgins. Five per cent down payments and 95% financing. Cash-back mortgages making saving irrelevant. The RSP homebuyers plan allowing tax-free real estate deposits. First-time homebuyer seminars, mortgage specials and closing-cost tax credits. And 400-square-foot condos any other age group would consider to be a half-decent bathroom.

It’s believed home ownership among the iSomethings has exploded in the last few years, although nobody seems to have hard numbers. Unlike in the US, where a real estate bust has taught under-35s a massive lesson.

In fact, there are more potential first-time buyers in the States (51.5 million) than there are people in Canada. And far from posing the solution to their house-weary parents, an increasing number of them want nothing to do with property. Look at this chart…

Rates of home ownership among them has fallen back to 1990 levels. In the last three years only 9% of this generation got a mortgage, down by half from a decade earlier. Why? Student debt, of course, plus higher youth unemployment. But we have both of the same drags in Canada. So why the massive discrepancy?

Two reasons: Young people with brand-new jobs, no savings, no investments and no credit rating in the US can’t get a house with a 5% down payment, which the bank gave them, at a really, really cheap rate that the federal government has guaranteed. In fact, they can’t even get a mortgage of any kind. If you think Canada doesn’t have subprimes, think again.

But the mainly, young adults here have not experienced a real estate downturn, think it’s impossible, lap up HGTV, eschew CNN, believe Americans are nimrods and Global TV is accurate. Besides, mom, the bank gave us the money!

OK, let’s now turn to horny and dumb people with fading bladders, muffin tops and Stones CDs. A few days ago a poster on this pathetic blog wrote:

“Garth, in keeping with this retirement theme, can you do a bit about reverse mortgages? My father has come to the enlightened conclusion that the best plan for retirement is still owning a house, because no matter what goes wrong you can reverse mortgage it. I was astounded. Didn’t he know that reverse mortgages were essentially stealing the house from old people? I went on line and found a “reverse mortgage calculator”, and my fears were confirmed. If you own a $500,000 house free and clear, you could get $90,000. And the fine print is they get the house when you sell.”

Yes, reverse mortgages are the final indignity and should only be entered in to if you hate your children.

Often wrinkly people without enough retirement savings and a big chip on their shoulders come to this site and claim having the bulk of your money in real estate is fine because you can always suck out the equity in retirement and use it to buy beer and Alpo. This is true. You can. A reverse mortgage (offered by HomEquity Bank through the CHIP program) will give people post-60 up to 40% of their equity in tax-free money which never has to be repaid.

The cash can be used for anything, even paying off an existing mortgage. The funds received will not be counted as taxable income, so they won’t jeopardize your OAS pogey. So for people who mistakenly spent a lifetime paying off their mortgage instead of savings and investing, it seems like a godsend.

Seems. But it’s not.

Reverse mortgages are designed to consume the equity in your home – not just the equity you converted into cash. All of it. Over time the mortgage becomes bigger and bigger (unless you make regular annual payments, which nobody does), and your ownership shrinks proportionately as interest accrues relentlessly.

For example, right now a CHIP reverse mortgage comes with a rate between 5.08% and a withering 7%. So a $150,000 loan taken out at 6% doubles – to almost $300,000 – in ten years. Now, imagine if house values stop rising and in fact start declining. Right. After a decade it’s possible that every single dollar in equity could have been digested by the ravenous reverse mortgage.

And these suckers cost a fair amount to set up – appraisals, legal fees and administrative costs can easily top $2,000. Because most reverse mortgage-takers are cash-starved, they add these costs to the mortgaged amount (as CHIP encourages). This boosts the effective mortgage rate even further, as that money is amortized and amplified.

Of course, all this has to be paid back at some point. If it happens when you sell the house, you can end up with zero equity and maybe a bill for the commission. If it happens when you croak, you get to surprise your family!

And now for the yellow helicopter.

Trust me, I couldn’t make this stuff up.