Entries from March 2012 ↓

The unexpected

In case you missed it, the war ends on Thursday. This means you have about 48 hours to lock into a five-year mortgage rate you might not see again. Ever.

Days ago Scotia told brokers it was pulling its 2.99% special on four-year fixed loans. On Monday RBC, too, yanked the plug, not only jumping its four-year rates from 2.99% to 3.49%, but increasing its five-year mortgage by a fifth of a point, and goosing the VRM at the same time. And BMO’s cheapo product – which started this latest basis-point pissing contest – also expires on the very day F stands up to deliver his budget. How unexpected is that?

This is happening because at 2.99% the banks make no money. The whole exercise was to build market share in a slagging economy where mortgages are critical because the banks view them as ‘relationship’ products. If you have a home loan, then the odds are you’ll also apply for a LOC and a car loan, as well as opening a TFSA and an RRSP, filled with bank mutual funds. Before you know it, [email protected] is rubbing your thigh when you go in to pay a bill.

And it’s no coincidence all this will be over by the time F struggles onto his cute little pixie legs in the House of Commons at four in the afternoon. Ottawa’s been aggrieved that throwing around bank billions at crazy low rates is doing nothing but encouraging house-horny people to bury themselves in masses of debt, destined to reset at higher rates. That just adds to a record level of personal indenture and fuels house prices.

Recently, bidding wars erupted again in godless Toronto with the average SFH price jacking through $841,000, at exactly the time this mortgage war erupted. Ironically, the same bank CEOs pushing the feds to hose down borrowers with shorter amortizations or higher down payments, share blame for the housing orgy. If they could suck and blow any harder they’d be airborne.

Speaking of F, that little devil, he’s now been relieved of the burden of icing the housing market in this budget. The mortgage truce helped, but the real knockout punches are coming from CHMC and the bank regulator, OSFI. As I told you last week, tough new rules will be enacted within the next few months forcing the banks to scrutinize borrowers more, get accurate house appraisals, then reappraise when mortgages are renewed. That could mean if house prices fall between purchase day and renewal five years later, homeowners might be forced to make up the difference. Yikes.

As for CMHC, it plans on drastically cutting the amount of insurance available for those high-risk, high-ratio loans that everybody loves.

How drastic? Well, the average rate of growth in the CMHC portfolio over the last five years was 13.5%, and that’s now scheduled to plunge to just 1.5%. The change is so profound, it’s led insiders to wonder if the Crown Corp has had its chain yanked big time by a federal government terrified real estate could meltdown.

The likely victims: people buying investment properties to rent, self-employed and commissioned borrowers, banks wanting blanket coverage on loans they’ll sell or (of course) the Y&H upon which our entire real estate empire is based.

F no longer needs to drop the 30-year amortization to 25 or consider raising the minimum down to 7%. Instead, with the regulator about to ban cash-back mortgages and force tighter lending guidelines, while CMHC turns off the insurance spigot, that housing bubble is history. If you can remember 1991, you know what comes next.

So if you have a variable rate mortgage with the ability to lock up, do it. A year from now the cost of money will be higher, and houses lower. Bankers will be dorks again, which will be comforting. And hopefully more people will be investing than slobbering over granite.

Did you hear about the new survey on savings? Almost four in ten Canadians say they have none. But seven in ten have houses.

How can the outcome not be obvious?

Busted

Tim’s 54 and wants to retire in six years. “I’m one of the lucky guys,” he chortled. “Got a government pension.” And he’s right. Just over 70% of Canadians have no pension – corporate, military or civil service – to look forward to, let along one that guarantees 60% of your salary, indexed to inflation.

But Tim, like so many teachers, cops and government workers I’ve met, has PD. That’s Pension Delusion, which leads him to think this big pot of cash eliminates the need to save or invest his money. As a result, he’s got less than a hundred grand in do-nothing, cost-a-lot mutual funds stuck in RSPs for him and Joan. Got a paid-for house, too, worth about $250,000 a half hour south of Winnipeg.

We crunched a few numbers yesterday. Sixty per cent of his $95,000 salary is $57,000 a year, which is $38,000 less than he lives on now. Add in early CPP, and it’s still a $32,000 shortfall. “But I’ll spend less in retirement,” he argued, which is (of course) a myth. People who retire at 60 don’t stay home all day so they can read, knit and get naked. In most cases, spending goes up, not down.

If he cashed-in the taxable RSP funds and used them to supplement his income, that’d last four years. Then what?

Two choices: live small, or sell the house.

The former sucks. The latter rocks.

By adding $250,000 to his portfolio, cashing in the blood-sucking mutual funds and investing in a balanced and diversified portfolio averaging 7% over a number of years (most earned in low-taxed dividends and capital gains), he’d add $24,000 a year to his income. That would easily rent a nice, 2-bedoorm condo in The Peg ($1,100 a month), eliminate overhead (property taxes, maintenance) and boost his income back to 85% of his former salary. Plus, he’d have a $350,000 liquid nest egg, instead of a $250,000 encumbrance. From KD to soufflé.

In a nutshell, this is another reason why real estate has a troubled future. There are 9,000,000 people like Tim and Joan representing 32% of the Canadian population – and three-quarters of them don’t even have guaranteed pensions. The vast majority of personal net worth for this entire generation of wrinkly, confused hedonists is buried in residential real estate. Personal savings have dropped, debt has risen, RRSPs have plopped, HELOCs have sprouted and most people (as evidenced by this pathetic blog’s comments) don’t trust financial markets and weirdly believe everything [email protected] tells them.

So, they either sell now, while markets are still juiced, invest and prepare. Or, try to sell later when a few million others are doing the same, and discover it’s impossible to unload in a falling market except for far less. But that’s what most will do. Like Tim they’ll underestimate living costs, think keeping the house means cheap living, invest what little they have in the wrong places, be surprised at how cheap CPP is, and be shocked their real estate’s turned illiquid.

Guaranteed. This is the world, post-2015. Boomer bust.

Given the certainty of this outcome (along with all the draconian mortgage changes outlined here over past days), buying a house would seem to be pure risk. Especially in hot markets with bidding wars and fat prices. Odds are that 2012 values may not be seen again for many years. In fact, if even a portion of the Boomer horde dumps their real estate in favour of cash flow and liquidity, prices will be far lower for far longer than most people believe possible.

Already a third of folks going into retirement do so carrying mortgage debt. A BMO survey finds 42% of Boomers regret not having saved or invested enough. In the US, where real estate equity’s all but vanished for millions, the lunacy of thinking a house is a retirement plan has been exposed. The average balance in 401(k) retirement plans (like our RRSPs) at one major fund company is a mere $60,000 for this age group.

And while there are endless comments on this blog from young people trashing Boomers for making houses unaffordable and sucking off all the jobs, the outcome could be steeped in the unexpected. According to a prominent US economic prof, this will be the first generation since the 1930s worse off in retirement than their parents.

“According to our projections, it looks like most middle-class workers, not just low-income workers but most middle-class workers, will be living at or near the poverty level in their old age. This is the first time since the Great Depression we are looking at poverty rates increasing among the elderly.”

Is it a coincidence home ownership is now estimated to be 81% among Canadian Boomers, the highest on record?

Nope. Millions have pinned their entire financial lives on a single asset, failing to understand house prices shot higher when they all clamoured to buy, and will do the opposite when they stampede to sell.

Smart people contemplating retirement will get out now. Most will not. That, in turn, will seal the fate of the young and the horny, so blindly covetous of home ownership.

Irony. She’s a bitch.