Entries from April 2012 ↓

The cult

Bob Jablonski exudes cowboy confidence. “The Calgary market continues to move in the right direction,” says the real estate board president, “with all indicators pointing towards stable growth and a move towards typical levels of activity.” Apparently typical is an average SFH price of $433,500.

And up that boring road in Edmonton, head realtor Doug Singleton is thumping the Alberta Advantage. “Other markets, such as Toronto, are reporting feverish real estate activity involving multiple offers and unconditional offers,” he boasts, “but our market is calm, orderly and slowly evolving.” In oil town, a single home is now $380,083.

Arguably, with downgraded Ontario’s  new taxes on the rich, BC shrinking economically and mentally ill, and indebted Quebec trashed by students, Alberta’s looking phat. Highest average income. Hundred-buck oil. Top marginal tax rate a full 10% below that in the east. Two Amazonian political party leaders. Maybe this is as good as it gets these days.

So why is it so many people can’t pay their property taxes? As a blog dog mortgage broker pointed out, there are 220 foreclosures on the market in Edmonton alone, or about 5% of active listings. Context? “CMHC has been stressed tested to be able to handle a doomsday scenario of over 3% default rate before becoming insolvent itself, according to Canadian Mortgage Trends,” he points out.

More telling, there are about 600 properties in each city scheduled to be sold off because the owners are at least two years behind in paying their municipal taxes. The list is here. Says our broker, “These numbers serve as a leading indicator that folks are financially stretched to the limits and holding on by their fingernails. And this in a province where we have tons of jobs and apparently it’s boom times again.”

Exactly. This blog’s message is reinforced yet again: most people are screwed. Observe carefully, then run in the other direction.

Here’s more evidence. A new survey from the Association for Canadian Studies asked people if they were concerned about paying their bills. Over 50% in Ontario and BC – where real estate costs the most – said yes. Of those making between eighty grand and $100,000, 41.2% are worried. And across the country, among people taking home more than $100,000, almost 23% admitted they may fall short.

So how could folks earning twice the national average fret and gnash over paying the next cable bill?  Easy answer to that one. I flash on the 50-something BC couple I met on the weekend. He’s an engineer. She’s a lawyer. Family income is $274,000 and they have only $64,000 between them in RSPs and a suicidal trading account. But they own a house, a cottage, a rental condo and a vacant lot – all mortgaged. All either declining in value, or about to do so.

The cult of real estate claims more victims daily. Precious family income’s shoveled into a dying asset class rather than a diversified portfolio. Almost everybody underestimates the cost of ownership and inflates the rewards. Brushed aside are closing costs and selling charges, as well as property taxes, maintenance charges, condo fees and endless home improvements driven by fad and fashion. Truth is, most people who bought in Calgary or Edmonton four years ago have lost money. The same will be true in Vancouver two years hence. And recent ‘winners’ in Toronto bidding wars will curse ever having gone to battle.

RBC estimates 52% of pre-tax average family income is needed to own a house in Canada – even with the lowest mortgage rates ever. That leaves 48% of the after-tax portion of $83,100, or just $30,340 yearly – $2,500 a month – to afford food, clothes, a car, gas, insurance, utilities, vacations, kids, pets and sufficient alcohol. The survey noted above says four in ten of those families can’t hack it. They worry about running out of money before they run out of month. So you can kiss off any cash for the TFSA or retirement plan.

So what happens when 70% of all families join the cult? Yep. Screwed.

Understand this. Do the opposite.

Tomorrow, death by condo.

What fools do

It’s not every day the finance minister puts the words “condo” and “crash” into the same utterance. Probably never. Except on Friday. And he picked a helluva time to do it.

Personal finances in Canada and the US are nearing a crisis point. At least most Americans know they’re screwed. Watching your work colleagues and relatives discover that here will be quite the experience. But you can be sure it’s coming.

For the record, F said the following to an editorial board meeting at the Globe and Mail. In the last few days the elf from Whitby has completed his flip-flop – from the real estate pumper who ushered in the cheapest, easier credit in Canadian history, to the panicked politico sticking his finger into the crumbling dyke of public debt.

“I also talk to developers, and I hear from some of them who are in the business of building condos that they don’t really have a plan, they’re just going to keep building them until people stop buying them. It’s not exactly a fiscal plan. It will lead to a crash. I do worry about the last person buying a condo in Toronto, and people getting caught”

That last person, by the way, is called the greater fool. Did you ever think F would get around to publicly endorsing this pathetic blog?

This crash warning comes after Ottawa moved to rein in CMHC, refuse to increase the agency’s insurance limit, make it illegal for the banks to stuff insured mortgages into bonds, force the cost of home loans higher, and encourage tough new lending regs for later this year. But it also comes too late. Real estate prices are extreme. Everybody you know has pigged out on cheap loans. The cult of housing is everywhere.

In the last two years an unknown and growing number of first-time buyers have put 5% or less down, taken on a massive obligation, and bought a property. They did this when prices were the highest and rates the lowest. What were they thinking?

The risk in this behaviour is enormous. Real estate values need only fall a small amount to wipe out every dollar in equity, so owners end up shouldering a debt worth more than their property. This is exactly what continues to take place in the US, where young couples need only a 3.5% downpayment to get an FHA-insured mortgage (think CHMC). In the last two years alone, over a million of them have slipped under water, with another 10,000 a month joining them in financial failure.

This is what happens when values fall. The consequences this time in Canada are unknown, since we’ve never had a housing bubble based on emergency interest rates, cash-back mortgages, variable-rate loans and government lender insurance. Add to that a rapid and building oversupply of housing stock, economic lethargy and a Boomer tsunami, and little F is right to freak out. Very few people are ready for what comes next.

But this real estate stuff is just the wick. It’s not the bomb.

Housing’s inevitable correction and economic blowback looks likely to happen when millions of people in Canada and the US are learning how much retirement sucks when you didn’t get ready for it. It’s hard to overestimate the impact of Boomers – nine million here and 76 million in the States – entering their Depends years.

I’ve given you the stats many times: seven in ten of us have no corporate pensions. Half have no savings. Forty per cent of families can’t pay all their monthlies. The average RSP will last about two years. And nobody can live on CPP and OAS.

To the south, even more drama. A quarter of Americans now say they’ll retire after 80 – about two years longer than most will live. On average people have saved only 7% of their modest retirement goal ($350,000). Thirty per cent of people aged 60 have about twenty thousand saved. Only one in nine is confident about retirement. And 60% have a net worth, outside of real estate, of $25,000 or less. Yikes.

This is an economic and financial disaster waiting to roll across the continent. And every day, through their ignorance, greed and fear, people make it worse. For example, the most popular investment in Canada today outside of a house? Bond funds. In the first 90 days of this year misguided people shoved $7.1 billion into these funds while they sucked $3 billion out of equity funds.

Of course they’re doing this because they perceive stocks to be dangerous and bonds safe. But the opposite is more likely true. As interest rates creep back to normality and the global economy stabilizes, bond prices and bond funds will take a drubbing as bond yields rise. Even the spectre of higher rates – which Mark Carney has already raised – is enough to create losses for new investors.

But this is what fools do. Buy bonds when rates can only go up and buy condos when prices can only decline.

Look around you. Do the opposite.

If you made mistakes – like telling millions of people they could buy houses with zero down and lifetime mortgages without risk because it’s different here – there’s still time to repent.