Entries from May 2012 ↓

Seriously

Darren and his hot but encumbered wife live in Vancouver and credit this blog for becoming second-class citizens. “This blog saved us from buying a house last year,” he says, “so I owe you some thanks, man.”

You may have heard that sales have just plopped 20% in VanCity, and on Friday listings hit a 10-year high. The price of a SFH is off a hundred grand. Cocker spaniels can predict what comes next. But not Darren’s inlaws. More on this in a moment.

On Tuesday the Royal Bank, whose stock is looking quite tasty, gave the world another of its awesome housing affordability reports, coming to the astonishing conclusion that it sucks. RBC said things have deteriorated sharply in Vancouver and to a lesser degree in Toronto, mostly because prices have swollen like a lonely gland. With a SFH in Van still over a million and hovering near $840,000 in 416, we should not need a report.

But here’s the latest score: In Toronto to afford a standard bungalow with a 25% down payment (stop laughing), requires 53.4% of a family’s pre-tax income. The average household earns $97,000, so fifty-three per cent of that is $51,264. The actual after-tax income of this family is $71,251, which means in the real world they devote 72% of their take-home pay to the house. That leaves $1,600 a month for everything else (and no money to invest or save).

In Vancouver, the same bung with the same down payment (about $250,000) now requires 88.9% of pre-tax income. This works out to be $9,684 more a year than the average family brings in the door. In other words, the house now costs 111.5% of what the household earns.

“It became a little tougher on household budgets to carry the costs of owning a home at market prices,” said the bank’s economist, Craig Wright, trying hard not to throw up on his suit. “Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years. Affordability headwinds are likely to increase next year, as interest rates make their way towards more normal levels.”

You can see easily how we passed the point of absurdity some time ago. This is a bank, for the love of Allah, which we all thought cut off your dangly bits when your gross debt service ratio snuck towards 35%. How anyone thinks we will avoid a reckoning is beyond me. Except Darren’s delusional inlaws.

And while we’re reflecting on the coming evisceration of greater fools, remember this? I wrote a post about le roi-des-condos, towering, Rolls-driving, Brad Lamb about a month ago, ripping the marketing for his new condo development in Calgary. Aimed squarely at flippers and speckers, it promised an unseemly “282% return on investment” to those brave enough to buy a one-bedroomer across the tracks from downtown and up the street from the recycling depot.

He’s at it again. This time in his native GTA. And being Toronto, the returns are even better – 287% for those snapping up a one-bedroom plus den unit at Spadina and Adelaide, the metrosexual scooter capital of North America. And how many virgin investors will fall for this math? Like counting mortgage equity as a “return on investment”? Or guaranteeing a 4% annual capital gain every year for the next decade? Or assuming 3.5% mortgages will never increase? Lots, probably. Brad’s a smart guy. Worth millions. This is how.

Now, back to Darren. He’s asked for our assistance in convincing his wife’s parents that they are courting real estate disaster. What should he say?

Was at my inlaws this weekend. They own a house in Surrey BC, no mortgage, are about to buy an estate-type retirement home and are totally sure there’s no reason to worry about real estate, convinced their place is worth about $500K.  My father-in-law told me flat out, that a drop in prices in their neighborhood will “never happen.” (his words), because they’ve been there since 1978 and it’s never happened before.

Oh, and also, I think they’re starting to get worried about money. I know they lost a ton in 2008, and the other day my MiL mentioned casually that she wished they drove a car more like my 8-year old vw than the $60,000 Lexus they bought in 2009, brand-new, for cash, after inheriting some money. I know, I know.

To me, it seems like the only smart play is, sell, rent a nearly identical place for a grand or 2 a month, and if you really insist on home ownership, buy in a few years after prices fall. A total no-brainer. Like, if you can count past 21 without removing your shoes and your pants, this should be obvious, right?

Then today it clicked. They think that renters are second-class citizens.  They were looking at possible locations to re-locate to, and my father-in-law basically vetoed any place that would have renters in the neighborhood. I swear to god, I’m not making that up. My question for you is, what if anything, should I say?  You’ve been giving financial advice longer than I’ve been interested in the opposite sex. If you were in my position, what would you say?

Oh, and, of course, feel free to publish this on the blog, but keep my name out of it. Unless you’re advice on picking a divorce lawyer is as good as your advice on bank preferred shares was.

Oops. Sorry, man.

Emotion

Emotion may make you sweat, heave, tingle and squirt, but when it comes to investing, stay dressed. Your two enemies are the evil twins, fear and greed. Yesterday I related how greed made a lot of people throw their money away on Facebook stock. This unfortunate blog’s also shown too many times how horny has led people into bedding real estate they should have ignored.

Last year greed and fear made a rare joint appearance. As stock markets corrected and the media wept, gold and silver popped higher on pure emotion. Sell, I said. Take your capital gain and run. Today gold is down 20% and silver’s crashed 40%. Last October, when I walked through downtown Toronto’s Scotia Plaza, past the area to buy precious metals, it was packed. Silver was fifty bucks an ounce. On Monday I passed through there again. Not a single buyer. Silver is twenty-eight.

The same human weirdness plays out with stocks, ETFs, index investments, even bonds, REITs and preferred shares. When stuff goes down, people think it will go down forever and run screaming. They’d prefer to buy when prices are frothing higher – when risk is at its highest level, instead of when it’s low. This is also why the greatest wave of selling during the GFC came on March 9th, 2009. On that day equity markets hit bottom. It was the moment most retail investors chose to flee, generating the biggest loss. Of course, this was the day to buy.

By the way, that night this comment (typical of many then) appeared on this blog from the renowned and famous authors of the site, The Automatic Earth:

Neither of us would touch equities with a bargepole right now. Neither of us sees a light at the end of the tunnel either, although I do think a major sucker rally is coming that could last several months. I fully expect people to think the worst is over by some time this summer, just in time for the light at the end of the tunnel to be revealed as an on-coming train. …I would also say that depression is a given during that time, and a depression worse than the last one at that. Right now we’re still much closer to a top than to a lasting bottom.

We now know it was the trough. Those who sold maximized their loss. No wonder some people are still so pissy. Those who bought made 50% on their money in less than a year. Kinda makes you wonder about now, when the doomers are at it again claiming a nation of Greek tax evaders will bring down the world. Retail investors – the little people (as opposed to the pros) – have been bailing for months now. Trading volumes are down and prices have corrected, after a 30% advance from last autumn. Fear’s in vogue.

Of course, two-thirds of companies just beat earnings estimates and folks with bonds are making out like bandits. Meanwhile millions of people stuff billions into the orange guy’s shorts for no return, or chose “risk-free” investing by flipping Calgary condos and buying high-leverage rental townhouses in Mississauga. The lack of judgment is arresting. The financial illiteracy profound. I feel sad for them in advance.

This brings me to two points, one from yesterday’s blog when I posted the letter of a guy who walked from his California home after its value collapsed. Many people berated him for gaming the system plus outright thievery for abandoning his financial obligation and stiffing the bank. It was an interesting all-beaver Canadian moment.

He responds:

I don’t blame people for being angry.  We were rather angry ourselves for quite a long time.  Angry at the pushy real estate agent who sold us the house (insert “buy now or forever be priced out” story here), angry at the banks, angry at the politicians, angry at all those pesky Americans not “living up to their promises” (-I’m paraphrasing Kevin here-) and ruining the housing market and overall economy.  We were angry at our neighbours, the ones who disappeared in the middle of the night, bringing down the property values of our very neighbourhood.  Angry at ourselves.   We were very very angry.

And we weren’t the only ones, obviously.  Our neighbours were angry.  Our friends were angry.  Our colleagues were angry.  It was one big old angry mob.

I’m betting that if you had polled Americans a decade ago, most would have agreed that walking away from your house would be unthinkable (perhaps even “immoral”). I’m betting that if you did same poll today, a good percentage of Americans would view it as a viable option; a purely financial decision.  (I would estimate that about 30% of the homeowners we knew personally in California ended up losing their homes, by one means or another.)

The Canadian mob is out there.  It will get angry.  It may not react exactly like the US mob, since the laws are a little different, but it will react.  It will be ugly.

Actually I agree with this.

Greed and lust make us ignore risk. Fear brings danger into focus. People react in extremes. Then they go bitter.

There’s still time to avoid the outcome so many will be walking into. You know my rules. Love liquidity. Keep real estate exposure low. Strive for balance and diversification. Buy things that pay to own them. Never take advice from your mom. Get help.

And when you get emotional, just come here.