Entries from July 2012 ↓


You can tell it’s summer when half the letters I get are from teachers. So, here’s Laura. She and her squeeze are both you-know-whats. “We have a combined income of about $140,000, almost $30,000 in savings and zero debt,” she tells me.

Sadly this is typical of teachers, who believe they have pensions as enveloping as mama’s bosom, so they spend almost everything they earn. Big mistake. The Ontario Teachers’ Pension Plan, for example, already has a $9.2 billion shortfall. Despite record investment gains, it’s technically impossible for the plan to pay out all the benefits its members will be expecting. Solutions? “Increase contribution rates. Reduce inflation protection. Reduce benefits. Or a combination of these actions.”

Yikes, Laura. What’s the plan?

“We are really sick and tired of renting, but understand the housing market is seriously over priced, so my questions are: how much longer should we wait until we buy a house? Is it stupid to only put 10% down on a house or is it okay since we both have extremely secure professions?”

First, let’s chat about this ‘extremely secure profession’ thingy. Other than populist bloggers who combine rapier insight with eye candy physicality, no job’s safe. In BC, for example, they’re graduating almost three times more teachers than there are openings. In Ontario the unemployment rate among new teachers is a staggering 24%, and a recent survey found two-thirds of teachers’ college graduates end up dumpster diving behind the Royal York. Or, doing non-teacher stuff.

In fact, some teachers could find themselves on government hit lists, as has happened in the US. Public budgets at all levels are tapped out, and so are taxpayers. So if courts and elected politicians in California and Wisconsin can roll back pensions (and jobs) with the support of voters, could it not happen here?

Earlier this week I told you a little about the threat of deflation. It’s close. Assets values and commodity prices alike can plunge, even as the cost of living rises. That means your real estate bleeds equity, even while the supermarket bleeds you. It also means sagging oil and gas prices, as demand for our exports slump, making you happy you never did move in with Missy Bunny in C-town when she asked.

And look at the latest economic growth numbers, released Tuesday. Michael Jackson may have more of a pulse. GDP in May limped ahead by 0.1%, or just a third of April’s number. It means growth for the year might hit 1.6% – which is a full point less than the inflation rate and almost exactly equal to that of the US, which depressionistas on this blog keep saying is bankrupt.

In fact, even with its vaunted austerity measures (like getting rid of 19,000 civil servants) Ottawa is planning on increasing spending by 2.1% a year for the next five. How does that happen when the economy grows by less? Right. Tax more, or borrow more. Or download pain on the provinces and eventually the schools.

Like in Toronto, where the school board has this to say:

“TDSB continues to struggle with the significant budget challenges posed by this year’s $20M decline in provincial funding, aging infrastructure and a growing $3 billion backlog in renewal projects – things like replacing drafty windows, leaky roofs and antiquated boilers.  These budget challenges are compounded by declining enrolment – 35,000 students over the past decade – and a provincial funding model based largely on student enrolment numbers.  Looking ahead, TDSB is projecting a funding shortfall of more than $50 million for the 2012-13 school year if the Board is to maintain the current level of supports and programs students need.”

Like I said, so much for the security of the teaching profession.

So, Laura, is it dumb to buy a property with 90% financing at a time when real estate’s starting its decline, the economy’s torpid, new rules and regs are anti-house, your finances suck and doing so would leave you with zero reserves, no investments, no diversification and 100% of your net worth in one asset with a future even more unstable than yours?

No more, I suppose, than devoting a blog post to you. How pathetic is that?

Nature wins

“We sold the damned condo!,” Jen told me yesterday. “Listed April 6th, accepted an offer July 6th, money showed up July 26th! Yeesh. Hair raising to have it out there for 3 months — some friends managed to squeak out with big profits earlier than us, and other friends are still on the market!”

Just to be clear, this is not a CityPlace shoebox made of rebar and cement hulking in a downtown Toronto condo forest with an intimate view of the building next door. No, this is luxury West Coast, metrosexual urbanity, as close to California as we get, in a building gazing over English Bay, where mermaids and narwhals frolic.

And still, tough sledding. Almost makes Jen wonder what happened to that massive real estate bubble everybody’s been yakking about. The buying in 2006 was easy ($640,500), but the sell in 2012 ($699,000) wasn’t. What with real estate fees, repairs and sale-related expenses, Jen figures they walked away pocketing about $20,000 – after owning a choice property during five years of the frothiest market on record.

How come?

Probably because they sold too late. The Van market is sucking air, and growing weaker daily. There are enough houses for sale in once-blistering Richmond to last the next two years. The tony Westside is devoid of both HAM and hope. Condos have croaked. Jen had horseshoes just closing the deal.

She blogged about it. “Renting vs. Buying, in our particular situation, had no clear winner,” she says. “I did love our condo and really enjoyed both the space and the location. It was a great place for us to live, so I’m happy the numbers didn’t show it was a financially terrible idea to have done so. But, considering renting isn’t bankrupting us either, I’m really enjoying the freedom and flexibility of non-ownership, and am in no hurry to buy property again anytime soon.”

The conclusion might have been different, if she’d bailed out a year ago. And it would certainly be changed if the condo wasn’t going to market until this autumn. What was a seller’s market in 2011 has turned into one where buyers have the power to force prices lower. But it pales in comparison with what’s coming.

It’s a lesson the smug ‘hey, it’s different here’ crowd in Calgary and Toronto better learn. The fundamentals are not changing for either city, nor for the ingénues in Skatch or The Peg. The tumbling Vancouver market provides a useful template of what others should expect in the months to come. Nature always wins.

First sales weaken. Then listings start to swell. Bidding wars are extinguished. Soon price increases are erased. Sales declines gain momentum, and the media starts to notice. Realtors sweat a little, say the market’s balanced. Listings mushroom even as prices stay sticky. New condo projects are cancelled. Sales fall further. Realtors declare a buyer’s market – hurry! Now prices tumble lower, often crashing first in those hoods where they exploded higher just months earlier.

Here’s an example. 2785 Chelsea CS, in West Van. Listed in March for $2.448 million. Relisted in April for $2.28 million. Reduced in June to $1.998 million. Sold two days ago for $1.61 million. That’s a 34% drop after 116 days on the market

By the way, this sale price is a half million less than the appraised value.

Like I said, the mighty fall first.

Now, ready for the Letter of the Day? Just to be clear, I do not make these letters up. I do not pay people to write me. I do not drug them. As much as they beg, I do not dispense sexual favours. Not even to sweet, young Angela, who has a problem…

Hi Garth, I would love to get your input on my situation if you could spare the time.

I am 29 and single. I bought my downtown Toronto Condo in 2009 for $240,000 with a 35 year mortgage (accelerated biweekly) with a 3.69% 5 year fixed rate. I had an interest free loan from family for the down payment. As I recall this was the literal bottom out period before prices started to rise again. It is right on the outskirts of downtown bordering Liberty Village very close to where I work and play. I cycle everywhere to reduce costs.  Right now my monthly housing costs are around $1,300 which includes hydro, mortgage and maintenance fees (which have gone up $100 in thee years with one hike and the new HST). I have recently placed my Condo on the market and originally priced it at $324,900 but have since reduced it to $299,999 due to lack of attention.  It’s now getting a lot of views but no real offers yet and I am almost a month on the market now. My building seems to have a lot of competing units.

I work for a bank and I have a small amount of savings (less than $1500) and I make $1,317.83 bi-weekly. I do ok but large unexpected purchases can throw me off and require me to budget myself. I live pay check to pay check right with decent job security. But IT is never 100%.

After the price reduction and no real offers yet, my feet have been getting a bit cold… and I have been wondering if possibly renting my unit and finding a cheap $800 rental for myself would be a comparable plan to selling. My place could probably get $1500 a month at this time if I rented it out. Combining this with reduced living costs if I were to find a rental for myself I could start to save again. Also there is the potential loss in rental income to consider when rates finally start to go up.

I think I should still sell and move my money to another vessel but I am wavering a bit. Your advice on this would be much appreciated.

Angela, figure it out. After commission you’ll be lucky to walk away with enough to repay your family. Reality is, you’ll get closer to $260,000 and end up with less than ten grand. Renting it out is no option – you’ll net a paltry $200 a month while the condo sinks. A year from now you’ll owe more than it’s worth.

Three years of home ownership, and look where it’s put you. Savings of $1,500. No real equity. The potential of a big loss. Looking for an $800 pad. Still single. Writing to a pathetic blog.

Angie, bail!