Entries from September 2012 ↓

Realtors

Realtors are just like the rest of us, contrary to what some people on this pathetic blog believe. It’s no easy profession. Nobody pays you for driving them around to look at sixteen houses and get decorating ideas. Your broker only likes you when you sell stuff. Every seller wants to screw you out of commission. You probably work for a company that pays you no salary and charges you to have a desk and a phone. You pay for your own business cards and assistant, plus your car and gas. No sales, no money. It’s the ultimate eat-what-you-kill job.

Truth is, most people couldn’t hack it. Too much uncertainty and stress. No pension and almost no benefits. Market conditions beyond your control. Picky, idiot first-time buyers. Vendors who think they live in castles. Clients who are a nauseating cocktail of emotions – greed, fear, suspicion, lust and doubt. Then, of course, there’s Garth Turner.

Some realtors, like this one in Calgary, can’t function without worrying about me, reacting to me or trashing me. He chafes when I mention Cowtown, and then chafes when I don’t.

Why do you think the correction is not underway in Calgary? Why would the new mortgage rules affect everyone else and not us? Something’s different here, because Greater Fool Garth Turner won’t even mention Calgary in the same breath with other cities, “In short, there are a spate of negatives about to befall housing. The big slump in BC is the warm-up act for places like Winnipeg, Ottawa and Edmonton, as well as most of the GTA and poor Montreal.”

Of course, Calgary’s no more immune from the lousy economics underlying the Canadian real estate market than anywhere else. Just as everyone in Vancouver said a year ago, “it’s different here”, when it wasn’t, there are people living in Calgary (or Winnipeg or Saskatoon) who don’t get it. Any community in Canada with decent sales and sticky prices now or in the months to come is providing a rare chance to exit near the top. Take it.

Other realtors understand this with unobstructed clarity. They seem to be the ones who put clients’ interests ahead of their own, who will as happily tell people to wait as others blurt, ‘buy now or buy never.’ They tend to be younger, less jaded, leaner and analytical. And right now, in Vancouver.

I’ve twice mentioned Sam Wyatt on this site, who three months ago sounded the alarm for people looking to grab a piece of that city’s fabled west side. His torch is being shared now by Keith Roy, also making waves in the business by chronicling the collapse of the country’s most delusional real estate market. In a recent blog post he revealed why he bailed out of his own house, (“I sold because in 6 months my home will be worth less than it is today”), and why 2012 is probably turning into another 2008 for property.

As I’ve spelled out enough times to bore even myself, real estate’s all about supply and demand. But housing is not just another asset priced in an efficient marketplace. Instead we have imbued it with intense social meaning unlike, say, shares in Scotiabank. So real estate can be sexy or revolting, just as it can make a statement about our tastes, financial stature or culture. People buy houses for reasons entirely different than those driving them to get mutual funds or gold coins.

That means supply goes up when people feel like selling, or demand falls when others fear buying. Some realtors try to coax or push, berating those who parse local conditions. Others accept the ebb and flow and try to minimize the damage to the unsuspecting.

“I would suggest that good times have passed in the Vancouver real estate market, at least for the foreseeable future,” says Roy, and for good reason. In his area there have only been four months in the past ten years when the supply of houses for sales pushed past a critical point – two of them were in 2008, and the other two have just happened, in 2012.

As for demand, an equally telling story. It’s fallen for the last six months, off about 40% from the 10-year average, and on its way (it seems) to 2008 levels. So the conclusion is obvious – supply overwhelming demand, suggesting price reductions. And this is a pattern which is seldom broken, of sales declines leading to even more listings, higher days-on-market counts and cheaper houses.

But it doesn’t happen simultaneously. Markets like Calgary can continue to crest so long as enough people drink the local Kool-Aid. This is exactly how the average SFH in Vancouver achieved the $1.2 million mark, despite household incomes trailing the national average. The ‘it’s different here’ mantra is so powerful it can repel the laws of economics for months, or even years. But this only makes the trip back down more painful.

Every market is unique, but none are different. Mountains, oil or immigration are no match for rising household debt, swampy earnings, economic torpor, scary demographics or rule changes which whack the virgins. Time will prove this so.

So, yeah, realtors are just like the rest of us. And that should scare you.

Parental guidance

After watching their parents’ finances destroyed along with the value of the family home, lots of American kids swore off real estate. In fact, the home ownership rate tumbled from 69% to 62% in five years, after taking 45 years to gain that ground. Today the same proportion of Americans own houses as when John F. Kennedy was president.

By the way, the Yanks spent about $2 trillion in the last few years sheltering, subsidizing and bailing homeowners. Just imagine what the rate might be if not for that.

How do we compare? Well, 70% of us own houses, even though they’re on average twice as expensive as in the US. This explains why we now have substantially more debt, because after-tax incomes in Canada and the States are roughly similar. And not only do we pay far more and shoulder comparatively huge debt, but Canadians cannot deduct mortgage interest or property taxes from their incomes. Or get a 3% mortgage fixed for 30 years.

Despite making the same, paying more, being further in debt, more heavily taxed and massively exposed to rate risk, people who live here think they’re financially superior. In Canada it’s estimated that 50% of all new-home sales are made to first-timers, about 95% of whom don’t have enough money to buy a Mazda. This can only mean we continue to raise the horniest offspring on the planet, then goading, pushing and shaming them into a dangerous asset and decades of indenture. We call this parental love.

How insane is this? Much. A new study by RateSupermarket says at the rate we’re going the average home will cost $553,000 by 2020 (it’s now $350,192), and the average college grad will need to save for 12 years just to get a 5% down payment. To double that to 10% will take 21 years.

This assumes a modest initial student debt of $27,000, a 3% rate of return on money saved and annual salary increases of 3% from a $40,000 starting point. It does not take into consideration the normalization of mortgage rates (the average over 25 years is 8.2%), increases in personal taxation (count in it) or, conversely, the impact of a housing correction.

The conclusions are obvious. First, real estate’s beyond the grasp of most kids. Second, nobody should expect newbie buyers will continue to be a major market force. How can they? Surely we don’t send all these damp, warm bodies to university for four to seven years so they graduate and self-destruct.

Do the math. A $400,000 one-bedrooms plus den condo bought in Toronto actually costs $412,000 at closing, plus a CHMC mortgage insurance premium of $10,780. So with 5% down (that’s $20,000), the mortgage ends up being $403,000. The mortgage at 3% is $1,950 with a maximum 25-year amortization. Property taxes and condo fees would raise the monthly to about $2,400 (plus insurance, parking, utilities).

So five years later that’s $144,000 in payments, of which $59,800 was bank interest. If there’s no correction and the kid sells for what she paid, less 5% commission, the proceeds are $380,000. Of that $344,200 is still owing to the bank, which leaves $35,800, of which $20,000 is the down payment. The balance is $15,800. Deduct that from the $144,000 paid to live there, and you get occupancy costs of $128,200, or $2,136 a month.

And what does the same unit rent for? About $1,700. So if the difference – $436 a month – were invested for five years at 7%, it would become $31,832. Yes. Enough to buy a Mazda. A nice one. Or three Kias.

But this won’t happen. Odds are a $400,000 condo in Toronto or Vancouver in the autumn of 2012 will be a $350,000 condo in a year, and then devalue slowly as more inventory streams on to the market, as rates start to inch higher and it dawns on everybody that real estate is a dumbass place for a 24-year-old to get ensnared. That means buyers now will be absolute losers later, their financial fortunes eclipsed by their renting peers.

Did I even mention the loss of mobility and freedom to a young person that a mortgage brings? The premature maturation? The inability to say ‘screw this’ and hit the road? The death of independence? The trading of adrenalin and adrenalin …for a balcony?

Such stuff used to matter. Before parents became helicopters.