Entries from November 2013 ↓

The enabler


Dustan Woodhouse’s a mortgage broker in Vancouver who writes a regular commercial and calls it a blog. That’s cool. It’s an eat-what-you-kill business. Why would he be objective? Still, his answer to the question, “Would you buy real estate in Vancouver today?” is one you hear a lot around town these days. It’s yes.


“Perhaps the timing will prove poor initially – whether you buy this month, next year or three years from now.  However 7-10 years from the date of purchase you will most likely be glad that you bought into whatever market you did.  It is difficult to find many homeowners who regret buying in 2003… Focus on the big picture, know that time fixes pretty well every Real Estate mistake as far as values are concerned.”

The average house price in Vancouver in 2003 was $329,447. The median family income was $57,926. Today the median income is $68,970, and the average house costs $922,600. Hmmm. A ratio that was nosebleed ten years ago (the average house costing 5.6 times income) is nuclear now, at 13.4. If we saw similar gains in incomes and prices over the next decade, as Dustbuddy suggests, the typical Van house would sell for about the net value of Detroit.

Of course, he’s nuts. The point of unsustainable absurdity has been reached in a number of Canadian markets. There are only two reasons why houses cost what they do, and that’s cheap money and cheaper pitchmen. By counseling people to jump in, whatever the cost, because “time pretty well fixes every real estate mistake”, we’ve reached a new pinnacle of ethical fuzziness.

In case Dusty missed the news of the last 24 hours (don’t expect to see it on Global TV tonight), let’s recap. First, the IMF says we’re screwed. Well, not everybody – just those who borrowed a boatload of cheap-for-now money in the past few years to buy a house in Toronto or Van or Calgary or The Peg.

Look at this chart, which tracks real estate valuations based on a house-price-to-rent ratio. The only serious country which comes close to being as screwed as we are is France, where men cry and carry handbags.


And then there’s the Royal Bank, just making it worse for the Dustmeister.

Our biggest bank (and issuer of mortgages) says housing affordability continues to erode, thanks to mortgage rate increases this year and the fact stunned buyers (clients of you-know-who) continue to buy houses and inflate prices. The combination has resulted in a bizarre situation. It now takes 55.6% of pre-tax family income (an average) to carry the average Toronto house (mortgage, taxes and utilities), even after a whopping 25% downpayment.

The average GTA family income, by the way, is about $98,000. Fifty-five per cent of that is $53,900, which is actually 75% of the money that family brings home in after-tax income. Ridiculous. But it’s nothing compared with Vancouver, where RBC says it now takes 84.2% of gross income to carry a house (with 25% equity, remember), which is $6,000 more than the average family actually nets. “Affordability slipping,” adds the bank. No kidding. They said that.

Of course, Rob Ford isn’t the only great thing about Canada drawing widespread attention these days. The boys at Motley Fool just came up with “7 Remarkable Numbers from Canada’s Housing Market.” They’ve all pretty much been beaten to death already on this pathetic site, and include a 150% increase in real estate values, household debt at 163% of income and 53,000 more condos under construction in Toronto (“That’s twice the rate of New York City — an area with three times as many inhabitants.”)

But the Fool also reminds us of the really scary stuff: “This debt binge has produced some eye-popping valuations. Today, Canadian real estate is priced at 27 times annual rental income. In certain cities, the figures are even more outstanding. In Toronto, the average home sells for 37 times average rental income. In Vancouver, it’s 60 times annual rents! This is well outside historical averages.”

And this, of course: “Today, 13.5% of all jobs in Canada are linked to the construction industry — the highest proportion in 40 years. Compare that to the United States, where only 5.8% of jobs are related to construction.”

DustanWoodhouse  No, Dustbunny, this isn’t 2003 anymore. We have an asset class so swollen and gorged by debt, rendered so unaffordable by house lust, and pimped so far into the absurd by enablers like you that a reckoning cometh. Time will not heal this mistake. But you can.

Update: Mr. Woodhouse responds.  Says he owns the hat, not the car.

The indebted


Julie Dickson is the country’s bank cop. She gave a speech this week to 1,433 mortgage brokers jammed into a Toronto convention centre and said meaty things about “prudent lending.” This is like lecturing teenage boys on gender respect. But the lady did manage to drop one telling piece of information.

The bank regulator has seen something new happening in the past five years that house prices have bloated – a big move into 30-year mortgages. They make up, she said, “about half of originations now.”

That’s a huge number. What does it tell you when 50% of all of the uninsured mortgages being arranged in the country have the maximum amortization? Probably that the borrowers are cash-strapped and are opting for the lowest possible monthly payments. It means they’re using historically low interest rates not to pay down debt faster, but to gobble up more of it. And that they’re financial fools.

julie  As you know, F & the Peckerettes already banned 30-year mortgages for house buyers who need CMHC insurance because their loans are high ratio – those with downpayments of 20% of less. But the door to go long was left open for buyers who could scratch together enough money to avoid the costly insurance premium. Until Julie spilled the beans this week, there was no official confirmation that lifetime mortgages were being sold at this pace.

So what?

First (as stated) the only possible reason to get a 30-year mortgage is because you can’t afford one with a shorter amortization. Or you were raised by golden retrievers. The longer the am, the lower the monthly payment, and the more interest you end up paying. It’s like making the minimum monthly on your credit card. (I owed Mastercard $12,325 recently after changing the oil and filters in my Hummer. My statement said, “The estimated time to repay the current statement balance if you only make minimum monthly payments is 87 years and 4 months.”)

Naturally, this makes irrelevant anyone (like F) who tells Canadians they should be using cheapo interest rates to pay off debt fast, because the likelihood of higher rates in the future is about 100%. He’s right. Mortgage rates will be doubled in fewer years than almost anyone expects. But if half of all the people who can actually afford a 20% downpayment are opting for the slowest, most costly way to handle their debt, it spels trouble ahead.

Remember, debt has piled up higher in the last four years than ever before, and the swelling continues. The cost of money will probably never in your lifetime be less than it is now. That means future payments on current debt will be higher. So you’d better pray your salary is, too.

Which brings us to Sears. And Heinz, Encana and others.

It was telling enough when the venerable retailer announced it was fleeing its flagship Canadian store in Toronto’s Eaton Centre, because it’s more profitable to sell the lease than socks, no-stick frying pans or liquid makeup. After all, 50 million people a year walk through that building. How can you not make money flogging them a load of stuff?

Now 712 people will be losing their jobs over the next few months as the company downsizes. Worse, the layoff news came just a day after an article was published in New York citing sources saying the CEO of Sears Holdings (it owns 51% of Sears Canada) has been shopping the company around, looking to dump it.

Best Buy is closing stores and punting hundreds. Blackberry is melting down and firing thousands. CP is laying off 6,000 in a major restructuring. Heinz shocked Leamington with news a 109-year-old plant is being shuttered, throwing 800 out of work. Disney’s Pixar Studio is pulling out of Vancouver. Postmedia is post-mortem. Encanada is laying off 20% of its workforce. It’s a long, long list.

There are a few reasons why stock markets in New York have more than doubled the gains in Toronto this year. One is our slowing, grinding, stuttering economy. Commodity prices are weak and our condo construction sector is now bigger than the oil and gas business. Seems we’re far better at selling each other houses than we are at actually manufacturing stuff and finding foreign buyers. And guess how long that can go on when we’re using fluke interest rates to mushroom personal debt?

That brings us to Cathy. She and her husband like to get oiled up and enjoy an evening of MLS sold listings and this blog. “We’ve entertained the idea of buying a few times in the past,” she says, “but could never bring ourselves to pay huge money for a 100-year-old crapshack in Riverdale or the Beaches.”

But here’s the thing. Everyone else is pushing.

“Our bank thinks we are nuts (CIBC) as do most of our friends/family. We’ve been approved for up to 900k (combined income at 175k with 110k saved – we’re both 29) but we would be comfortable around 400-500k in order to have a life, savings, children etc. Thanks again for your blog and for speaking truth in a truly messed up world!”