Entries from February 2014 ↓

You’re _ _ _ _ _ _ than you think!

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A little over four years ago I wrote about a woman in Vancouver who was struggling deeply with selling her trendy condo. Her little family was industrious, but getting nowhere. The condo had grown in value, and was their sole asset. And while everyone was telling her it would soon double in value, she was torn asunder with doubt.

We talked. I explained how, if they sold, the invested equity could pay the rent allowing them to save and grow their net worth. More diversified, I explained, and less risk. Soon after, they found a buyer.

They also found mobility. Beth’s husband was offered a superior job on the island a year later, and they were able to move in a matter of weeks. Still renting. Here’s her report to me:

Our neighbour here on the Island just sold their house for $60,000 less than they paid 6 years ago. A slow but significant decline if you have to/want to sell. We are so glad we didn’t buy, and that we rent. Just for a lark I emailed our old realtor and asked about the value of our old apartment. The unit would sell for the same today as what we sold for 4 1/2 years ago. He said units in our old building are selling below assessed value these days. If we hadn’t crossed paths with you, financially we would be behind, but not even realize it. Instead, our portfolio has grown steadily, and we have financial security. Thank you for educating us!

Now, I don’t include her words just to make me feel good (although it did occur to me), but to illustrate a point. Real estate giveth, and it taketh away. Beth’s neighbour just got whacked for sixty grand (and much more after commission), while if Beth had kept the condo she would have paid a mortgage and strata fees for the four years she’s been living rent-free.

This brings us to an amazingly weird piece of work just published by StatsCan and slathered over by the boys in the mainstream media. You know the one – that report claiming middle class net worth has rocketed, and we’re all wealthier than we think. According to Ottawa, the net worth of Canadian families grew a stunning 44.5% between 2005 and 2012 – a period which included a recession, market meltdown and spike in unemployment. Does this even pass the smell test?

Said one researcher: “This shows the middle class isn’t withering away. It shows Canadians have money to set aside for savings, so it’s not like they are living from paycheque to paycheque, which is the way a lot of the narrative surrounding the middle class has recently been framed.”

But this “money to set aside for savings” is not supported by any statistical evidence. The savings rate is negative in the province StatsCan says net worth has exploded the most (BC). RRSP contributions have withered and most TFSAs are unfunded. Household debt, as we know, is elephantine. So where is this 44.5% eruption in net worth?

Simple. It’s real estate. All of it. Financed with $1.34 trillion in mortgage debt, up from $864 billion in 2005. That, of course, if a 55% increase in borrowing, pretty much all of it made at the lowest interest rates in history – rates which absolutely will be rising long before the debt’s paid off.

Here are more reasons the StatsCan researchers are blowing smoke:

Real estate equity doesn’t exist until it’s realized. The gain is meaningless. It can’t be used to finance a retirement, send a kid to university or buy that desperately-needed Softail Fat Boy until the property is actually sold and turned into cash. All those BC millionaires living in ugly Vancouver Specials would have to bail and move someplace far cheaper in order to experience any real increase in net worth.

Besides, a surge in real estate equity is as subjective and fickle as house prices. If one place on your block sells for 15% below appraised value because of an ugly divorce, your house loses equity. To equate this with pension or investment assets means you probably earned your researcher designation on a Nigerian web site.

A housing correction (and it’s coming) will completely skewer the findings of this report. A 10% or 20% drop in property values would erase much of the net worth gain – but none of the 55% more debt which financed it. Every dollar in borrowing would remain. As mentioned, the bulk of that indebtedness will have to be repaid at rates in excess of today’s.

Romping real estate, bloated home ownership levels and exploding debt finance costs have had a major impact on personal finances. People are less diversified than ever, blowing their wad on houses. Survey after survey spits out alarming results: 42% say they’d be in financial trouble if they missed getting a paycheque by one week. More retired people than ever before have mortgages. A third say they’ll need to live on the crumbs CPP pays.

There’s nothing happy about this report. It proves the middle class is sinking deeper and deeper into debt, as wealth is concentrated in a single asset whose value has been pushed higher by cheap money and rank speculation. As we grow less diversified, paying absurd prices for a home, risk shoots higher.

Remember Beth’s comments. Already, as I reviewed yesterday, the tide is turning in so many communities. The era of the house is over.

Some people get it.

Out there

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As pointed out here often, there’s no real estate market, like there is a stock market. While a share in RBC sells for the same price in Vancouver as it does in Dartmouth, a two-story, four-bedroom detached house on a 50-foot lot sure doesn’t. So in many ways the endless discussion about whether properties are dangerously bubbly, or will rise forever, is a waste of time. It all depends where you live – and in many parts of the country, real estate’s already in retreat.

Take the biggest urban area east of Quebec, for example. With 400,000 people, Halifax is a major market. Local agents are blaming the weather for what can only be called a collapse in housing, when most people think there are far larger forces at play. Housing speculation ran rampant three years ago after the feds announced a $25-billion ship-building program that would keep the city humming.

Yep, the same program that was quietly skewered in the last federal budget – along with local real estate. January sales in Halifax-Dartmouth collapsed 36.6% from the same month a year earlier, while average prices are now down 10.5%. This is what a correction looks like.

Meanwhile the second-largest real estate market in the country is Montreal, a city of 3.8 million people, has hit the real estate wall. 2013 was a lousy year, and this year (so far) is worse. Barely more than 2,000 properties changed hands in January, a 2% drop from the previous January – which sustained a 14% drop from January of 2012. Yikes.

Prices in Montreal are flat – with the average days-on-market jumping by 15. Condo sales have dropped 4%, and a single-family home averages just $272,000. Active listings are up for the 41st month in a row, which means this is one giant buyer’s market.

Ontario? It ain’t just Toronto.

To the east, for example, is Kingston – a beautiful, historic lakefront city of more than 120,000 souls, two hours out of the orb of the hyperventilating GTA. Real estate sales there have tumbled almost 20% compared to this time a year ago, while prices are running about the rate of inflation. The most worrisome sign, however: there are now 11.5 months of inventory, which means anybody trying to sell their home might still be waiting for a buyer in the winter of 2015.

To the west, London. With over four hundred thousand people, it’s the tenth largest city in the country, home to a sleepy housing market with prices that would make someone in Oakville – barely an hour to the east – drool in envy. Here, again, things are not going well at the moment. Sales have dropped year/year by 13% and prices are stuck in the snow.

The average detached SFH in London sells for $262,632, basically unchanged from previous months, while the average condo (at $169,450) is 4% cheaper. Just next door, poor St. Thomas – now home to a big, hulkin’, empty, sad Ford plant – has even cheaper homes, down from this time last year by 17%.

Of course, I could carry on. And will. Here’s Regina, provincial capital of that big, flat place, where sales of houses have declined 7% from last year, while the length of time it takes to sell a place has jumped 30%. And over in Victoria, home to absurdly expensive houses – many of the most expensive ones now on the market for well over a year – sales are up, but prices are falling. The Frankenumber is down about 2%. It’s also worth nothing January of last year was a disaster, so a 16% jump in sales is somewhat of a hollow victory.

Well, there ya go. Millions of Canadians live in places where bidding wars, escalating prices, no-condition offers or quick sales are completely unknown. A majority of markets are stagnating, with declining sales, prices or both. Hardly surprising with a slower economy, flat household incomes, record debt levels and real estate values which many sane families find ridiculous.

And speaking of ridiculous, here’s RBC.

A reporter from CTV called me today. “I’m doing a story on how houses are now affordable according to the Royal Bank,” she cooed. “But they’re not,” I said. “Can I interview you,” she asked? “No,” I said. “I broke my leg, I’m surly, and can’t get to your studio this afternoon. Besides, did you actually read what the bank said?”

She had not.

For the record, RBC now says small gains in household income (?) mean home ownership is a little less onerous that a few months ago. However, it still takes 55.6% of a family’s gross income (with a 25% down payment) to carry a Toronto house, and 82% of gross income (which is more than 100% of take-home pay) to do the same in Vancouver. Nationally the number is 43% for a bungalow and 48% for a standard suburban home – which still gobbles almost two-thirds of gross income.

But here’s the thing. The bank warns it’ll get worse.

“RBC anticipates that as longer-term interest rates begin to moderately rise, the costs of owning a home at market value will gradually outpace (growth) household incomes by late-2014, leading to strained affordability in several markets across Canada, much like the trend in Toronto.”

In other words, you can’t fight the bond market. Even a modicum of economic revival will bring higher yields, and rates. It is as inevitable as those claiming mortgages will never rise are wrong.

Then we could all feel like St. Thomas, where Jumbo died.