Entries from March 2014 ↓

Live with it

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The Big Owe, as we now understand, will do diddly about the mortgage wars. Thus are the Oliver years begun. The new finance minister is throwing in the towel on a real estate market now largely out of control, hoping the day of reckoning’s delayed until after the 2015 federal election.

Uh-huh. Another profile in courage. Canadians will be encouraged by BeeMo and its clones to borrow more because money’s cheap. More bidding wars for saggy semis. More price inflation. More risk.

Blowing into this real estate gasbag now seems like the only economic strategy on the table. Judging by a spat of anti-Garth comments on this blog lately, I’d say more people are capitulating – willing to dive into houses, despite the staggering cost. Either they’ve bought into the ‘buy now or buy never’ mantra, or they simply can’t stand the stigma of renting (at less cost) and the social pressure to conform.

Interesting, this is the same crowd that runs screaming from a stock market at record levels (‘it’s bound to crash!’) but embraces a house – and its massive debt – at exactly the same point (‘it’s different this time’). Ah well. You’ve been warned. Now live with it.

And what about these mortgage rates? If you want money, how should you borrow?

Well, five-year variable-rate loans are available for as little as 2.35%, but with five-year fixed mortgages now at 2.99% (and four-years at 2.7%), it’s hardly worth the additional risk. Without question, interest rates will be higher by 2019, likely (say most bank economists) by about 2%. As the prime swells, every VRM puffs right along with it, which means higher payments or more debt at the end of the term.

Ten-year? Nope, also not worthy. The cheapest is 4.4%, which constitutes a big premium. You are always better to borrow cheap on the mortgage, then divert your extra cash flow into quality financial investments which can grow, giving you more cash to throw against the house at renewal time.

By the way, regarding the BMO 2.99 special, remember this is a no-frills deal. You are totally locked into it for five years (no getting out unless you refinance with the bank or sell and pay a penalty); pre-payment privileges are less; no HELOC; no payment skips; and lower annual lump sums. If you want more flexibility, then don’t be so cheap.


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Yesterday I came around the corner into the living room. Bandit opened one eye, started furious tail-wagging, jumped to his feet and launched joyously into my chest.

I was standing.

Ten weeks after I crumpled on the January ice beside him, my foot snapped from my leg, eight weeks after surgery (yeah, that’s my ankle above), and four weeks into S&M physiotherapy, I took my first steps. Teetering on my cane, all I needed was an 85-pound Chow ricocheting off my thorax. Happily, we landed in a chair together, my face washed with copious amounts of sticky dog spit delivered by a foot-long purple tongue.

For two months Bandit artfully jumped out of the way when he heard the thump of approaching crutches, and learned to lie millimetres from my wheelchair without getting his paws run over. Every morning he’d test me on going for a walk. Every morning I would decline, tell him why and hand the lead to Dorothy.

Tomorrow we walk. Slow, short, halting, painful. Can’t wait.

Race to the bottom

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On Thursday, BeeMo emailed everybody saying its new 2.99 mortgage rate was because of the bond market. “This rate change is driven solely by the fact that bond yields have fallen…” said banker spokesguy Paul Deegan.

Paul probably knew that wasn’t true. The yield on government bonds bottomed seven weeks ago and has been rising since. Oops.

Of course the banks really put mortgages on sale because (a) it’s spring and the sap is running, (b) real estate prices are up but volumes are down so they need more market share, and (c) that little pecker F is gone and they’re testing the big Owe. You may remember that the last time this happened the elfin deity responded quickly, telling the loan floggers that even-cheaper money would turn Canadians into vats of tepid, swimming hormones, leading to more debt and real estate risk. The Bay Streeters retreated.

But will the new finance minister also slap them down? So far Joe Oliver’s blinked. “Our government has taken action in the past to reduce consumer indebtedness and the government’s exposure to the housing market,” he said in an amusing email. “I will continue to monitor the market closely.”

Yeah, right. Scary. So you can expect more offerings of four- and five-year mortgages in the 2.5-3% range over the next few weeks, before they disappear. And what will this do to the marketplace? More of the same. A paucity of listings (people don’t sell when they figure they can’t afford to buy). Static, unimpressive sales volumes. And higher average prices.

As I’ve told you, there’s nothing good coming out of a report in which the average SFH in 416 shoots above $900,000, while the number of houses changing hands plunges 21.5% from two years ago. This is a classic indicator of a market with less participation – fewer sellers, fewer buyers and significant over-valuation.

If you ever owned Nortel, you know all about late-cycle price peaks. Or if you’ve been a real estate developer for more than 25 years, you also know trouble when you see it. Like PS (he asks that I do not use his real name), who admits building houses in Alberta has been good for him, but he seriously worries the music will stop.

“There is no doubt that the present state of the housing market in Canada is the responsibility of the policies of CMHC and the Bank of Canada,” he tells me. “The various arms of the development industry have capitalized on the opportunities created by these entities, but very few are willing to be honest about the unintended consequences that have been the result.”

Like me, he won’t go quietly. The CEO has put together a document for his management team, “to keep them aware of what we are facing.” I’m sending a copy to Joe Oliver, in the faint chance he’s not reading this.

Twenty-two Reasons Real Estate in Canada is Near a Top

1. Real estate valuations have reached record levels in their relationship to multiple long-term fundamentals.  Current Canadian real estate valuations are all at record levels in relationship to; rental cost, average income, overall debt, and equivalent global values. When valuation metrics are at all time highs, caution is generally in order.

2. Canadian household debt levels are at record levels and are largely being ignored. Canadians moved counter to the global trend of deleveraging during the recent financial crisis and instead, increased their levels of personal debt. When the inevitable day comes to begin paying down the debt, the major driver of real estate will end too.

3. Real estate debt in Canada is at all time high levels.  The growth of housing debt has substantially exceeded the growth of personal incomes.

4. Interest rates are at multi-generational low levels will not continue indefinitely.  The presently low interest rates are masking the negative consequences of household debt and the ability to carry debt will deteriorate quickly when interest rates normalize.  Low interest rates always send a message of “low risk” which results in misallocation of capital and ends with an asset bubble.

5. There is presently almost no awareness of the risk of contracting real estate values.  When the risk to any asset class has been discounted to near zero and the value is only expected to increase, irrational exuberance will often be interrupted by another reality.

6. The Canadian real estate market did not fully experience a full correction that the US market did during the global financial crisis.  Canada experienced an abbreviated version of a housing correction, in part, through extreme government intervention.  This has emboldened the market to consider real estate as one of the safest investments.

7. Investor intelligence is at a low point.  Fear and greed have taken over the real estate market and buyers will do anything to keep from being left out.  Buying decisions tend to be easily reinforced because it is a familiar, practical and emotionally comforting asset class. There is also a general inability to rationally consider the economic costs of buying versus renting.

8. Employment growth in Canada is flat.  In the past year, there has been almost no employment growth in Canada and the past six months have even shown negative growth.

9. Low interest rates and small down payments have made it possible for housing purchasers to acquire more home than would normally be possible.  The access to additional levels of debt has expanded purchaser’s ability and desire to increase the values of their homes.  Traditionally affordable properties are being turned into jewel boxes with much higher values.

10. When any asset class experiences multi-year increases in valuations it is cause for concern and not excitement.  An increase in Canadian real estate prices in twelve out of the last thirteen years provides a strong indication that a correction may be overdue.

11. The combined policies of the Bank of Canada and CMHC have encouraged investment in real estate at the expense of the manufacturing sector.  Capital and credit is a limited resource and has been increasingly directed towards real estate and away from productive manufacturing.

12. The present value of Canadian residential construction in relation to the overall economy is substantially greater than it was in the US at the peak of their market. Canadian residential construction now represents about 7% of GDP, while the US housing construction never contributed more than 5% of GDP.  For more than a decade, residential housing construction has exceeded a sustainable contribution to the Canadian economy.

13. The total number of residential construction starts in Canada has remained above the long-term trend for more than a decade.  Oversupply will always be the mortal enemy of prices in any economy.

14. Real estate market cycles tend to be long and they always overshoot to the upside just as they will eventually overshoot to the downside.  Long term studies consistently show that prices in even widely diverse markets nearly always follow a similar pattern of reverting to their long term mean.  Canadian real estate prices have not been within the mean range for well over a decade and are “technically” overdue for a major correction.

15. Real estate developer sentiment appears to be universally bullish.  Record high prices are being paid with speculation on land that will not be available for development for five years and more.  The input costs of land are being fixed at record levels and have no margin of safety for a correction in real estate values in the future.

16. Numerous major global financial institutions have sounded the warning on the risks of the overpriced housing market.  These warnings are coming from some of the most unbiased perspectives and still the market remains undeterred.

17. The free market has not been allowed to operate efficiently in establishing the fair market value for real estate.  Government intervention in the housing market through CMHC with more than $800,000,000,000.00 of financial backing of residential loans has had numerous unintended consequences. If left alone, the free markets would have assessed risk much more conservatively and the easy access to credit would not have prematurely drawn many marginal buyers into the real estate market.  Housing and land would have remained much more affordable without this, and the intervention of extremely low Bank of Canada interest rates.

18. There is an investor disregard for the fact that real estate is a non-productive asset class.  It produces nothing that may be sold and pays no dividend, but it carries a significant capital liability and has the regular cost of maintenance.

19. Baby boomers will begin exiting their real estate in a growing wave.  Due to their limited financial investments apart from real estate, retiring boomers will begin a trend of liquidating real estate to fund retirement expenses.

20. Asset prices commonly accelerate towards the end of a bubble only to be immediately followed by a correction.  Canadian house prices have recently had their biggest rise in the past two years.  Fear of being left out of any remaining opportunity, the late investors panic as they finally get in at the tail end of the cycle.  The early investors, blinded by the pride of entering the market sooner, continue to hold out for even greater profits.

21. Canada has the one of the highest rates of home ownership in the world.  Spain and Ireland have higher rates of homeownership and are still experiencing a housing crisis, while Germany has a homeownership rate half of Canada’s and has avoided the global housing crisis altogether.

22. The strength of the real estate market is inspired by a false belief that “this time it is different”.  It is never different, not even in Canada.