Entries from April 2014 ↓

Nobs and tubes

 

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Above: Mike was walking his dog in Ottawa and came across this. “They are offering a 3-yr lease to the first twelve people that purchase a condo worth $300K or more,” he says.  “I checked Mercedes web site for a lease on a 2014 base model CLA and it suggests monthly payments of $399.21. Total value not accounting for time value of money is $17,801.56. This works out to a maximum 6% “reward” of the purchase price of the condo. I’ll stick with the dog. She will make me happier.”

Now, the latest mortgage news. The 2.99% special is no more, at least at BeeMo, the naughty little bank that loves debtors. On Tuesday Bank of Montreal will announce a jump to 3.29%, thanks in part to the bond market.

It’s still cheap money, of course, but also an indication of real estate torpor. An extreme lack of listings and a frightening puff in prices are dialing back sales in many markets. Some, like Halifax – where deals are down 20% from last year, which were 20% lower than the year before – are a swamp. Others (like Ottawa) are flatlining. Others (Regina) are in a slow slide. Even in hyperventilating Toronto, detached home sales are ahead of 2013 levels, but trail 2010, 2011 and 2012.

Listings have shrunk like manhood in a cold pool. Homeowners hear the media buzz about raging prices and conclude they’d never be able to buy, so why sell? And as fewer homes come to market, the ones that do command more. Presto – inflated values, especially when we have the lethal combination of greater fool buyers and unethical agents.

Here’s an example:

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This unrenovated 1930s-era house full of knob-and-tube, in need of a $300,000 makeover, was listed days ago in a high-demand area of North Toronto. On that street (Glencairn), every 30-foot lot is worth about $1 million, and has been for at least a decade. So, this was probably a $1.1 million property, considering that dolled-up equivalents sell for at least one point five.

But for listing agent Bradley Hutton, this was an opportunity to milk an unbalanced market, and in the process make almost a thousand people irritated, while getting his name in the media. So he listed it for $699,000, or about four hundred grand lower than current market value.

The result was predictable. A thousand people made appointments to view it. Adults drooled. There were 72 offers. Eighty per cent of them were for at least seven figures The market value of $1.1 million was pushed higher by sheer competition. The beater sold for $1.366.

So, Agent Hutton succeeded in sucking more than $200,000 extra out of the ‘winning’ buyer with his cattle auction tactics. And he also double-ended the deal, because the buyer was Hutton’s own client – a person he introduced to the property. That means he collects double commission.

Lessons?

When you see something wildly underpriced, don’t even bother booking a showing. This is a technique used by agents who are destined to have short, brutish, lonely careers. The last thing you want to be involved in is a blind auction.

Second, do some research before being swept up in such a circus. Get the comparables on a property before you bid on it, and see what its neighbours or similar houses on the street have commanded recently.

Third, to do that, engage an agent. An principled one. Buyers flying blind into competitive situations almost always end up as emotional wrecks, divorced, neutered, or paying a huge premium for their stupidity. Having a seasoned agent represent you will cost nothing, arm you with facts and experience and hopefully keep you far away from the sleaze.

Fourth, stop looking for real estate (except in Halifax, maybe). This is not the time. Hormone levels are high and inventory’s low. Sellers have been media-whipped into a greedy state. Fools abound who believe this price push is indicative of the months and years to come, and it only takes one of them to ruin your perfectly good offer.

There is a time to buy, and a time to sell. You must choose. Unless you’re Bradley Hutton, and do both.

Evil

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If there was no CMHC then derelict semis anchored with termite tubes on Toronto’s Danforth wouldn’t cost $900,000. Nor would butt-ugly Vancouver Specials on the East side start at $900,000. There’d be no condo boom with 53,000 new units coming down the pipe in the GTA. No bidding wars. No multiple offers. No auctions. No bully bids.

Once the Canada Housing and Mortgage Corporation did good things. It helped veterans buy tacky little clapboard homes by giving them easy credit and competitive rates. Now it’s largely responsible for the average price of a detached home in two major Canadian cities passing the $1 million mark; for $1.3 trillion in collective mortgage debt; and a homeownership rate of 70%.

Of course, that has come with a record level of household debt and a disproportionate whack of the economy now dependent on constructing, financing and selling homes. As that occurred, personal savings rates fell, retirement assets tumbled into neglect and house horniness raged across the land, especially when interest rates cratered.

How did CMHC do this?

Simple. It took away the one element that acts as a governor on dumb human behaviour: risk. By insuring mortgages loaned out to dubious clients – people with so little money they must finance between 80% and 95% of a real estate purchase – the federal agency (backstopped by taxpayers) wiped out lender risk. The banks, for example. So, they fund virtually anyone. Worse, they give people who lack money for a down payment the cash to proceed. And they offer the same interest rate to children with no credit rating and 5% down as they do to experienced, older, wealthier clients with a 50% down payment.

And why not? When CMHC is there to ensure the lender is repaid if the high-ratio borrower blows up, the regular rules of risk-management no longer apply. And that’s why the federal agency now has almost $600 billion in outstanding insured mortgages, roughly equal to the country’s accumulated national debt, and why the average family cannot afford the average home in many cities. It’s why normally-tolerant Canadians start blaming immigrants for inflated prices, and why real estate risk augments.

Has there ever been a better example of good intentions corrupted?

But maybe this is seriously changing. DDF (dearly-departed F), as you know, chopped allowable 40-year amortizations back to 25, eliminated 0%-down borrowings and raised the bar for virginal loans. Still, prices kept going up.

As I told you last week, when the fact average SFH price in 416 and Van this month passed the $1 million mark (in contrast, the median house price in metro New York City is $549,000) it caused shock and awe in Ottawa. The middle class, in order to maintain its attachment to real estate, is being forced to take on ever-larger dollops of debt, and inordinate personal risk. As families do so – at a time when incomes are dormant – they have to cut back on consumer spending. And, bang, the local Best Buy goes down.

That logic was behind the announcement last Friday to squish the self-employed and the multiple-insured. Come the end of May, CMHC will not allow any more insured loans to be handed out to entrepreneurs or commissioned salesguys unless they can come up with independent, third-party verification of their incomes. Meanwhile the agency will stop insuring second homes, so anyone with a CMHC-insured property won’t be able to get, or co-sign for, another insured mortgage. Anybody already in that situation better make new plans before existing mortgages come up for renewal.

The feds say this only impacts 3% of the lending base, but it’s starting to add up to death by a thousand cuts. For example, when CMHC punted from insurance all properties selling for $1 million or more, it dropped prices in that category by at least 15%. These days there are 7,000 such active listings between Vancouver and the GTA, and sales have been choked.

There’s more to come. That was made clear three days ago:

As a result of changes to CMHC’s mandate to contribute to the stability of the housing market, benefitting all Canadians, while effectively managing and reducing taxpayers’ exposure to risk, CMHC is undertaking a review of its mortgage loan insurance business. This is the first set of changes resulting from this review. (CMHC media release)

Several days ago this pathetic blog brought you a few charts from various sources. They showed Canadian real estate prices are now at the same level, relative to history, where implosion happened in the US. They reminded you people here pay 66% more for a house than Americans do. As you know, we are now judged to have the biggest housing bubble in the world. Rent-to-price and price-to-income ratios are ridiculous. And all that our kids want to do is buy a condo, because real estate always goes up.

CHMC may be an evil agency, but they now get it.

Do you?