Entries from May 2014 ↓

Good debt

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In the first three months of this year, 59.6% of all the mortgages that CMHC insured went to buyers who borrowed at least 85% of the purchase price. Of those, the vast majority (45.2%) leveraged more than 90%.

Yes, this is down from the torrent of high-ratio, high-risk loans the feds backstopped during the same time last year (because the housing market is inexorably slowing), but it still gives you a great insight into what’s behind inflating prices. Yes, moist virgins.

In fact, a report this week from the mortgage brokers’ association confirmed that when it comes to goosing properties, it’s the kids who are the driving force. Last year a massive 55% of all real estate transactions were done by first-timer buyers – you know, the ones with desire but no money, using the Bank of Mom, taking cash-back (bribe) mortgages form the bank, and shifting all of the risk for their potential defaults onto taxpayers’ backs.

This, along with the current paucity of listings in many markets (“why would we sell, honey, when we can’t afford to buy?”) tells us something fundamental about the market. Experienced homeowners are growing increasingly cautious at the same time the kids are diving in.

It’s not hard to see that at any weekend open house in Toronto’s Lesleyville or East Van, where swarms of millennials and hipsters are looking at houses their parents would make garages out of. These are the ones – gassed up on stunning pre-approvals from the voracious banks – who think nothing of jumping into a bidding war and adding to the home loan because it’s all “good debt.” Moreover, lots of the kids figure they’ll never pay the mortgage off anyway, so who actually cares how big it is? The only important number is the monthly.

The brokers, by the way, asked the virgins about their epic borrowings. They found that 66% classify mortgages as good debt, despite the fact the loans are amortized and could end up costing $2 for every dollar they accepted.

As for risk? Pffft. When have houses ever gone down? Only fossils worry about that crap.

“They say they feel confident they can weather a downturn in the housing market and they consider mortgage debt to be good debt,” says the CAAMP report. “Their attitudes are the same whether they live in Toronto, Calgary or Vancouver where prices continue to rise, or in areas where home prices are stabilizing.”

But the kids have never seen a housing correction, and may have only a foggy notion of what it could mean. They don’t how much it sucks to be forking over $3,000 a month in mortgage payment, property tax and condo fees for an apartment they could rent for $1,650 – when it’s no longer rising in value. Maybe even declining.

Even the brokers’ economist, Will Dunning, has been sounding the alarm.

“While the national market may look healthy,” he says, “activity in the Greater Toronto Area (including Hamilton), the Greater Vancouver Regional District and the Calgary area is skewing the numbers high. In the rest of Canada sales activity has weakened and house prices are flat, and even falling in some communities. Housing has played a key role in driving economic growth and job creation in Canada. But looking ahead, decreased starts and slower price growth will throw off the balance between the housing market and the overall economy.”

Unknown to all experts, of course, is what all of these people with 90% and 95% leverage will do when real estate prices moderate, 3% mortgages disappear or the housing-heavy economy stumbles. Never before has so much debt rested in the hands of so many so young, so naïve.

Meanwhile, even though CMHC has taken steps to limit the effects of a potential plop, its private-sector competitors are ramping up their risk. The crown corp has been giving up market share to Genworth and Canada Guaranty, which haven’t been cutting back as much on lending to the self-employed, or for second homes.

For the record, as a taxpayer, you are currently on the hook for $555 billion in CMHC-insured mortgages. That’s a little less than the $618 billion we have in accumulated national debt. However, CMHC’s debt has doubled in the last five years, while it took Canada almost a century and a half to get to this state.

Have a nice weekend. And keep your daughter away from those bloody open houses.


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Why do people watch trash like Entertainment Tonight, or the mind-numbing house porn on HGTV? Because we love to compare how we’re doing with everyone else. Reality television lets us safely cut up other people’s lives, denigrate their disturbing choices and dis the junk they own. It’s therapeutic.

So, it’s time for a reality blog. Break out the bad attitude.

Here’s Gerald, who scored buying a place in one of Toronto’s demand hoods in 2007 for $400,000 he now figures is worth at least six. Since that time he’s made some intense decisions, like acquiring a girlfriend and $200,000 in gold. The 37-year-old also has a $300,000 RRSP, mostly doing nothing. “I got cold feet in the first part of the year and now my RRSP is sitting in cash anticipating a downturn in the markets and a chance to buy back in.”

“With regards to the house; we love living here. It’s a wonderful home in one of the most sought after parts of the Beaches.  I’ve done a lot of work to it to make it really lovely and the thought of selling is heartbreaking.  I know owning a home is luxury rather than a real investment.  However, a market drop of 30% would be far more heartbreaking and I am wondering if I’d be better to take my money out of the market for a year or two and if there is a drop I can then come back in to get another property at a discount. My thought is I may even be able to buy something outright as the downturn would get me a discount and I could finally beat those blood thirsty bankers.

“Everyone thinks I’m crazy to consider this, but I feel like no one else is really paying attention to anything but bogus realtor “market updates” and not really examining the true state of our economy.  I on the other hard have taken a crash course on economics since the 2008 downturn, and fear that all that’s been done is to shove the problems under a rug and that these problems will come back to bite us hard , which will be sooner rather than later. What would you do?”

Well, Gerrie has a great set of assets – more than a million in net worth – but virtually every dollar is making him nothing. The gold is dead money while the RRSP cash is earning diddly. And the capital gains within the real estate are likewise yielding no income, with peak pricing meaning there’s little more to come.

What should he do? Mostly, stop overthinking things or tying to time markets. The precious metals have been a disaster since 2011, and by going to cash inside his retirement funds he’s missed a few years in which double-digit returns were the norm for balanced portfolios. There’s not another 2008 coming, so no need to stock up on gold wafer and toilet paper or hide in cash.

Now he’s trying to time real estate, planning on selling and then buying again a year or two later. Another bad idea. Toronto real estate prices will have to drop 10% almost immediately for him to recover commission, double land transfer tax and other closing costs. That could well happen, but there are easier ways to build wealth that don’t involve blowing up your girlfriend. Besides, the real property damage will be happening in 905. Not the Beach.

You have an investing problem, Gerrie, not a real estate one.

In suburban Vancouver, Marie is 49 with two teenagers and a husband who dangerously reads this blog.

“One day I sat down and reviewed the numbers and our mortgage and realized the insanity and that we would really never or very late in our lives be mortgage-free. We sold our house – the best thing we ever have done so far. We were not left with much after debts/mortgage were paid off however now we do not have any debt except a small car loan.  We are currently renting a home. All in all, we have about $100,000 invested in RESP, RRSP and TFSA, that’s it.”

Marie says they earn about $170,000 and now she’s feeling house horny again.

“We have entertained the idea of buying a smaller home outside the lower mainland, perhaps buying land and or a cabin/ cottage. Yes, and that is not a great idea at the moment.. Looking at where we are now 5 years later I’m seriously thinking that we will not be owning our own home ever, not at least in BC. My husband and I have not had a salary increase in years, the property/utility taxes are going up every year (this year that cost our landlord $7000), commodities are going up so it seems impossible to get ahead. My husband and I are the same age, have good salaries, municipal pensions, healthy but still wanting to be able to have our own home one day.”

“I am confused,” he says. “Your thoughts?”

My thought is that at 49 they’re way behind the curve – with net worth of just a hundred grand, despite an income double the Vancouver average. Obviously they had little equity in the house, and at least now have some liquidity and no debts. Sounds like the biggest problem is setting a budget and living by it, so at least TFSAs can be topped up and properly invested.

As for buying real estate, Marie, forget it. If it was threatening to crush youwith debt before, this time it’d finish you off, sucking away all your wealth and saddling you with a lifetime indenture. Buy land or a cabin in the woods? Oh, please. Then you’d have useless real estate and no money. Get a grip.

Miles away (3,600 of them, actually), lives Stephen. He and his wife don’t earn $170,000. In fact, the household income is just $45,000. But on Grand Manan Island, an idyllic bump in the Bay of Fundy on the NB/Maine border, that’s enough to accomplish what Marie only dreams of.

“I am 27 years old and my wife and I have two children, ages 1 and 2.  We drive a paid for car and have 11 years left on our mortgage (which was originally 15 years after placing 20% down). We also have 6 months emergency savings. My wife and I live a financially responsible, frugal lifestyle.  Currently I have 25% taxes withheld from my pay, then CPP and EI are taken out, leaving me with around 69% of my income to live on.  My wife and I believe in giving 10% to our church (religious or not, all financial experts believe that giving is part of a healthy financial plan) and we put 10% of our income into a retirement plan.”

Why did Stephen write me?

“I believe the modern consumer age has inflated our lifestyle to the point where young people will never save adequately.  And that this is the major financial issue my generation is facing. After taxes and giving I am left with around 49% of my income to pay for life.  This leaves us with very little disposable income.  My wife and I have decided that we are staying the course and continuing to save and give no matter what.

“I would be interested to read an article on how financial responsibility is effected by things like taxes and housing costs and the financial irresponsibility of everyone around us.  I believe as time goes on the staggering cost of living suppresses people’s (especially young people’s) ability to live a financially responsible lifestyle and save while enjoying a few other pleasures our modern age affords. This may even come off as sounding like I’m whining but these are the major financial issues facing my generation.”

A Toronto millionaire doomer. The high-income, no-assets Van losers. And the NB kid making forty grand who supports three, is paying off a house, and worries about our values.

I hope you feel better now. Or worse.